Recent Economic Developments in Singapore* External environment showed signs of improvement Chart 1 The strong performance of the US economy early this year has helped to kick start growth in other parts of the world. The US economy staged a remarkable turnaround in Q1 2002, with real GDP growth rising to 5.6% on a seasonally-adjusted quarter-on-quarter annualised (SAAR) basis, up from 1.7% in Q4 2001. Signs of levelling off have also emerged in the Eurozone, while Japan is also experiencing a cyclical upturn. 10

US

Eurozone

QOQ SAAR (%)

5 0 -5

Japan

-10 -15 1997

1998

1999

2000

2001

2002

Q1

Chart 2 The global electronics industry has also shown signs of bottoming out in recent months. Global chip sales have started to pick up from the worst downturn last year, increasing significantly in Q1 after five consecutive quarters of contraction. US electronics new orders (excluding semiconductors) reverted to negative territory in Q1 after rebounding strongly in Q4 last year. On the supply side, inventory correction has moderated. 80

US Electronics New Orders (excluding Semiconductors)

QOQ SAAR (%)

60 40 20 0 -20 -40

Global Chip Sales

US Electronics Inventory (excluding Semiconductors)

-60 1997

1998

1999

2000

2001

2002 Q1

* This is a brief which aims to provide a quick pictorial summary of recent economic developments. It will be updated every quarter.

Update on the Singapore Economy

2

Chart 3 The improvements in the global indicators have generally been reflected in the latest data for regional exports. On a three-month moving average basis, exports have largely turned around in each of the ASEAN economies we monitor, as well as in the NIEs and China, particularly in response to the rise in new electronics orders from the US. 50

30 Philippines Malaysia

20

Thailand

10 0 -10 -20

Export Growth - NIEs & China

40 YOY % Growth, 3MMA

YOY % Growth, 3MMA

50

Export Growth - ASEAN

40

Singapore Indonesia

-30

30

China

20 10 0 Hong Kong

-10 Korea -20

Taiwan

-30

-40 1997

1998

1999

2000

2001

-40 1997

2002

1998

1999

2000

2001

Apr

2002 May

Chart 4 Given the more encouraging economic data which have recently emerged, the Consensus forecast for 2002 is for a mild recovery in the eight regional economies (excluding China), with GDP growth projections ranging from 1.8% to 5.6%. 20 15

Malaysia

5 0 -5 Thailand

Real GDP Growth - NIEs & China

15

Philippines

YOY % Growth

Singapore

10 YOY % Growth

20

Real GDP Growth - ASEAN

10

China

5

Taiwan

0

-10

Hong Kong

-5

-15

Indonesia

Korea

-20

-10 1997

1998

1999

2000

2001

2002Q1

1997

1998

1999

2000

2001

2002Q1

Update on the Singapore Economy

3

The domestic economy has also turned around Chart 5 The domestic economy saw firmer signs of recovery in Q1 2002. Growth momentum, as measured on a quarter-on-quarter SAAR basis, rebounded to post a 7.7% increase in Q1, up from 5.6% in the previous quarter. In year-on-year terms, GDP growth posted a smaller contraction of 1.7% in Q1 2002, compared with the 6.6% decline in Q4 2001. The improvement principally reflected the tapering off in the contraction of manufacturing output, along with the strong performance of the transport & communications sector. 20

SAAR

15

YOY Growth

Per Cent

10 5 0 -5 -10 -15 1997

1998

1999

2000

2001

2002 Q1

Chart 6 The domestic manufacturing sector has recovered strongly. The index of industrial production as measured on a q-o-q SAAR basis gathered pace in Q1 2002, increasing by 38%, up from 10% in Q4 2001*, although this remains 5.2% below the levels in Q1 last year. After contracting over the past three quarters, non-electronics output reversed to register positive growth of 3.5% in Q1 2002 on a year-on-year basis, fuelled by the robust performance of chemicals & chemical products. Electronics production also exhibited signs of levelling off, falling by a milder 13% in Q1 2002, after declines of 35% and 29% in Q3 and Q4 2001 respectively. 60

Chemicals & Chemical Products

YOY % Growth

40

Manufacturing Sector Value-added

20 0

Electronics

NonElectronics

-20 -40 1997

1998

1999

2000

2001

2002 Apr

* Computed from EDB source data

Update on the Singapore Economy

4

Chart 7 The turnaround in the domestic manufacturing sector also appears to have begun spilling over to the trade-related services sectors. The volume of sea cargo handled saw a dramatic pick-up, growing by 11% on a year-on-year basis in Q1 2002 and by a further 13% in April, after four consecutive months of decline. Air cargo volumes have also begun to show improvement, expanding by 5.4% in Jan-May 2002, following double-digit contractions for most of 2001. 40

