SINGAPORE (May 29): This is not an easy time to be a policy maker anywhere. This is especially so in Singapore, which is much more exposed to the cruel twists and turns of the world economy than larger countries. Decisions with outsized impacts on the welfare of citizens as well as the survival of companies have to be made in the context of extreme uncertainty. As the Covid-19 pandemic reaches a new phase marked by continued uncertainty and where many countries are beginning to relax restrictions on economic activity, Singapore has to advance policy in two broad areas. One is a short-term approach that limits public health risks while allowing the economy to revive and the second is a longer term strategy of keeping Singapore going strong in the post-pandemic world that is already taking shape.
But as May turns to June, the pandemic is now moving into a new phase. While the public health crisis remains fraught, the worst appears to be over in most developed economies in terms of new infections and deaths caused by the pandemic. Some progress has also been reported in the development of treatments and drugs that reduce the seriousness of the illness induced by the virus. This should help to bring the death rate down while also alleviating the demand for scarce critical care equipment such as ventilators. There has even been some good news on the development of vaccines but we should be realistic and not expect it to be readily available for mass inoculation any time soon.
Countries across the world are beginning to ease the restrictions on activity that were imposed to control the spread of the disease. The pace of easing, however, varies greatly:
- Countries and territories which have been more or less effective in suppressing the virus and even demonstrated the capacity to limit any second waves that appear, are moving to normalcy fairly quickly. These include China, Japan, South Korea, Taiwan, Hong Kong, Australia, New Zealand and a few European countries such as Iceland and several countries in eastern Europe. This is important because such countries account for roughly a quarter of world GDP.
- Another category of countries have made good progress in containing the virus but not entirely are moving more cautiously — this includes Singapore, Malaysia, Thailand and most other continental European economies like Germany, Italy and France. This group makes up roughly a fifth of total global output.
- A third category of countries, like the US and the UK, are relaxing restrictions on economic activity even though the spread of the virus and the daily death toll remains at worrying levels. Here, restrictions may ease but as the risk of becoming infected remains material, people are likely to be cautious about returning to normal working and spending — economic activity will resume but at a slower pace than the first two groups of countries. This group accounts for a quarter of global output.
- There is also the final group of countries where the spread of the virus remains dangerously high. Even though some of these countries are shifting away from lockdowns, they remain in crisis with little prospect of a quick economic upturn. The net effect will be that the second quarter of this year should mark the worst of the crisis and a recovery should begin in the third quarter of the year. However, the policy responses have been massive and will soon begin to provide more support to these economies. Even larger stimulus efforts are imminent: For example, Japan proposes a further stimulus package worth JPY117 trillion ($1.53 trillion). When combined with the package announced in April, the total stimulus amounts to JPY234 trillion or a staggering 40% of GDP. Similarly, the US is likely to enact a fourth set of stimulus measures which should bring the quantum of policy support close to 20% of GDP. The Europeans are also edging closer to a compromise on yet another fund to promote economic growth. In China, comments made by the senior leaders at the recent National People’s Congress left little doubt that monetary, fiscal and supply side measures to boost growth will be expanded. The scale and speed with which stimulus measures have been enacted have not been seen before — and will soon have a substantial impact.
- There is now little chance of a turnaround in the deterioration in US-China relations. That relationship seems to us to have reached the point which US-Soviet Union relations reached in 1979 — when the Soviet invasion of Afghanistan ended the period of détente between the two superpowers and ushered in a period of hostility which caused instability in many parts of the world. The distrust has grown and attitudes have hardened on both sides as the hawks are now in the ascendant. This can only mean more aggression in trade and other economic affairs and growing efforts on both sides to promote decoupling of their economies. That means some degree of deglobalisation or at least “slowbalisation”. Whatever it is, the massive increase in flows of goods, services, people and ideas which promoted growth in east and southeast Asia will slow, to the detriment of Asian growth prospects. Another result of this will be “technological bifurcation” where the US and its allies develop technology standards separately from China and its allies.
