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Persistent uncertainty dials back expectations of strong 3Q rebound

Amala Balakrishner
Amala Balakrishner10/9/2020 06:30 AM GMT+08  • 8 min read
Persistent uncertainty dials back expectations of strong 3Q rebound
market watchers are looking at a 7.6% y-o-y contraction in the GDP for 3Q2020
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Businesses that are trying to quickly put behind the unprecedented economic contraction earlier this year in hopes of a quick 3Q rebound might have to dial back their expectations.

The beginning of the Phase Two measures — which permitted the resumption of in-store shopping and dining from June 19 — was assumed to have brought a much-needed lift to Singapore’s ailing economy for 3Q ended September, which follows a 13.2% y-o-y contraction in the preceding 2Q.

Alas, weakness is still spreading across several sectors. Consumer-facing industries such as retail are still feeling the heat of the pandemic, with total retail sales value plunging 5.7% y-o-y in August.

CGS-CIMB Research’s economists Michelle Chia and Lim Yee Ping note that as at July — when the metric recorded an 8.5% y-o-y drop — the retail sales level remained 8%–10% below the 2019 average.

The duo attribute this to the lower visitor arrivals, which plummeted by 99.5% y-o-y to just 8,900 in August. This is a result of the measures restricting international travel, in a bid to curb the spread of Covid-19.

Still, the economists are taking solace in the 1.4% increase in Singapore’s seasonally adjusted m-o-m retail sales value. This was a result of higher spending on motor vehicles as well as goods at supermarkets and hypermarkets, furniture and household equipment, and computer and telecommunications equipment.

A similar performance is seen in the construction sector, which has been seeing more activity in the last quarter as workers gradually return to work. However, the sector — which was among the top contributors to Singapore’s GDP in 2019 — is still falling behind its potential performance for the year, as developers and project owners — including the government itself — scale back or push back timelines.

According to the Building and Construction Authority, construction demand this year is seen to range between $18 billion and $23 billion, down from its earlier forecast of $28 billion and $33 billion made in January.

Conservative consumers and companies

The impact of the pandemic on the consumer-facing and construction sectors, is reflective of the level of activity in Singapore. This weakness has pushed companies and consumers to be more conservative in their spending habits, thereby causing bank lending to slow for the sixth consecutive month in August. Total loans from the domestic banking unit — which captures lending in all currencies, but mainly reflects Singapore-dollar lending — slipped 0.1% from the previous month to some $678 billion in August. This is down from the $678.7 billion disbursed in July.

Meanwhile, the export-oriented sectors appear to be faring better with global supply chains — which had been under duress earlier in the year when several countries were in lockdown — showing signs of improvement. This has enabled Singapore’s manufacturing activity and non-oil domestic exports (NODX) to rebound in August.

For one, factory output snapped out of a three-month losing streak to expand by 13.7% y-o-y in August. This is thanks to growth in semiconductor production and demand for biomedical products. Similarly, the better-than-expected 7.7% growth registered to August’s NODX has made analysts sit up.

Despite the signs of an improvement in Singapore’s economy, the data released between July and August has pushed the likes of CGS-CIMB’s Chia and Lim to slash their 3Q2020 GDP forecast to between –4.5% and –5.5%, from their initial –3.5% estimate.

The Ministry of Trade and Industry will release flash estimates for 3Q on Oct 14. Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye are expecting an even worse GDP to contraction of 6.3% in 3Q due to the drag from the services and construction sectors.

“The Google Mobility index to retail and recreation venues has recovered to about 11% below pre-pandemic levels as of Sept 11, from the lows of 90% in April,” the duo point out, citing this increasingly popular proxy indicator of economic activity.

However, “tourism-dependent services however remain due to tight borders controls. Construction activity remains well below normal levels in 3Q as the majority of foreign workers were only allowed to return to work from end-August”, they add.

Overall, market watchers are looking at a 7.6% y-o-y contraction in 3Q2020, according to findings from the Monetary Authority of Singapore’s (MAS) released on Sept 7. The coronavirus emerged as the top economic threat thwarting the city state’s growth, the 26 analysts polled reflected.

“The rationale for this can be attributed to the strong risk on sentiments since the re-opening of global/domestic economies since June, the dovish commitments by major central banks to keep monetary policy accommodative for longer, and the yield-seeking investor behaviour due to the very low interest rate environment,” says Selena Ling, head of OCBC Bank’s treasury research and strategy department.