Total Goods Exports

YOY % Growth

30 20

Air Cargo

10 0

Sea Cargo* -10 -20 1997

1998

1999

2000

2001

2002 Apr-May

* Latest data up to April

Chart 8 Reflecting the marked improvement in entrepôt trade, the contraction of the wholesale & retail sector moderated to 3.7% in Q1 2001, after declining by 8.5% in the previous quarter. Growth of re-exports returned to positive territory in April this year, after consecutive declines in the previous three quarters. However, growth of retail sales turned negative, coming off a high of almost 30% in Feb 2001 to post a 3.2% decline in Q1 2002, as a result of weak consumer sentiments. Following double-digit declines in October and November after the terrorist attacks on the US, visitor arrivals fell by a milder 3.6% in Q1 2002, before expanding slightly in April. 40

Retail Sales Volume*

YOY % Growth

30

Wholesale & Retail Value-added

20 10

Visitor Arrivals

0

Real Re-exports

-10 -20 1997

1998

1999

2000

2001

2002 Apr

* Latest data up to March

Update on the Singapore Economy

5

Chart 9 Support from the financial services sector fell off sharply in Q1 2002, contracting by 3.2% after positive growth over the past six quarters. The deterioration reflected in part the continued worsening of the insurance segment, as the boost from the liberalisation of the CPF Investment Scheme continued to taper off. The commercial banking segment also weakened sharply, reflecting weaker lending and fee-based activities, while foreign exchange trading activity dipped. However, the negative impact was mitigated somewhat by stronger growth in the Asian Dollar Market (ADM), investment advisory and stockbroking segments. 600

60 SGX Turnover Volume (LHS)

YOY % Growth

45

Financial Services Value-Added (RHS)

400 300

30

200

15

100 0

0

YOY % Growth

500

-100 -15

-200

*ADM Non-bank Lending (RHS)

-300 1997

1998

1999

2000

2001

-30 2002 Apr-May

* Latest data up to April

Chart 10 Growth of commercial bank lending remained sluggish, after weakening from an average of 4.2%* in 2001 to 1.6% in Q1 2002. Overall credit growth was dragged down by contractions in loans to the manufacturing and commerce sectors, as well as to the non-bank financial institutions. The surge in loans to the transport, storage and communications sector, which had helped to underpin commercial bank lending last year, finally tapered off, with growth moderating sharply from 49% as at end2001 to 1.7% in the first quarter and -5% in Apr 2002. 70

Transport & Building & Communications Construction (Incl Housing) Professional & Private Individuals

60

YOY % Growth

50 40 30 20 10 0 -10 -20

Overall

Manufacturing

-30 1997

1998

1999

2000

2001

2002

Apr * This figure has been adjusted for the impact of DBS Finance's integration with DBS Bank. Without the adjustment, growth of loans to non-bank customers would have averaged 6.6% in Jan-Dec.

Update on the Singapore Economy

6

Chart 11 The loan-to-deposit rate has remained below 1.0, reflecting the easy liquidity conditions in the banking system. 1.2

24

Loan-to-Deposit Ratio (LHS) Banks' Liquid Asset Ratio (RHS)

22

1.0

21 20

Ratio (Per Cent)

Ratio

1.1

23

0.9 19 0.8 1997

18 1998

1999

2000

2001

2002 Apr

Chart 12 Domestic interest rates declined steadily over most of 2001 in tandem with easing global monetary conditions. Reflecting the relatively steeper drop in the 3-month US$ SIBOR rate, the differential between the 3-month US$ SIBOR and domestic interbank rate narrowed to 63 basis points in Dec 2001. As at May 2002, the differential has edged back up to 102 basis points, as the US$ SIBOR held firm following the US Federal Reserve’s decision not to cut rates further. Retail interest rates also weakened, with the average prime lending rate having fallen to 5.40% since Oct 2001, after holding at 5.80% for the first eight months of 2001. The 3month and 12-month fixed deposit rates have also declined, falling to 1.00% and 1.48% respectively as at May 2002. 9

Prime Lending Rate**

8

% Per Annum

7

3-month US$ SIBOR

6 5 4 3

3-month Interbank Rate*

2 1 0 1997

1998

1999

2000

2001

End-of-Period * Closing offer prices quoted by money brokers. ** Average rate compiled from that quoted by 10 leading banks.

