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A bigger war chest to fight Covid-19

The Edge Singapore
The Edge Singapore • 12 min read
A bigger war chest to fight Covid-19
Unfortunately, the package — while helpful — will not be enough to stave off a recession, says Maybank Kim Eng’s senior economist Chua Hak Bin.
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Singapore government pumps in $48.4 bil more to save jobs, support companies and stabilise the economy

SINGAPORE (Mar 27): The Penny Black — a popular English-style pub at the corner of Boat Quay — is a favourite watering hole of both Raffles Place workers and tourists alike. The Singapore River, which the pub faces, is typically a scene of serene and calm. But no thanks to the Covid-19 outbreak, a “mighty storm” has already arrived at its shores.

Charles Lew, chairman of Muddy Murphy Holdings — which owns this pub — says his revenue has halved since January, and that he is “playing in a depleting field”. With all the pubs and nightspots required to shut down till April 30, Lew and many of his industry colleagues need all the help they can get.

On March 26, the day the shutdown took effect, Deputy Prime Minister and Finance Minister Heng Swee Keat announced the widely-anticipated $48.4 billion Supplementary Budget to help to help save jobs, keep companies afloat and stabilise the economy. “The Covid-19 pandemic is already a mighty storm, and is still growing,” says Heng.

Earlier that same morning, the government had announced that the Singapore economy contracted by 2.2% y-o-y in the first quarter of the year — a steeper drop than the 1.4% dip expected.

This is the biggest year-on-year drop since the Global Financial Crisis. OCBC’s chief economist Selena Ling calls the Covid-19 “an economic tsunami” and she expects the second quarter is likely to shrink by 7%.

In a sign of how the situation is deteriorating rapidly, the government now expects full year GDP to be between –4% and –1%. This comes merely a month after its previous forecast of –0.5% to 1.5%.

The $48.4 billion, on top of last month's $6.4 billion support package, means a whopping total of $54.8 billion — equivalent to 11% of Singapore’s GDP — is targeted at fighting the Covid-19 crisis. A spending this big will require the government to dip into past reserves and run a budget deficit of $39.2 billion — or 7.9% of GDP — for FY2020. Economists call this package a necessary “bazooka” so that jobs and livelihoods can be saved.

Out of the $48.4 billion, the biggest chunk — $15.1 billion — is allocated to the Jobs Support Scheme, where the government will subsidise between 25–75% of the wages of local employees, or up to $4,600 per month. Under its previous iteration, the subsidy was just 8% and totalled some $1.3 billion.

“This robust fiscal response surpasses the handouts [announced] in the first Budget (on Feb 18). It is beyond expectation,” notes DBS’s senior economist Irvin Seah. However, he feels it is appropriate in the current situation as more industries crumble from the weight of the virus outbreak.

CIMB economist Song Seng Wun agrees, noting that the measures serve to cushion the impact of the slowdown, especially for local employees — several of whom are forced to take pay cuts or no pay leave. He adds that the support for job creation and the adoption of digitalisation among businesses will prove effective in the longer term once the economy recovers.

Unfortunately, the package — while helpful — will not be enough to stave off a recession, says Maybank Kim Eng’s senior economist Chua Hak Bin. “The fiscal support will reduce job losses and the extent of unemployment, but will not lift growth or corporate revenue,” he says. As the number of cases of Covid-19 in Singapore increases — including 52 new cases on March 26 — Chua says the lifeline may only be enough for the next six months. If Singapore and the world are still in a recession, another fiscal package will be necessary, he adds.

Aside from these measures, economists also say an easing of monetary policy is on the cards.

On March 30, the Monetary Authority of Singapore (MAS) will announce its policy statement (this is earlier than the scheduled April announcement). While the MAS says it is not an off-cycle move, economists are in a consensus that there will be an easing.

“[Given] the economic slowdown, the MAS is likely to respond correspondingly with a more aggressive adjustment. There could thus be a zero appreciation of the Singapore Dollar Effective Exchange Rate (SGDNEER) and a one-off downward adjustment to the band,” notes Seah.