Persistent weakness

In spite of the persistent drag from Covid-19 and the uncertainty it brings to both the domestic and global economy, Singapore’s economy is showing slow signs of improvement. This is often attributed to the close-to-$100 billion in relief measures disbursed through the budget packages this year. The MAS estimates that these measures have collectively prevented Singapore’s GDP from contracting by a further 5.6% in 2020 and 4.8% in 2021.

While this spells good news, economists are still expecting Singapore’s GDP to contract this year — the only question is the magnitude.

United Overseas Bank economist Barnabas Gan, who is seeing a “high degree of uncertainty” on prospects of recovery, has pencilled in a 5% full-year contraction. “One major uncertainty is how effective other economies are in containing Covid-19, as well as whether an ‘effective and safe’ vaccine can be developed....We note that the very nature of the pandemic is fluid and it could still be more severe and protracted than previously anticipated,” he says adding that this may tip the performance of Singapore’s trade and manufacturing sectors.

At what cost?

As gloomy as the outlook is, the government’s upcoming measures, in the wake of the near $100 billion already announced, seems like a band aid in contrast. Deputy Prime Minister Heng Swee Keat told the Parliament on Oct 5 that the government will extend the Enhanced Training Support Package by six months to end-June 2021. Another six-month extension was made to the Temporary Bridging Loan Programme till September 2021 to ensure businesses have better access to loans.

Heng also enhanced the capability-building grants which look into market readiness, productivity and enterprise development, to boost businesses’ efforts in transformation, digitalisation and global or regional expansion.

“Even as we shift our approach in supporting businesses and workers as the economy recovers, we will make sure that the support does not taper off too sharply,” he stressed. As such, he is looking at longer-term strategies to prepare Singapore for the structural shifts that are expected to emerge in a post-Covid-19 global economy. These efforts include re-making Singapore as a hub for technology, innovation and enterprise, fostering inclusive growth and investing in economic resilience and sustainability.

“Everything this government does to protect, re-open, and grow our economy — we do, not for the economy’s sake, but for our people. We strive to secure a way for Singapore to continue to make a good living, so that Singaporeans can have a good life,” he said.

To OCBC’s Ling, these extensions and en- hancements are “welcome news”. “Market expectations were probably not overly high going into this announcement, since [Heng] had said there would not be a fresh stimulus round per se,” she says. And since the government has not announced another draw on its reserves, Ling believes that “this is probably as far as budgetary policy assistance goes for now”.

CIMB Private Banking economist Song Seng Wun agrees, saying that the announced extensions — especially for schemes that are expiring soon — provide some degree of visibility for firms in the months ahead.

The economists note that Singapore’s measures to retain its maritime trade, regional trade and logistics and digital connectivity and agri-food sector status are also helpful in giving the economy a boost in the ongoing 4Q2020 ending in December.

While these measures are expected to relieve businesses and the economy at large, Singapore’s fiscal balance is expected “to feel the strain”. According to Heng, the government expects operating revenue to be 16% lower than initial estimates presented during the Unity Budget in February, and that revenue collections are expected to fall across all revenue categories. And while the government expects the republic’s revenue position to be weak amid the lingering economic effects arising from Covid-19, its expenditure will increase on continued support for Singaporeans and businesses, he added.

“Going into FY21, we foresee the fiscal deficit narrowing slightly, but will continue to be impacted by weak operating revenue amid large spending to help balance the economy,” note economists at RHB’s Singapore Research team.

However, CGS-CIMB’s Chia and Lim say that the government has “maintained its fiscal deficit target by rationalising expenditure”. The Ministry of Finance (MOF) estimates FY2020’s total expenditure to be $102.1 billion — $8.4 bilion lower than the disbursements announced in the May 26 Fortitude Budget. This is due to a $1.6 billion reduction in operating expenses (opex) as well as a $6.8 billion cut in development expenditure (devex), note Chia and Lim.

“Opex cuts were driven by project cancellations or deferments and lower variable compensation for civil servants, while the devex decline was due to delays in major construction projects,” they elaborate.

As Singapore picks itself up from this unprecedented crisis, it appears that the government measures — while costly to the economy — are necessary to tide it through and remain relevant in the post-Covid world. As Heng puts it, this outcome will only be possible with “the collective determination, adaptability, and sacrifice of our people and businesses”.

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