Measures to Help Businesses Given Economic Slowdown

Ms Tan Su Shan asked  the Minister for Trade and Industry (a) in view of the decline in Singapore's current account surplus from $35 billion in the first half of 2011 to $27 billion in the first half of 2012, how much of this can be attributed to the decline in the deteriorating global environment and how much is attributable to a decline in our relative competitiveness; and (b) if our international competitiveness is declining, will MAS consider recalibrating its strong Singapore-dollar policy and allow the Singapore-dollar nominal effective exchange rate (NEER) to appreciate at a slower pace.

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Mr Speaker, Sir, Singapore did not enter a technical recession in the third quarter of 2012. Based on advance estimates, the Singapore economy contracted by 1.5% in the third quarter on a quarter-on-quarter seasonally adjusted annualised basis. However, the second quarter GDP growth was better than expected, resulting in an upward revision from the preliminary estimates of -0.7%, to 0.2%. The revision was due to new data from the construction sector, which showed much stronger growth than originally estimated for the second quarter. While we have avoided two consecutive quarters of decline, economic growth for the first three quarters of 2012 was very modest, at 1.7% on a year-on-year basis.

The muted economic growth was largely due to the challenging global economic conditions, which slowed our export growth and caused our current account surplus to decline. Other Asian economies like South Korea, Chinese Taipei and Hong Kong were also similarly impacted by such external headwinds.

Despite the sluggish economic performance, Singapore remains internationally competitive. In the 2012 World Economic Forum's Global Competitiveness Index, Singapore maintained its ranking at the second position. In addition, according to a recent report by the Economist Intelligence Unit, Singapore is the most competitive city in Asia, and third globally, after New York and London.

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Amidst the weak economic environment, the Government is mindful of the challenges faced by businesses and has, therefore, calibrated the pace of economic restructuring to a rate at which businesses can adjust. For example, the increase in foreign worker levies will be implemented in several phases from 2010 to 2013, while companies have also been given up to two years to comply with the new Dependency Ratio Ceiling requirements, which came into effect on 1 July 2012. Furthermore, measures have been put in place to provide support to companies, especially our SMEs, to raise their productivity to cope with the tighter manpower situation. These include tax credits to encourage productivity and innovation-related expenditures, as well as funding support for employee training. Over the medium term, the economic restructuring efforts to raise productivity and reduce reliance on foreign workers will help to sustain Singapore's economic competitiveness.

Mr Speaker, Sir, the strengthening of the Singapore dollar is a key macro-economic policy tool to keep inflation in check over the medium term. The Monetary Authority of Singapore (MAS) recognises the need to strike the right balance between ensuring exporters are not unduly hurt by a stronger currency in the short-term, and capping underlying price and cost pressures in the economy. However, the exchange rate cannot be used as a tool to manage Singapore's export competitiveness. Over the longer term, competitiveness can only be achieved through higher productivity and innovation, such as creating new products that the market demands. The trend appreciation of the Singapore dollar exchange rate is in line with our economic fundamentals. It keeps inflation low and stable, which helps to preserve the purchasing power of Singaporeans' income and savings. It also provides a stable and conducive environment for businesses to undertake long-term investments, thus enhancing competitiveness and providing the basis for sustained economic growth.

Given that Singapore's labour market remains healthy, with strong employment creation and a low unemployment rate, there is no immediate need for the Government to step in with measures to cushion the economy from the slowdown in external demand. However, the Government will continue to keep a close watch on developments in the global economy and stands ready to respond when appropriate.

Sir, I wish to thank the Minister for his clear answers. My supplementary question arises from a need to understand if the Minister is more concerned about the risk of growth or the risk of inflation. If it is, indeed, the risk of inflation that we are worried about, then, needless to say, our Asian counterparts, the US and Europe are all seeing a slowdown in inflation. Singapore's inflation has gone down and, perhaps, it is debatable that quite a bit of our inflation is made in Singapore and cannot be addressed by a strong Sing-dollar policy alone. My question is: what gives? Are we going to focus on growth or are we going to focus on inflation management?

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Mr Speaker, Sir, the MAS just issued its monetary policy statement on Friday. And in its statement, the MAS explains quite clearly this balance of risks that the hon Member talked about.

On the economic growth side, even though the external environment presents very strong headwinds to Singapore, we expect that we will end the year still within the range that we had forecasted, between 1.5% and 2.5%, and that, next year, our growth rate will be below our potential but we will still continue to enjoy modest growth. We can achieve between 1.5% and 2.5% this year, and similar rates next year. We are not heading into a recession, technical recession notwithstanding.

On the other hand, the risk of inflation is significant. MAS, in its monetary policy statement, explained that the headline "Inflation" or what we call "CPI- All Items" inflation rate will come in at slightly over 4.5% this year. For next year, the projection is between 3.5% and 4.5%. So, this is still significantly high inflation, by Singapore's inflationary experience.

If you look at core inflation rate, it is still on the high side. MAS estimates that our core inflation will come in at about 2.5% this year, and between 2% and 3% next year. So, to keep this balance, MAS has decided to maintain its gradual and modest appreciation in order to keep this inflation risk at bay.

I agree with the Minister's endorsement of the strong dollar policy − that is probably the best way to keep consumer price inflation down. My only concern is whether a strong dollar policy also attracts a lot of capital which may, in turn, create asset price inflation. I think getting capital in for cheaper borrowing costs and higher equity values is probably a good thing, but if this capital flows to the property market, it may actually create higher property prices. So, I am wondering if there are any other controls to keep this in check.

As the Minister for National Development mentioned in his answer earlier, we do face these problems and we have to manage these through macro prudential policy changes.

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