Although the $48.4 billion package is wide-ranging, it pays special attention to SMEs for they make up 99% of businesses in Singapore and employ 70% of the workforce. For example, the enterprise financing scheme (EFS) working capital loan (WCL) was considerably enhanced. The EFS is to help SMEs access bank loans with the government sharing the risk with the banks.

The EFS-WCL, which is available to SMEs in all industries, was enhanced for one year from March 2. Heng said the EFS-WCL will be further enhanced from April 1 to March 31, 2021.

SMEs will be able to avail themselves of $1 million per borrower — up from $600,000 earlier — for as long as five years, and SMEs may request for deferment of principal repayment for one year, subject to conditions. The government’s risk-share is raised to 80% from 70%.

The EFT-Trade Loan will also be enhanced for the same period (April 1 to March 31, 2021) with the loan quantum doubling to $10 million per borrower, and the government’s risk share up to 80% from 70% previously. The EFS-TL repayment period remains the same at one year.

In addition, Heng says the maximum quantum for the EFS temporary bridging loan will rise to $5 million per borrower from $1 million previously and will be available for all sectors. The maximum repayment period is five years, and the government’s risk-share portion will be 80%.

Local banks remain supportive of the various enterprise financing schemes. Joyce Tee, group head of SME Banking at DBS, says “As cash flow is the lifeblood of SMEs, DBS will do what we can to support SMEs with their working capital needs, be it for trade financing or interest servicing.”

In addition to the $48.4 billion relief package, MAS has announced that it will provide up to US$60 billion ($86 billion) of funding to banks in Singapore through a new MAS USD Facility. “Banks in Singapore are strongly encouraged to avail themselves of the liquidity facilities provided by the MAS so that they can better meet the USD funding needs of their customers in Singapore and the region,” MAS said in its statement. On March 19, MAS and the US Federal Reserve announced a US$60 billion swap facility with the US Federal Reserve.

The MAS USD Facility will support more stable USD funding conditions in Singapore and facilitate USD lending to businesses both here and in the region. It will also contribute to global efforts by central banks to maintain stability and normal functioning of financial markets, MAS adds.

Manufacturing sector

For the better part of 2018 and 2019, the manufacturing sector was already suffering from the US-China trade war. The Covid-19 outbreak merely added to its woes. “A clear challenge is in the shutdown of manufacturing plants and factories,” says ABI Research’s principal analyst Su Lian Jye.

Companies trying to maintain business as usual have issued some of their workers with stay home notices. But there is no way they can work if they are away from the factory floor.

Some companies also faced challenges when forced to implement split-team arrangements.

“Operations teams are working everyday but support functions have split hence some loss of productivity,” Denselight Semiconductors CEO Rajan Rajgopal tells The Edge Singapore. He is bracing for a 15% drop in revenue in FY2020.

“This is no longer just a “China” supply chain issue,” he says. “An industry rebound is now only likely to happen in 4QFY2020.”

For Chandran Nair, group president of AEM Holdings, the additional stimulus is a bonus for struggling companies. But as he tells The Edge Singapore, “I think businesses should take it upon themselves to help during this period instead of waiting for government subsidies to be given to them on a silver platter.”

Meanwhile, Singapore Semiconductor Industry Association executive director Ang Wee Seng believes that the sector will definitely benefit from the package. “It is not just a package that helps the current situation, but it helps develop long term resilience for companies to go through this difficult time,” he says.

Retail sector

Before the second package was announced on March 26, the government had already announced a $4 billion stabilisation and support package at Budget 2020 for the hospitality, F&B, retail and transport operators such as taxis and private-hire drivers. But some companies say they have yet to see the benefits from that first package. Smart home solution retailer mc2, for example, says it has yet to receive the benefits from its landlord. In the meantime, its business has been down since January and disruptions in its supply chain have held back inventory delivery. The company thinks that the government should offer direct cash rebates directly to small retailers like themselves to help reduce their high rental costs.

