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Country Commercial Guides for FY 2000: Singapore Report prepared by U.S. Embassy Singapore, released July 1999 Note*

Chapter II. ECONOMIC TRENDS AND OUTLOOK

Major Trends and Outlook

The Singapore economy grew by 0.3 percent in 1998, a sharp deceleration from the average annual growth rate of about 9.0 percent in the preceding 10 years. (Note: The government revised its 1998 growth figure downwards from 1.5 percent when it recently introduced a methodology for calculating the output of financial services that included offshore stockbroking, investment advisory and insurance activities.) The economy lapsed into a minor recession when GDP contracted by 1.9 percent and 1.1 percent in the third and fourth quarters respectively. The weak economic performance in 1998 was due to the regional financial and economic crisis which dampened external demand for Singapore's goods and services (particularly in the commerce, financial and business services, and transport and communications sectors). It also eroded Singapore's cost competitiveness vis-ˆ-vis countries in the region whose currencies have devalued sharply as a result of the crisis. In addition, the economy was hit by the global electronics slump and excess capacity, which caused the export-oriented manufacturing sector to contract by 0.5 percent. (Note: Electronics - notably disk drives and other data storage components, semiconductors, computers and communication equipment - contribute 10 percent to Singapore's GDP, 43 percent to total manufacturing output, and 61 percent to total domestic exports.)

The economy emerged from the recession in the first quarter of 1999, when GDP grew by 0.8 percent. The manufacturing sector led first quarter growth, expanding by 6.5 percent (after three consecutive quarters of decline) on the back of a strong electronics upturn, and higher output of pharmaceuticals and petrochemicals products. Consequently, unemployment, which peaked at 4.5 percent in the third quarter of 1998, eased to 3.9 percent in March 1999. (Note: Singapore's average annual unemployment rate in the last 10 years was 2.0 percent.) At the same time, labor productivity grew by 3.2 percent after three consecutive quarters of decline. The manufacturing sector, in particular, witnessed a 14.3 percent surge in productivity in the first quarter. Meanwhile, the deflationary cycle was also halted when the consumer price index went up by 0.1 percent in May 1999, after 11 consecutive months of decline.

Singapore's nascent and tentative recovery in the first quarter has since strengthened, largely due to the marked electronics upswing in the developed markets and booming economic conditions in the United States. Moreover, the regional economy is recovering more rapidly than earlier forecast, responding positively to expansionary fiscal and monetary policies, low interest rates, currency stability, higher exports, and a stock market rally which is reviving consumer spending.

In addition, various counter-cyclical and competitiveness-boosting measures that Singapore adopted in 1998 have also positioned it well to ride the crests of the current strong electronics and regional upturns. These included a US$6.0 billion business cost-cutting package which included a 10 percent across-the-board cut in salaries (November 1998), and a US$1.2 billion "off-budget" package (June 1998) that provided US$400 million for stepped-up construction of the country's educational and economic infrastructure. The Monetary Authority of Singapore (MAS) - Singapore's central bank - estimated that the boost from the November and June fiscal measures will add about 1.3 to 1.5 percent to real GDP in 1999.

Furthermore, Singapore has intensified efforts to strengthen its domestic economic fundamentals. These include: restructuring its economy towards knowledge-based and high valued-added activities; pursuing manpower development strategies; undertaking reforms to become an international financial center; and developing new export markets. Singapore secured the top spot in the 1999 World Economic Forum (WEF) ranking of economic competitiveness, ahead of the United States and Hong Kong which took second and third places, respectively.

Analysts of the Singapore economy, including the government are unanimous in their prognosis that the economic outlook has brightened considerably since the beginning of the year, notwithstanding the significant challenges that remain. The primary threats to the recovery include: a sharp correction in the U.S. financial markets leading to a downturn in the real economy; failure of Japan to pull out of its decade-long economic malaise; and a relapse of regional economies due to unresolved structural weaknesses.