2002 May

Update on the Singapore Economy

7

Chart 13 The Singapore Dollar remained largely unchanged against the US Dollar for most of Jan-Mar 2002, after which it rose steadily, reflecting the generalised decline in the US Dollar since Apr 2002. As at 31 May 2002, the domestic currency had strengthened by 3.2% against the US Dollar since the Mar 2002 trough, while shedding 3.9% and 3.8% against the Yen and Euro respectively. Over the same period, the Singapore Dollar also weakened against the major Northeast Asian currencies, as they moved in tandem with the Yen. Movement of S$ against Selected Currencies 120 5 Jan 2001 = 100

Appreciation of S$ Rupiah 110

Yen

Euro

100

Baht

US$

Won

90

80

Jan 2001

Mar

May

Jul

Sep

Nov

Jan 2002

31 May

End-of-Week

Chart 14 As at May 2002, the benchmark Straits Times Index had recovered by 27% since end-Sep 2001. Most other regional stock markets also saw signs of bottoming out at the start of 2002. After the strong rebound in the wake of 11 Sep, the recovery of the NASDAQ has moderated somewhat.

Index (1997 Q1 = 100)

120

Indonesia (JCI)

400

Singapore (STI)

US (NASDAQ)

100 80 60 40 20 0 1997

Malaysia (KLCI)

Thailand (SET)

Philippines (PCI)

Index (1997 Q1 = 100)

140

300

100

0 1998

1999

2000

2001

2002 May

US (S&P 500)

200

Hong Kong (HSI)

Korea (KOSPI)

1997

1998

Japan (Nikkei 225)

1999

Taiwan (TWSE)

2000

2001

2002 May

Update on the Singapore Economy

8

Wage and price pressures subsiding Chart 15 The deterioration in the domestic labour market moderated somewhat in Q1 2002. The seasonally-adjusted unemployment rate, which came in at 4.4% in December, edged up slightly to 4.5% in Mar 2002, and is likely to peak in the second half of this year. A total of 4,857 workers were retrenched in Q1 2002, following the 25,838 layoffs recorded last year. In addition to the negative cyclical effects of the economic downturn, the increase in retrenchments has also reflected the recent wave of restructuring and consolidation in the financial services sector. 6

Per Cent

5

Unemployment Rate

4 3

Seasonally Adjusted Unemployment Rate

2 1 1997

1998

1999

2000

2001

2002 Mar

60

12

50

10

40

8

30

6

20

4

10

2

0

0

-10

-2

-20

-4

-30 1997

1998

Manufacturing Construction

1999 Services

2000

2001

-6 2002Q1

Avg Nominal Earnings (RHS)

YOY % Growth

QOQ Changes in Employment ('000)

Chart 16 Wage growth returned to positive territory in Q1 2002, after declining by 5.2% in Q4 last year, while employment in the two major goods-producing sectors — manufacturing and construction — fell by a total of 11,672 in Q1 2002. Employment in the services-producing industries also declined in Q1 2002, albeit to a lesser extent, shrinking by 2,321.

Update on the Singapore Economy

9

Chart 17 Consumer prices declined by 0.9% in Q1 2002, after contracting by 0.2% in Q4 2001. The fall was mainly due to a further reduction in electricity tariffs, in tandem with lower world oil prices. Food prices also declined more significantly, while inflation of several mass-market retail items continued to remain negative on the back of weak consumer sentiments. Cost increases of “other miscellaneous” items (largely comprising holiday tour packages) have also moderated. Reflecting some upside risks stemming from rising commodity prices, CPI inflation is forecast to come in at the higher end of -1.0% and 0% for 2002 as a whole. 3

MAS Underlying Inflation

YOY % Growth

2 1 0

Overall CPI Inflation

-1 -2 1997

1998

1999

2000

2001

2002 Apr

Chart 18 As the initial fears of a permanent dislocation of the global economy following the terrorist attacks of 11 Sep subsided, the Government’s official forecast for Singapore’s real GDP growth for 2002 was revised from 1-3% to 2-4%. With the economy at a turning point, the growth profile in 2002 could vary considerably depending on the strength of the recovery in the world economy and global electronics industry. 80

Electronics

Index (%)