Other retailers, like Audio House, have been relying more on online sales but it is still seeing a drop in business. Overall sales have fallen some 20% since January this year. Audio House say they too have yet to receive any benefits from the first relief package. However, the company hopes to see more subsidies for e-commerce platforms as well as rental relief and support for staff retention.

F&B sector

The Covid-19 outbreak has hit restaurants and bars hard, spurring DBS to turn less positive on the food and beverage sector as co-mingling and staying among crowds being discouraged.

To make matters worse, bars and clubs — as well as cinemas and theatres — have been ordered to close from from 11.59pm on March 26 until April 30.

On March 25, DBS analyst Alfie Yeo downgraded his recommendation on Jumbo Group — popular with tourists — to “hold” from “buy” with a lowered target price of 18 cents from 38 cents. “While share price has taken a severe beating, we believe it could take time for operations to normalise,” he says.

Based on a poll conducted by the Restaurant Association of Singapore (RAS) done in February, 57% of the respondents expect a more than 50% decline in revenue over the next three months. Other members — especially those who rely on tourists — even expect their revenue to fall by 80%.

An informal grouping of tenants — who call themselves SG Tenants United for Fairness — say landlords have so far only offered very scattered and insufficient help. “We don’t see any reason to think the zero-sum game mentality of landlords has changed with this latest budget.” RAS president Vincent Tan estimates that the total reduction in property tax will translate into an equivalent of 1.2 months of rental savings a year, which in comparison to the 50– 80% drop in revenue, is still “very small”. He hopes government owned properties will help send a “strong signal” by giving two-month rental waiver, and hopefully other landlords will follow. Meanwhile, RAS will continue to press landlords to charge rentals pegged to between 10 and 15% of gross turnover for the next six months, depending on the location.

Hospitality sector

The hospitality sector is expected to take the largest hit from the Covid-19 outbreak as it is the most reliant on tourist arrivals, which has all but disappeared. Property and hospitality giant City Developments (CDL) has even introduced staycation packages to attract locals.

CDL has also arranged for a couple of its hotels to house all affected by the recent spate of events such as the Malaysia lockdown and returning overseas Singaporeans who need urgent accommodation. “In a way this somewhat mitigates the drop in occupancies,” adds CDL.

The enhanced Jobs Support Scheme for hotels, travel agents, tourist attractions, cruise operators and MICE venue operators is geared most heavily towards this sector, with employers receiving a 75% wage offset, versus 25% of most other sectors.

Overall, $90 million has been set aside for the tourism industry’s recovery. Deloitte consultant James Walton welcomed this move, which he says will give the sector a “significant” boost. The 75% Enhanced Jobs Support Scheme, for one, will be critical for companies facing prolonged closures. “The sector support packages look promising but ultimately much will depend on how long the crisis continues and then how quickly confidence is restored,” he adds.

If market reactions are to go by, some investors are feeling a bit adventurous. The US market enjoyed strong back-to-back gains on March 24 and 25 has led some optimists to believe that the economy has bottomed. The Straits Times Index had a roller-coaster ride this past fortnight too, with falls of more than 7% on certain days offset by gains of more than 6% on March 25.

However, market analysts — caught off guard by the ferocity of the outbreak — are not going to call a trough to the market yet. “In terms of policy response, it is clearly very significant, from the central banks, and fiscal authorities,” says Jonathan Garner, Morgan Stanley’s chief Asia and emerging markets strategist. “Unfortunately, we have not seen flattening of the curve for Covid-19 cases. This is a global public health crisis. We need improvement in that before markets can stabilise,” he adds.

The world has to brace for more uncertainty. “The situation is still fluid, so we cannot rule out further action by the government in a few months,” says NUS Business School professor Sumit Agarwal.

For now, large swathes of the economy will just have to hunker down. Meanwhile, the nightly merrymaking at Penny Black will also have to wait. Lew is resigned to the fact that he will lose money, but he understands that the virus has to be contained. “I fully support the government’s action even though we will lose money in the process. Our priority now is being responsible and hence saving people’s lives, it’s not about making money,” he adds. — Reporting by Goola Warden, Jeffrey Tan, Samantha Chiew, Amala Balakrishner and Uma Devi

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