SINGAPORE (Apr 30): The Monetary Authority of Singapore’s (MAS) latest take on the Covid-19 pandemic’s effect on Singapore’s economy makes for sombre reading. The global demand that so substantially shapes our prospects will contract sharply this year. That will compound the woes created by the stringent restrictions on social mingling here. There could be a fairly robust upturn next year, but even if much goes well, the world economy will probably still be below where it should have been without this pandemic shock. Moreover, the MAS warns that the risks are very much to the downside: The oil price crash is also hurting Singapore’s economy and tighter financial conditions around the world could trigger more stresses in the world economy. Singapore’s economic prospects are therefore “significantly diminished”.

The MAS assessment provides a good guide to what to expect for the economy. Our view is that the world economy might actually perform better than expected by the end of this year, which will help brighten Singapore’s prospects for a recovery in 2021, though not much is likely to help the city-state in the near term.

However, our greater concern is that the downside risks within the Singapore economy could turn out to be worse than anticipated: without policy support to deflect these risks, the parts of our economy which determine the welfare of most Singaporeans — small and medium-sized enterprises (SMEs) — may not benefit from the global recovery next year. We may get a situation where the headline GDP growth in 2021 might appear positive but too few Singaporeans actually feel the uplift.

Don’t underestimate the risk of a downward spiral

Singapore fared reasonably well when it faced two of the worst economic challenges in its recent history. The downturns caused by the Asian crisis of 1997 and the global financial crash of 2008 were limited in scale, duration and intensity even though the effects were pretty devastating elsewhere. That relative resilience should not make us complacent about this downturn. This time is different, as never before has our economy seen virtually all of its engines of growth stall simultaneously:

• With the possible exception of the biomedical sector, global demand for Singapore’s manufactured exports will probably plunge in coming months, putting about a fifth of our economy at risk. The good numbers we saw for exports in March were one-off and unlikely to be repeated.

• Our regional hub — port, airport, export-import entrepot activities, financial services and business services — are likely to be severely stressed. That’s another roughly quarter of our economy under downward pressure.

• The pandemic has also crushed our touism sector while construction activities have slowed sharply because of the circuit breaker. That’s another 10% of the economy hurt.

• Finally, most of our domestically-oriented services such as the retail sector, food & beverages and local business services are all contracting.

As a result, we would not be surprised if the economy contracts by around 6%–7% for 2020 as a whole. That would represent the deepest recession Singapore has suffered in more than 50 years — and much worse than the 4% contraction that government economists forecast as a worst case scenario.

In short, the suggestion that the Singapore economy will contract this year is generally known but probably by a lot more than anticipated. But could we also be underestimating the potential for a downward spiral in the economy?

When a shock like this hits, it can be either absorbed — if there are sufficient buffers in the economy — or it can be amplified if there are structural weaknesses. In this current case of multiple weaknesses in virtually every sector, there is now a real risk that these different frailties interact to create a destructive doom loop.

But we do have one very good buffer in the form of a strong policy response. Certainly, the Unity, Resilience and Solidarity budget packages are large, amounting to the most formidable policy response Singapore has mounted in decades of dealing with economic downturns. The MAS estimates these packages will provide support of an additional 8.6% of gross domestic product to the economy — that is indeed powerful. In addition, the MAS has also allowed a calibrated easing of monetary policy and supplemented that with measures to increase financial liquidity, provide targeted assistance to borrowers, encourage banks to keep lending to riskier firms and introduced new lending facilities.

The SMEs are a source of great risk

Despite the overall stimulus provided by these large packages, the magnitude of the threats to the economy remains. It is not clear to us whether the existing policy buffers will suffice to neutralise dangers to the SME sector. This is an important part of the economy because its fortunes determine the welfare of a large number of Singaporeans: SMEs account for 99% of all enterprises in the country, provide two-thirds of jobs here and account for just below half of total economic output.

We cannot afford to take too many risks with this sector as they are at particular risk in crises. Typically, their cash buffers are low, so they struggle to survive a prolonged period of low revenues — especially when it is an abrupt slowdown that could not have been planned for. Many rely on a narrow base of customers and do not have the diverse base of demand that can see them through a downturn. Banks are usually leery of lending to SMEs because of their higher credit risk so SMEs usually do not have lines of credit that they can draw on in a difficult period. Most of them have no access to capital markets either, so cannot raise bond or equity financing.

In addition, SMEs are also at risk during a crisis if the large customers they serve use their dominant position to squeeze SMEs. There are already reports, for example, of large companies changing payment terms from 30 days to 60 days. That means an already cash-strapped SME would have to wait an additional month to be paid for work already done or goods already delivered. In a downturn, the loss of a month’s worth of cash could make the difference between surviving or not. In past downturns, there were also cases of large companies forcing SMEs to cut prices of services or components supplied. Finally, SMEs quite often depend on generous suppliers’ credits to conserve working capital — but these may not be available easily during a recession.

Going by the scale and speed of the economic contraction underway, we fear that there is a strong likelihood that many SMEs will be forced to shut down soon. Unlike other downturns, where revenues simply fall, the pandemic-induced lockdowns are causing revenues to completely disappear for many. But their obligations in terms of salaries, rentals and loan repayments remain. The SMEs’ reactions — and those that are on the brink of collapsing will have little choice if they are to survive — would be to lay off workers, stop paying rent and delay principal and interest payments.

But these actions are exactly what could amplify the initial downturn into a much more serious economic crunch. If there are mass layoffs, consumer spending will fall sharply deepening the recession. If SMEs defaulted on loans, banks would be stressed and cut back on the credit flows that are vital to keep the economy functioning.

The case for greater support for SMEs

The government has promised extensive aid for SMEs but probably needs to do more and to do so quickly. The key is to help them with their obligatory payments such salaries, rents and loan repayments.

• The Job Support Scheme should be expanded so that it lasts several months. The fact is that the downturn will extend beyond just the lockdown period since no one expects a swift return to normal revenue generation.

• The government needs to do more regarding the burden of rental payments, even if this means using its moral authority and/or legislative powers to ensure rental waivers. The lockdowns are preventing many SMEs from utilising the retail or industrial or office space that they are contractually obliged to pay rent for, placing a great strain on their survivability. The property tax rebate that the government offered and which landlords are required to return to tenants do not go far enough. In most cases, they do not even cover one month of rental expense. Landlords, especially the large dominant real estate players, have been generating huge profits for decades: there is a case to be made that they should bear some of the burden of securing the economy from a downward spiral by being asked to forego several months of rental income. Actually, the Housing & Development Board (HDB) has already shown the way by foregoing rents for small shops in housing estates. We just need more landlords to take their cue. Private sector landlords could be partially compensated for rental waivers through tax credits or other government policies.

• Finally, there should be far more extensive financing schemes for SMEs. In the US, the Small Business Administration (SBA) has offered loans through banks which are rapidly approved and which are converted into grants that the SBA funds — so long as the small business does not retrench workers. Something along these lines should be considered.

Some of these suggestions for policy may seem radical. They may also carry risks with them. But we are operating in a messy crisis where there is great uncertainty over how bad things could get: In fact, the worst case could be very severe indeed. There are no easy options, we have to choose the least bad options.

But in such cases, the optimal strategy is to err on the generous side of policy even if it is radical. The alternative could be to risk triggering downward spirals that would be difficult if not impossible to overcome once they start. The risks associated with such policy measures can always be managed by making the schemes for wage subsidies, rental waivers and limited time special lending programmes.

Manu Bhaskaran is CEO at Centennial Asia Advisors.

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