While these threats remain serious, we do not see them reversing the positive growth trends of the region in the near future. Hence, we expect the Singapore economy to remain firmly on the recovery track. The economy is likely to gain momentum in the second half of the year, when the global electronics upswing, continued regional recoveries, and domestic competitiveness-enhancing measures begin to register their full effects. These factors, together with the statistical low base of 1998, should enable the Singapore economy to achieve a 4.0 to 5.0 percent GDP growth rate for 1999.

Principal Growth Sectors
Financial & business services, and manufacturing are the key sectors of the Singapore economy, accounting for 29 and 22 percent of GDP, respectively. The other economic sectors are commerce, which accounts for 17 percent of GDP, transport and communications (11 percent), construction (9.0 percent), and other services (12 percent).

Financial and Business Services
Within the financial and business services sector, business services dominate with a 16 percent contribution to GDP (financial services make up the balance of 13 percent). This sub-sector has experienced declining (but positive) growth rates throughout the economic crisis, affected by weak demand for real estate brokerage, conveyancing, engineering, and architectural services on the back of a sluggish property market which saw private home prices plummeting by over 40 percent from their peak levels in 1996.

A revival in the private residential property market, which started at the beginning of the year, should help to improve prospects for these business services in 1999. The following factors should also bolster this sub-sector: strong public sector demand for information technology (IT) services (to intensify the use of IT in education); establishment of an electronic commerce infrastructure; and the roll-out of Singapore ONE (a country-wide high-speed fiber optic broadband network providing multimedia applications and internet services). In addition, there is ongoing, strong, private and public sector demand for services to solve the Y2K problem, develop applications, integrate networks and provide IT training.

The financial services sub-sector has been contracting at an average quarterly rate of 8.6 percent since the first quarter of 1998, reflecting the slump in domestic and offshore lending business opportunities following the Asian economic crisis. Growth in bank loans and advances to domestic non-bank customers plunged from pre-crisis double-digit rates to single-digit numbers. Looking ahead, the demand for credit by the local corporate sector may perk up as the economy picks up steam amid low interest rates. Demand for loans by private individuals to finance property and car purchases are also expected to increase as job market prospects improve.

Offshore loans to non-bank customers in Singapore's Asian Dollar Market (the Asian equivalent to Europe's Euro Dollar Market), a thriving business for Singapore-based banks prior to the Asian crisis, fared even worse. Besides posting quarterly declines averaging 19 percent since the fourth quarter of 1997, banks are also saddled with many non-performing loans (NPLs). As of March 1999, NPLs have risen to 24.3 percent and 8.0 percent of the regional and global loan portfolios, respectively, of Singapore banks. The NPL problem will continue to be a drag on the financial services sub-sector in 1999. However, it poses little systemic risks as Singapore banks are generally well-capitalized and well-provisioned, and the financial system as a whole is soundly and prudently supervised by the MAS. Apart from offshore lending business, offshore trading of stocks and investment advisory activities also fell sharply over the year as a consequence of the Asian crisis. (Note: This is reflected in the revised growth figures which had been adjusted to better reflect offshore financial activities.)

Despite the sluggish offshore lending business, the financial services sub-sector could still record modest growth in 1999, notwithstanding a sharp contraction of 8.4 percent experienced in the first quarter (its fifth, consecutive, quarterly decline). Growth is projected to come from the stronger demand for services in corporate finance (mergers and acquisitions), asset management (which will benefit from increased government fund placements and tax incentives), and the bond market.

Moreover, trading on the futures, equity and foreign exchange markets (Singapore is the world's fourth largest foreign exchange transactions center, according to the Bank of International Settlements) is also expected to gather steam. The Singapore International Monetary Exchange (SIMEX), Singapore's financial futures market, saw its trading volume rise to an all-time high of 3.24 million contracts in June 1999. Turnover also went up by 13 percent compared to a year ago. At the Stock Exchange of Singapore (SES), the first six months of 1999 recorded a trading volume of 90.2 billion shares, exceeding the 74.2 billion units that were traded for the whole of 1998. The value of shares traded in the first half of 1999 also went up by 8.0 percent to about US$62 billion, helping to establish a US$185 billion record for total market capitalization on the SES.

