VZCZCXRO7287
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0043/01 0150605
ZNR UUUUU ZZH
R 150605Z JAN 09
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 6236
INFO RUCNASE/ASEAN MEMBER COLLECTIVE
RUEHNE/AMEMBASSY NEW DELHI 2172
RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 SINGAPORE 000043 
 
STATE FOR EEB/IFD/OMA AND EEB/EPPD 
STATE PASS USTR 
NEW DELHI FOR EHRENDREICH 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN SN
 
SUBJECT:  SINGAPORE READIES BUDGET TO FACE ECONOMIC SLOWDOWN 
 
REF:  A) 08 STATE 134459; B) 08 SINGAPORE 1325; C) 08 SINGAPORE 
1110 
 
¶1.  (SBU) Summary:  Singapore has brought forward its budget process 
and will unveil on January 22 what are expected to be new 
expansionary measures to boost the economy and provide support for 
workers and businesses.  Singapore's economy is heavily dependent on 
exports and has been hit hard by the credit crisis and the resulting 
slowdown in global demand.  Local analysts are predicting that 
Singapore will continue to suffer substantial negative growth 
through the first half of the year, putting the economy into its 
worst recession in the country's history.  Worried about a rising 
unemployment rate, the GOS has already expanded programs to 
encourage businesses to keep workers on the payroll and is backing 
loans for small and medium-sized businesses.  The new budget will 
likely bring further credit guarantees, a cut in corporate tax rates 
and new public construction projects.  Households may see tax cuts 
or rebates and temporary relief for laid off workers.  End Summary. 
 
¶2.  (SBU) Singapore is on the verge of what may be its worst 
economic contraction since independence in 1965, in terms of both 
depth and length.  On January 2, the Ministry of Trade and Industry 
(MTI) released advance GDP estimates that showed a worse than 
expected 2.6 percent contraction for the fourth quarter of 2008, the 
third quarter in a row of negative growth.  MTI also lowered its 
forecast for 2009 to between -2.0% and 1.0%.  Local analysts went 
further, with many lowering forecasts to less than negative 2.5% 
growth for the year.  If those predictions are correct, the 
recession will be the worst in Singapore's history, surpassing the 
2.4% contraction in 2001 following the bust in tech stocks.  That 
recession lasted four quarters, but analysts say the current 
economic slump could easily show at least five quarters of 
consecutive negative growth. 
 
¶3.  (SBU) Singapore's export-led economy is particularly vulnerable 
to the global economic slowdown.  Overall trade is calculated to be 
over 350 percent of GDP.  Although Singapore has taken pains to 
diversify its industries, the overall drop in external demand has 
hit all sectors.  Manufacturing has led the slowdown, but 
construction and services have faltered recently as well, with 
weakness in financial, transport and storage, and wholesale and 
retail trade.  Exports declined for the past seven months through 
November, particularly in electronics (reftel B).  Tourism was off 
toward the end of 2008 and Singapore's tourism industry missed its 
yearly target for the number of tourists and tourist expenditures. 
 
Unemployment Tops GOS Concerns 
------------------------------ 
 
¶4.  (SBU) The GOS's chief concern is keeping workers in jobs, and it 
has embarked on a campaign to encourage companies to manage the 
economic downturn by cutting non-labor costs first and laying off 
workers only as a last resort.  The government is concerned not only 
about the impact on downsized workers, but also the negative 
socio-economic effects higher unemployment may bring and the 
economic costs of rehiring and training workers when the recession 
eventually ends.  The resident unemployment rate (not including 
foreign workers) stood at 3.3 percent in June 2008, but analysts 
expect the rate to climb beyond five percent in 2009 and remain 
there for at least six months.  In past economic downturns, foreign 
workers who provide much of the manufacturing and construction labor 
have suffered the brunt of layoffs, but the current recession is 
broad-based and has spread to the services sector, where most 
Singaporeans are employed. 
 
¶5.  (SBU) GOS officials have pleaded with companies to consider 
alternatives to layoffs, including wage cuts, sending workers for 
additional training, shorter work weeks, and other flexible work 
arrangements.  Although unemployment is low in comparison to other 
developed countries, Singapore's social safety net is relatively 
weak, and the government sees continued employment, even at a 
reduced salary, as the best hedge against economic downturn.  The 
National Wage Council (NWC) is expected to recommend this month that 
company contributions to worker retirement funds be reduced, and may 
recommend wage cuts as well.  The Council's recommendations are not 
binding, but many businesses and unions base wage decisions on the 
NWC's guidelines. 
 
