Strong recovery of Singapore?s trade

Singapores income per capita and level of development meet OECD standards. This city state is the main transport and financial service hub for Southeast Asia, but its economy is vulnerable because of its high reliance on demand from its trading partners and the focus on certain specific sectors such as electronics and pharmaceuticals.

As a result of the global crisis, Singapore slipped into its worst recession since independence, due to a dramatic decline in transhipment, tourism and the export of electronics. Both domestic exports and re-exports declined steeply, leading to a GDP contraction of 1.3% in 2009. However, the recession was markedly less severe than initially feared and year-on-year growth picked up again in Q3 of 2009. The government responded forcefully to the crisis, using public funds to bolster the economy and assist the private sector through a US$ 13.7 billion resilience package contained in the 2009 budget, together with a range of measures aimed at stabilising the financial sector and an easing of monetary policy.

As global demand picked up again and the Asia-Pacific region showed robust growth rates, Singapores former weakness became its strength again. The recovery in 2010 has been impressive, with year-on-year growth rates of 16.9% and 19.5% in Q1 and Q2, according to the Singapore Ministry of Trade and Industry [MTI]. This has been due mainly to a strong rebound of merchandise exports [+28.2% and +29.1% in Q1 and Q2], financial services and tourism. Manufacturing, which accounts for about a quarter of Singapores economy, grew 38.1% in Q1 and 46.1% in Q2.

In the third quarter, growth slowed down to 10.6% year-on-year, a 18.7% contraction on the previous quarter. This had been expected, as the strong but temporary effect of inventory restocking cooled down and some pharmaceutical companies switched to produce a different value mix of active pharmaceutical ingredients. All major economic sectors still expanded, albeit on a slower pace than in the first half of 2010. Manufacturing, wholesale and retail trade, and other services, were the main contributors to GDP growth. Exports increased 20.1% in the third quarter. Unemployment continued to decrease, to 2.1% [compared to 3.3% at the end of September 2009]. However, this strong economic rebound has fuelled inflation, as the domestic consumer price inflation rose from 0.9% in Q1 of 2010 to 3.4% in Q3.

Singapores banking sector is healthy and adequately supervised. However, some exposure to US subprime mortgages cannot be ruled out. The government has recently liberalised the sector further, allowing more foreign banks to open branches.

Economic policy

Monetary and fiscal stimuli have contributed to the astounding turnaround in Singapores economic performance. In December 2009, the Singapore Government extended by a year its financial support for companies, introduced during the global crisis in a bid to keep the economic recovery afloat. This extension of credit support through the Special Risk-Sharing Initiative, effective from February 2010 to the end of January 2011, will direct up to 8.4 billion Singapore dollars [US$ 6.0 billion] to spur a recovery in commercial lending and ensure that companies in need of finance can access loans. Some moves have been made to gradually begin scaling back the programmes and reduce economic stimuli.

Despite the stimulus measures, the 2009 and 2010 fiscal deficits are modest: at 1.0% and 0.7% of GDP respectively. Singapores fiscal discipline is excellent, and over the long term the budget is balanced.

With increasing competition from other Asian countries, Singapore has to look for new high value-added sectors and diversify away from the [relatively low-skilled] electronics sector.

A gradual appreciation in relation to the US$ is expected, while the exchange rates against the currencies of other trading partners will remain stable.

Outlook

After an exceptionally high growth rate of more than 12% this year, GDP growth will moderate to about 4.0-4.5%, as decreasing global growth will reduce export demand. However, growth in Asia-Pacific region is forecast to remain robust, with strong domestic demand and driving intra-regional trade. The government expects Singapores trade to grow moderately in the last quarter of 2010, and total trade and non-oil domestic exports to increase by 6-8% in 2011. External demand for transit and financial services, together with foreign tourism revenues, are expected to keep growing but at a slower pace.

Inflation is expected to rise in the coming months, among other things as a result of labour cost pressures caused by the tight labour market, before moderating in the second half of 2011. The Monetary Authority of Singapore will continue with its policy of a modest and gradual appreciation against the US$.