In addition, the financial services sub-sector will also benefit from the gradual but strong market-opening and reform measures that the government has begun to implement recently. These measures are targeted at turning Singapore into an international financial center. Singapore is seeking to extend itself beyond an offshore loan syndication and service center for the Southeast Asian region and a major foreign exchange market, into new areas like asset management and bond market. Greater foreign competition in the domestic retail banking scene will also be gradually introduced as part of the market liberalization measures.

Manufacturing
The export-oriented manufacturing sector will probably be the star performer of 1999, leading the economy along the recovery path as it expands in response to a strong pick-up in demand for electronics and chemicals (specifically pharmaceuticals) in the developed economies. Manufacturing output grew 8.2 percent in the first five months of 1999 year-on-year. This was spurred by a 16.9 percent rise in electronics and a 29.5 percent expansion of pharmaceutical products. Oil refining - Singapore is the world's third largest oil refining center after Houston and Rotterdam - continued to contract due to a supply glut as new Asian refineries come on stream. Nonetheless, the recent rise in world oil prices may cushion the fall.

Export growth lagged industrial production, reversing its declining trend only in April 1999 when total domestic exports grew 7.8 percent. In particular, exports to the U.S. - Singapore's top export market which takes a quarter of its total domestic exports, mainly electronics - started to recover in may 1999 when growth of 12.9 percent was recorded. Export growth to the European Union - Singapore's second largest market which accounts for 18 percent of domestic exports - materialized earlier with strong sales of pharmaceutical products.

New foreign manufacturing investment, which accounted for two-thirds of total manufacturing investment commitments, fell to US$3.1 billion in 1998 from the US$4.0 billion in 1997. Besides the Asian economic crisis, the decline is also due to the ongoing industrial restructuring process, in which fixed asset-intensive production facilities are relocated to lower cost countries as higher-end manufacturing and service operations are being established. Examples of such higher value-added activities include research and development, product design and development, process engineering, testing, market research, and headquarter functions (for example, Caltex Petroleum moved its U.S.-based global corporate headquarters to Singapore this year).

The Economic Development Board (EDB) expects total new manufacturing investment (foreign and local) to contract further by about 4.0 percent to US$4.4 billion in 1999, following a 7.8 percent decline in 1998. Despite Singapore's strong domestic economic fundamentals, foreign investment in Singapore in 1999 will be restrained by the recession in Japan (which discourages investment abroad by Japanese firms), and excess industrial capacity.

U.S. manufacturing investment commitments in Singapore - concentrated in the petroleum refining, chemicals and electronics industries - totaled US$1.4 billion in 1998, a decline of 5.3 percent from 1997. The U.S. remains Singapore's largest foreign investor, responsible for 44 percent of total foreign manufacturing investment commitments in 1998, followed by Japan (35 percent) and Europe (20 percent).

Other economic sectors
The commerce sector, which contracted by four percent in 1998 when it was severely hit by the Asian economic crisis, should do better in 1999 with increased visitor arrivals. The number of visitor arrivals, which declined by 13.3 percent last year, went up by 7.2 percent between January and May this year. Consumer spending is also expected to perk up in response to a bullish stock market and improved labor market prospects.

The transport and communications sector grew by 5.5 percent in 1998, moderating from 1997's expansion rate of 9.2 percent. The demand for sea and air transportation services for goods and personnel in 1999 should benefit from the economic recovery in Singapore and the region, as should the demand for communications services. This was evidenced by the 7.9 percent increase in outgoing international calls recorded by singapore telecom in the second quarter of 1999 on a year-on-year basis.

The construction sector, which grew by 3.9 percent in 1998, largely on the basis of public sector projects, fell by 9.0 percent in the first quarter of 1999. This was due to the slump in demand for residential properties, which began in mid-1996 but became acute in the second half of 1998. A quick recovery is not expected as the excess supply is just beginning to clear, thereby restraining developers from committing to new building projects. Moreover, contracts awarded in the first quarter of 1999, a leading indicator of construction activity, fell by 43 percent to about US$1.4 billion. The public sector accounted for 63 percent of this figure.