Bringing Up The Budget 
---------------------- 
 
¶6.  (SBU) In recognition of the severity of the crisis, the GOS has 
brought forward the release of what is expected to be an 
 
SINGAPORE 00000043  002 OF 003 
 
 
expansionary budget for 2009 from February to January 22.  In his 
end of year speech, PM Lee said the budget will contain measures to 
help businesses with rental and wage costs to continue to employ 
workers and to assist with financing support.  Citigroup analysts 
speculated in a recent report that specific budget items will 
include personal and corporate tax cuts or rebates, additional 
risk-sharing by the government for loans to small- and medium-sized 
enterprises (SME), and the revival of previously deferred public 
sector construction projects.  The budget measures are to be 
introduced in the first quarter of the year rather than the second 
quarter as in previous years. 
 
¶7.  (SBU) Citigroup estimated the budget for this year will be about 
S$41 billion (USD27.7 billion), ten percent higher than last year, 
and about S$4 billion higher than projected revenues.  Despite the 
revenue shortfall, the GOS has sufficient funds to pursue an 
expansionary budget.  The government ran a S$7.4 billion surplus in 
FY 2007 and still has funds remaining from that year and from many 
previous fiscal surpluses.  In addition, a new framework allowing 
the government to draw from investment returns on its fiscal 
reserves could potentially provide an additional pot of S$3-5 
billion of funds for the year.  As it has done in previous 
recessions, the government may deploy additional fiscal stimulus in 
an off-budget package later in the year as well. 
 
Limited Stimulus 
---------------- 
 
¶8.  (SBU) Many of the new budget measures will likely do little to 
stimulate the economy, although they may stem the tide of layoffs, 
according to Dr. CHOY Keen Meng, Professor of Economics at Nanyang 
Technological University.  Dr. Choy told Econoff that Singapore 
faced a fall off in external and domestic demand, and the new budget 
should emphasize measures to stimulate domestic demand.  Policies to 
cut business costs will help keep businesses afloat but will not 
affect demand, and construction projects would do little in that 
regard as well since Singapore has substantial "leakage":  most 
projects use foreign labor and imported materials, and there is 
relatively little impact on the domestic economy.  Dr. Choy 
advocated tax rebates for the relatively neglected middle class for 
the next three years, to encourage those who are most likely to 
boost their consumption. 
 
Some Measures Already Deployed 
------------------------------ 
 
¶9.  (SBU) In a November preview of budget measures to come, the GOS 
announced it would add an additional S$2.3 billion in funds through 
existing programs to support business financing.  SPRING Singapore, 
an enterprise development agency for SMEs, offers direct micro loans 
and shares the risk on loans for SMEs.  Under the new scheme, 
government risk-sharing on loan defaults was raised from 50 to 80 
percent and was extended from SMEs to all businesses.  Firms with 
less than ten employees are eligible for direct micro loans, while 
those with more than ten employees are eligible for loans up to 
S$500,000 under a bridging loan program.  The government also 
doubled the matching funds it provides to start-up businesses. 
Despite the increased government risk-sharing, banks have still been 
reluctant to lend, and reportedly only seven percent of SMEs have 
benefited from the financing schemes. 
 
¶10.  (SBU) The GOS also introduced in December a S$600 million 
package to retrain workers in a bid to encourage companies to send 
workers for additional training rather than laying off employees. 
Under the Skills Program for Upgrading and Resilience (Spur) 
program, workers and companies pay only ten percent of fees for 
approved training courses, including in-house training programs. 
Companies can also claim up to 90 percent of a worker's salary from 
the government while in training.  Low-skilled workers receive a low 
hourly wage while in training, essentially a form of unemployment 
insurance.  Skilled professionals receive training support for 
professional conversion courses to switch industries. 
 
Looser Monetary Policy? 
----------------------- 
 
¶11.  (SBU) There has been speculation that the Monetary Authority of 
Singapore (MAS), Singapore's central bank, will move up its 
regularly scheduled April review of its monetary stance in light of 
the rapidly declining economy.  In October 2008 the MAS weakened its 
stance to zero appreciation of the Singapore dollar to improve the 
competitiveness of Singapore's exports (reftel C).  However, it is 
unlikely to take further steps to weaken the currency so quickly. 
 
SINGAPORE 00000043  003 OF 003 
 
 
NTU's Dr. Choy pointed out to Econoff that Singapore's exports are 
not suffering from price competitiveness problems but rather a drop 
in overall demand, and changes in monetary policy would have a 
marginal impact. 
HERBOLD