- While the US and China will endeavour to avoid tensions accelerating to dangerous levels, there is a risk that some political hot spots in the region could bring the two powers closer to confrontation. China’s decision to impose national security laws on Hong Kong and its other efforts to strengthen its grip on the autonomous city-state will aggravate the differences between the US and China. President Donald Trump has made it clear that his administration will impose sanctions on China if it went ahead with its decision. China will see that as interference in its sovereign affairs and lash back. Looking further out, American efforts to provide more diplomatic and strategic support to Taiwan are also causing consternation in China, which has defined Taiwan as an area of “core interest” where provocations would be resisted strongly.
Substantial policy support can be refined further if necessary
The immediate economic policy task for Singapore is to ensure that its economy avoids a downward spiral and is positioned to recover well and quickly from the deep recession induced by the pandemic. To this end, Deputy Prime Minister Heng Swee Keat has introduced his fourth budget this year on May 26 — the Fortitude Budget — which adds another $33 billion worth of stimulus, bringing the total sum to $92.9 billion or close to 20% of GDP. This is a level of stimulus never seen before in any previous recession. The package covers much ground, from continued wage subsidies to relief from the burden of rental payments for smaller enterprises to substantial funding to help enterprises adjust to the permanent changes that the current crisis will bring.
The scale and design of the package, in combination with the previous packages, should go a long way to stabilising the Singapore economy. The financial support is likely to limit the magnitude of retrenchment of workers as well as reduce the number of enterprises that might default on their loans. The direct reliefs given to individuals will also help alleviate the pains caused by illness or being deprived of income for a prolonged period.
What is not clear is whether even this extraordinary level of support would be enough to prevent a large number of small and medium enterprises from shutting down. In April, we noticed a surge in filings for business cessation. With the restrictions on activity easing only modestly in June, many businesses will remain unable to generate much cash flows for another month. The chances are that May and June will see a further spike in businesses shutting down for good. A more targeted scheme to help such businesses and their stakeholders such as employees, suppliers and creditors may be needed.
How should Singapore respond?
The Singapore government is probably doing as much as it can to deal with the recession, particularly if the global economy starts to recover in the third quarter as we expect. The bigger question is how the city-state should re-engineer its policies for the long term. There are many tough decisions ahead.
First, our view for many years has been that Singapore has become overly dependent on foreign workers. The public health crisis affecting foreign workers in dormitories has made it clear that there were many risks and costs associated with the large-scale importation of hundreds of thousands of migrant workers that had not been fully considered. Now that these costs and risks are recognised, there is little choice for Singapore but to take much more vigorous action than before to reduce their numbers. However, this will not be a popular policy. For example, several chambers of commerce have just issued a joint statement arguing the case for maintaining a large inflow of such workers. Many Singapore companies have become so accustomed to accessing cheap labour that they are unable to restructure painlessly to less labour-intensive processes. Structuring a programme to reduce the need for foreign workers will impose costs on many enterprises, so the challenge is for policy makers to devise ways to soften the blow. This is one of those times when a short-term price will have to be paid to rectify a clear imbalance in the economy.
Singapore also needs to “grow its own timber” or put a lot more policy effort into developing local enterprise while still remaining open and friendly to the multinational companies that have helped develop the country. Many measures have been suggested in the past such as those by former ruling party parliamentarian Inderjit Singh. Perhaps it is time to take these recommendations more seriously.
Finally, there is a clear need to think harder about how to build resilience. Given how turbulent the world economy and geo-politics will be in the coming years, we should expect more shocks that will come out of the blue and catch us by surprise. The pandemic has shown that we need more automatic stabilisers in the economy, for example. A comprehensive unemployment insurance scheme would have helped provide a shock absorber for the economy. Unfortunately, this has been an anathema to policy makers but it might be time for us to overcome this aversion to such protections which are prevalent in virtually every country in the world. We also need a better framework of protections for small and medium enterprises so that they can adjust better to such shocks. The government has taken a step in the right direction with its proposed legislation to get landlords to provide rental waivers to business tenants during a crisis. More needs to be done in this regard such as by introducing a tougher competition law framework.
It is also heartening to see that the government has set up an Emerging Stronger Task Force to work out the longer term responses that Singapore needs to mount. However, it is absolutely vital that the task force be willing to boldly question previous policy assumptions and break the mould of old policy approaches where necessary. It would be a sad day for Singapore if it did not do so.
Manu Bhaskaran is CEO at Centennial Asia Advisors