Government Role in the Economy

Government-Linked Companies (GLCs)
The public sector is dominant in the Singapore economy. Revenue-generating statutory boards are responsible for providing public goods. Some of these include the Jurong Town Corporation, the Civil Aviation Authority of Singapore and the Housing and Development Board. Together with GLCs, they account for over 60 percent of Singapore's GDP. Singapore GLCs, which straddle the economic sectors, are registered companies that are generally run along commercial lines, unlike typical parastatals. Examples include Singapore Airlines, Neptune Orient Lines, Development Bank of Singapore, Singapore Technologies, Keppel Corporation, Sembawang Corporation, Chartered Semiconductor Manufacturing, Singapore Telecom, Petrochemical Corporation of Singapore and Singapore Refining Corporation. Many GLCs are publicly-listed entities, while some have foreign or other local equity partners.

Besides counterbalancing Singapore's heavy dependence on foreign MNCs to drive its economy, GLCs are also sometimes useful government instruments to spearhead national initiatives, such as regional investments to overcome Singapore's market and resource constraints and diversify risk. However, critics charge that GLCs crowd-out private enterprises, particularly in cases when they venture out of their core businesses into purely commercial areas (such as the retail food and beverage industry) that are not justified by national interests. The government is currently restructuring and rationalizing its stable of GLCs, to improve corporate governance, achieve greater efficiency and provide a clearer focus to guide their expansion plans.

The government is also involved in targeting potential growth industries (or sectors) for the economy, such as financial services, electronics, chemicals, trade logistics, electronic commerce, and exhibitions and conventions industries. Through the civil service and statutory boards, the government formulates and implements policies and strategies to guide the economy. It also administers fiscal and other incentives to local and foreign firms to promote selected targeted industries.

Government Budget Priorities
Singapore's FY99 budget is projected to incur a deficit of US$3.0 billion, or about 3.5 percent of GDP. This shortfall, which follows a US$271 million deficit incurred in FY98 (there were 10 consecutive years of surpluses prior to that), is largely due to increased development spending on education and the economic infrastructure, aimed at preparing Singapore for the next growth wave after the Asian economic crisis. The deficit is also caused by a projected fall in revenue of 11 percent due to the recession, and the impact of last November's counter-cyclical and business cost-cutting measures. Reflecting its commitment to a policy of maintaining a credible defense capability as the basis for sustained economic growth, the budget kept defense spending at 5.1 percent of GDP and 25 percent of total expenditure, despite the recession.

Balance of Payments Situation
Singapore's balance of payments surplus shrank to US$3.0 billion in 1998, from US$8.0 billion in 1997. While the current account surplus rose to US$17.6 billion, attributed mainly to a higher merchandise trade surplus resulting from a sharp contraction in imports, the capital and financial accounts experienced a larger net outflow of US$17.9 billion (compared to the net outflow of US$4.0 billion in 1997). This was triggered mainly by the financial crisis, which reduced direct investment inflows and created a net outflow of funds from Singapore-based branches of foreign banks. Singapore's official foreign reserves stood at US$75 billion as of end-1998, providing a healthy import cover of 8.8 months.

As the economy recovers in 1999, the current account surplus is likely to narrow, as imports of inputs for production will probably increase, offsetting improvements in the balance of services that may follow the pick-up in regional countries. The capital and financial account could also record a smaller deficit if the improved economic climate leads to a smaller net outflow of funds by overseas banks.

Infrastructure
Singapore has a highly pro-business and modern infrastructure that rivals that of developed nations. The city-state enjoys reliable and sophisticated networks for information-technology (IT) and telecommunications services, transportation, and utilities.

Singapore's IT and telecommunications infrastructure is highly developed. The phone-line penetration rate is on par with developed countries. One-third of Singaporeans have mobile phones and 70 percent own pagers. Over 40 percent of households own personal computers and almost one-fifth have internet access or subscriptions. To promote the growth of information industries, the country has installed Singapore ONE, the nationwide high-speed fiber optic broadband network that provides multimedia applications and internet services to all homes, schools and offices. In the most recent Information Society Index survey by the International Data Corp (IDC), Singapore was ranked fourth (after the U.S., Sweden and Finland) as an information-driven economy.

