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Singapore economy to see worst contraction since independence if Covid-19 drags on: MAS

Amala Balakrishner
Amala Balakrishner4/30/2020 07:00 AM GMT+08  • 7 min read
Singapore economy to see worst contraction since independence if Covid-19 drags on: MAS
Ggiven uncertainty over how the health and economic crisis will pan out, Chan Chun Sing, Minister for Trade and Industry, says it is “very likely” for the republic’s economic growth to see a steeper fall.
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SINGAPORE (Apr 30): Singapore’s GDP staged a grim 2.2% year-on-year contraction in the first quarter of the year, amid disrupted global supply chains and uncertainty over the course of the Covid-19 pandemic, the Monetary Authority of Singapore (MAS) says.

On a seasonally-adjusted quarter-on-quarter basis, the city-state’s economy shrank 10.6% in 1Q2020 — a sharp retraction from the 0.6% growth recorded in the preceding 4Q2019. The data is also a deviation from the “tepid recovery” anticipated by market watchers.

In its latest half-yearly macroeconomic review released on April 28, MAS noted the decline follows the unprecedented blow caused by the global health crisis which had over 2.9 million cases and at least 200,000 reported deaths as of end April. To curb the spread, many countries have implemented public health measures restricting human movement and the consumption of non-essential social activities. And these have caused major weakness in Singapore’s economy.

Sectors of weakness

Singapore’s economy took a hit in three main areas: A fall in foreign final demand for exports, disruptions to cross border supply chains lowering demand for intermediate inputs and stricter Covid-19 measures hurting domestic demand.

Singapore is heavily dependent on international trade and is particularly susceptible to movements in external demand. The collapse of foreign final demand affected the export of Singapore’s goods and services. For instance, final demand in the US and China — two countries Singapore has the most exposure to— generates value-added spill overs of some 13% of nominal GDP. Export activities in these two countries result in further spill overs amounting to 3.3% of nominal GDP, reflecting Singapore’s provision of inputs to exporters there.

The travel-related sector also saw the biggest decline. The Singapore Tourism Board reported a 51% year-on-year plunge in visitor arrival numbers in February, which caused hotel occupancy rates to tumble to 51% — significantly lower from the 87% average level between August 2019 and January 2020. Changi Airport remains a ghost town and clearly the numbers will remain subdued.

Other consumer-facing sectors have been hit badly too. For instance, the reduced footfall in public places following the implementation of social distancing measures brought an 11% contraction in February’s retail sales volumes. The F&B sector too recorded an overall decline of 16% in the same month.

When the Dorscon alert levels were raised, snaking queues formed at supermarkets, resulting in 14% growth in February for the supermarket sector. Operators have been experiencing record high purchases and correspondingly higher profits. Sheng Siong Group for one, announced a 48.2% increase in its net profits to a record $28.7 million in 1QFY2020 ended March and analysts are forecasting the sales momentum to continue in the current 2QFY2020.

The Building and Construction Authority had at the start of the year, projected another year of growth for the construction sector. However, as the Covid-19 pandemic worsened, the sector contracted 4.3% in 1Q2020. 2Q2020 is slated to bring even worse numbers as work has halted at all sites due to outbreaks in numerous dormitories housing foreign workers. So, for contractors like Figtree Holdings, the question is not when, but to what extent

“At this stage, the company is unable to quantify, nor determine the true extent of the financial impact of [the pandemic] on earnings per share and net asset value for FY20 ending Dec 31,” says Danny Siaw, managing director of Figtree. “However, the Covid-19 pandemic and its effects on the global and domestic economy are expected to impair the group’s earnings capacity and ability to secure new projects in the next 12 months”.

Even the services industries — financial services, business and management consultancies and the likes — were not spared given consumer spending has been deferred.

Interestingly, the trade-related sector staged an unexpected expansion of 6.6% in 1Q2020, thanks to industrial production. However, this was due to an exceptionally strong 68% surge in biomedical medical output although the rest of the manufacturing sector was more subdued. For instance, the linchpin electronics cluster contracted 10.5% as the global electronics cycle derailed semiconductor output.

Recession or not?

Looking ahead, MAS, the republic’s de facto central bank, sees a more severe contraction in 2Q2020 compared to 1Q2020, given the strict circuit measures within Singapore, which snuffed out domestic consumption, on top of much-reduced output in export-oriented manufacturing activities.

“The Singapore economy will enter into a recession this year,” says MAS, predicting full-year growth hovering between –4 and –1%. This was last downgraded in end March from an earlier range of –0.5% and 1.5%.

But given uncertainty over how the health and economic crisis will pan out, Chan Chun Sing, Minister for Trade and Industry, says it is “very likely” for the republic to see a steeper fall.

“We are really concerned that worldwide, [the pandemic] is going to lead to a more serious problem than many had anticipated just a month ago,” he said in an interview with Bloomberg.

MAS sees further downside if more stringent Covid-19 containment measures both at home and abroad are imposed — a likelihood given the difficulty governments face in fully containing the virus in the absence of a proper vaccine and cure.

If so, this would become Singapore’s deepest recession since independence. By comparison, the city state’s worst recession thus far was during the 1997 Asian Financial Crisis (AFC) when the economy contracted 2.2%. During the Global Financial Crisis (GFC), full-year economic growth came in at 0.1% in 2009 while the dotcom bust of 2001 shrank the economy by 1.1%.

Similarly, private sector economists expect bleak numbers. Citi’s forecast is for a full-year contraction of –8.5%, following the extension of the circuit breaker measures to June 1. “The circuit breaker would cause close to 25–30% of GDP to come to a standstill, with every month of extension further reducing 2020 GDP by 2–2.5%,” note economists Kit Wei Zheng and Ang Kai Wei, before adding, “the technical rebound after the lifting of the circuit breaker on 1st Jun will be capped by continued social distancing and only gradual recovery in exports.”

Selena Ling, chief economist at Oversea-Chinese Banking Corporation (OCBC), has also slashed her full-year growth forecast to between –6% and –10%, from –3% previously. For the current 2Q2020, Ling expects the economy to shrink by 20%. “Given that exiting the circuit breaker period will involve incremental opening up, the expected recovery in 2H, especially for 3Q, may be fairly muted,” she says, as cautious households prefer to save than spend.

While the health precautions have taken a toll on the economy, Heng Swee Keat, Deputy Prime Minister and Finance Minister, reiterates that the “circuit breaker” measures are necessary to curb further Covid-19 infections. “Our immediate priority is to protect lives. We had to take strong measures implementing and subsequently extending the circuit breaker. These measures have had a severe impact on our economy,” he noted in a Facebook post on April 28.

Heng adds that the government will provide further support to businesses and households, if need be. To date, $63.7 billion worth of fiscal measures have been announced to help tide businesses and households through this pandemic. Help rendered includes a blanket wage subsidy of up to $3,450 for all Singaporean workers in May and June, foreign worker levy rebates as well as handouts to households.

“We must continue to ensure that our monetary, financial, fiscal and regulatory policies work tightly to ease the impact on businesses and households. We are tracking both the global and our situation at home very closely,” he adds.

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