70 60

Overall

50 40 30 1999

Index > 50%: New export orders are increasing; Index < 50%: New export orders are decreasing

2000

2001

2002 May

Update on the Singapore Economy

10

Chart 19 The FY 2002 Budget was released by the Government on 3 May 2002, and represented a careful balance between the need for bold measures to improve Singapore’s international competitiveness and attract global talent, and the need for fiscal prudence in view of the uncertainties in the external environment. Some of the key initiatives include reductions in corporate and personal income tax rates, enhanced tax incentives for the financial sector, and the introduction of employee stock option incentive schemes. However, in order to offset the loss of revenue from the reduction in direct tax rates, the Goods and Services Tax will be raised from 3% to 5% from 1 Jan 2003. This is in line with the general strategy to shift the tax revenue base more towards indirect taxation. Some of the major tax changes announced in the FY 2002 Budget are listed in the table below. Tax Changes Corporate Income Tax § Reduced from 24.5% to 22% § Loss transfer Group Relief § One tier tax system § Tax incentive for Financial Sector and Enterprise Development Personal Income Tax § Top rate reduced from 26% to 22% § Increase in National Service reliefs § Handicapped parent relief § Income tax bands reduced from ten to seven § 10% tax rebate as announced in Oct remain § New class of “Not Ordinarily Resident” taxpayers § Employee Stock Option Incentive Schemes GST § Increase from 3% to 5% Motor Vehicle Tax § Additional Registration Fee reduced from 140% to 130% § Excise Duty on cars reduced from 31% to 20% § Road tax lowered by 20% § 5,000 additional Certificates of Entitlement in quota year 2002/2003 § Increase in ERP Foreign Worker Levy § Concession extended till Dec 2002 Excise Duty § Increase in excise duty on liquor § Increase in excise duty on cigarettes GST offset package § Increase in subsidy to Health, Education and Town Council Service and Conservancy Charges (S&CC) § Rebates for Town Council S&CC Charges and Rentals § Economic Restructuring Shares

§

Citizens’ Consultative Committees scheme (a new assistance program)

Amount Loss in Revenue $700m pa $170m pa

Loss in Revenue $620m pa $17m pa $2m pa

Gain in Revenue $1.3b pa Loss in Revenue

Time Wef YA2003 Wef YA2003

Wef YA2003 Wef YA2003 Wef YA2003

Wef Jan 2003 Wef May 2002 Wef May 2002 Wef Sep 2002 Wef May 2002 To be announced

Loss in Revenue Gain in Tax revenue $18m pa $100m pa Cost to government $29m pa

$340m (for total of 5 years) $3.6b (or $1.2b pa over the next 3 years) Set aside $3m pa over the next 5 years

Wef May 02 Wef May 02 Wef Jan 2003

Wef Jan 2003 First issue 2003

on

Jan

Update on the Singapore Economy

11

These tax measures, together with the offset package, rebates and ERS, will cause the FY 2002 fiscal position to turn from a modest budget surplus of $900 million to a small deficit of $190 million. The FY 2002 Budget, together with the off-budget measures already introduced last year, is assessed to be generally conducive to the current economic situation and should deliver a moderate boost to real GDP in 2002. Over the medium term, the FY 2002 Budget envisages a series of tax adjustments, specifically involving reductions to the personal and corporate tax rates, that will help enhance Singapore’s international competitive position and lay the foundations for continued sustained economic growth in an increasingly competitive economic environment. On the monetary policy front, the MAS has adopted an easier policy stance since July 2001, when it shifted from a modest appreciation of the Singapore dollar to a neutral stance, with the policy band centred on a zero percent appreciation of the S$NEER. The MAS subsequently widened the policy band in October so as to allow greater flexibility in exchange rate management. In January 2002, the MAS announced that it would maintain a zero percent appreciation path for the policy band, centred on the level of the S$NEER prevailing on the day of the announcement. In addition, the MAS has also restored a narrower policy band, as market and economic conditions have become less volatile. In addition, the government established the Economic Review Committee (ERC) in November 2001 to fundamentally review our development strategy and formulate a blueprint to restructure the economy. To date, recommendations have been put forth by the ERC Sub-committee on Taxation, CPF, Wages and Land, as well as by the ERC Sub-committee on Entrepreneurship and Internationalisation.

Prepared by:

Monetary Policy Division Economics Department Monetary Authority of Singapore

Date:

17 Jun 2002