Singapore's transportation network is highly efficient and modern. The city-state boasts the world's busiest port in shipping tonnage terms for the thirteenth year running. Singapore's airport is also frequently surveyed as among the best in the world. The road system is well-maintained, and road congestion is managed through the use of an electronic road pricing system (ERP) and a quota on the vehicle population. The public transportation system, which includes an efficient metro system, provides island-wide coverage at reasonable prices. The utilities networks provide reliable services. Health, safety, and building codes have become strict over the years and provide adequate protection.

The government has also taken advantage of lower building costs during the lull period throughout the Asian economic crisis to intensify the construction and upgrading of its physical economic infrastructure. These include extending the metro line to the north-eastern part of Singapore and to the airport, and engaging in reclamation works to increase the land stock of the city-state (total land area in Singapore is a mere 650 square kilometers). In particular, significant resources are being directed to create Jurong Island, to house a vertically integrated petroleum and chemicals industry (a project estimated to cost over US$4.0 billion). Other infrastructural enhancement projects include the development of tourist attractions and mega-exhibition facilities.

Singapore's Efforts to Address the Year 2000 Problem
Singapore is generally in a high state of readiness to tackle the Y2K problem. According to the National Computer Board (NCB) Chairman, all key government services and infrastructure will be Y2K ready, including telecommunications, power, banking systems, airports and hospitals, for which US$58 million have been invested to achieve readiness. The Stock Exchange of Singapore (SES) too has revealed that it is Y2K compliant after having spent US$6.0 million on the project. About 30 Singapore-based banks, including all the local banks, also recently passed a Global Payment Systems Test initiated by the New York Clearing House.

Singapore Airlines and Singapore Telecom have also provided assurances of having spent about US$30 million and US$12 million, respectively, to achieve Y2K readiness. Singapore's small to medium enterprises (SMEs) are, however, less well-prepared for Y2K. According to a recent NCB survey, 27 percent of SMEs will not be Y2K-ready by year-end. The Board, however, does not expect significant effects on the nation because SMEs typically have small computer systems that are not connected to any network.

Singapore received international endorsement for its Y2K readiness when it became one of just two countries (the other being Hong Kong) to receive an "all-green rating" by the Global 2000 Co-ordinating Group, a leading international Y2K watchdog group with representations from 65 countries. The rating affirms Singapore's high degree of Y2K readiness in financial services firms, clearing and settlement organizations, telecom providers, transport systems, basic utilities (energy and water) and government.

Indicators On Domestic Economy
(Note: Data is given in US$ million units, unless specified otherwise. 1998 data which are converted from S$ to US$ terms are lowered by the weaker exchange rate for the Singapore currency in 1998 as compared to 1997.)

				
				1997	        1998 	     1999(est)
	
GDP   	                       95,139	       84,379	    85,976 

GDP Growth Rate (percent          8.0	     	  1.5	       3.5	
(year-on-year)

GDP per capita (US$)           25,461	       21,828	    21,489 

Government spending as a
 percent of GDP (%)               9.5	    	 10.0	      10.5	

Inflation (percent)	          2.0	    	 -0.3	         0	

Unemployment (percent             1.8	    	  3.2	       3.5	

Foreign Exchange Reserves      71,392	       75,028	    77,000

Average Exchange Rate	         1.48	     	 1.67	      1.70
 (S$ per US$)

Foreign Debt Service Ratio
(government deb                     0	           0	         0

U.S. Economic Military / 
 Economic Assistance	          nil	         nil	        nil

Total Country Exports
 (Domestic plus 
transshipments)		      125,009	     109,801	    113,501

Total Country Imports	      132,412	     101,496	    104,916

Exports to U.S.	               22,978	      21,813	     22,548

Imports from U.S.	       22,237         18,674	     19,303