COVID-19 SPECIAL

Long hard fight ahead against economic impact of pandemic

Singapore ready to do more if needed amid successive waves of turmoil

Singapore is digging in and bracing itself to fight off successive waves of turmoil, generated by the global coronavirus pandemic.

But the shocks are overwhelming and economic recovery, whenever it begins, will likely be a lengthy and painful process.

This is probably why policymakers here are stepping up and declaring that they are ready to do more if needed.

Stock markets, taking a forward-looking stance, are stabilising. Wall Street made historic gains earlier this week, as new infection rates slowed down in epicentres worldwide.

But investors latching on to the seemingly positive flip in news flow are disregarding how difficult and long the path to recovery could be.

For instance, more than 460,000 Chinese firms closed permanently in the first quarter, including 26,000 in the export sector.

At the same time, the pace of new firms being established slowed.

This is an indication of how output losses are burgeoning across the world, robbing economies of the capacity to stage a quick recovery.

The devastation wrought by the Covid-19-induced downturn is likely to leave shell-shocked households and businesses in its wake.

Lack of spending and investments can drag economic growth for quite some time and may require even more state support over time.

There is also something unprecedented about this crisis: It constitutes the first recession by mandate, with governments crimping economic activity through nationwide lockdowns, in an effort to contain the spread of the coronavirus.

This extraordinary predicament has prompted an equally extraordinary response from policymakers.

An almost empty Merlion Park yesterday. While necessary to contain the spread of the coronavirus, Singapore's circuit breaker measures through this month alone will impede economic growth in the second quarter and pull the economy into a deeper reces
An almost empty Merlion Park yesterday. While necessary to contain the spread of the coronavirus, Singapore's circuit breaker measures through this month alone will impede economic growth in the second quarter and pull the economy into a deeper recession. Even if the country manages to fix everything at home, it will remain exposed to the deteriorating environment abroad. ST PHOTO: KELVIN CHNG

Singapore's efforts to avoid the worst-case scenario for both individuals and companies go beyond the $60 billion lifeline extended through three successive budgetary support packages.

The cost of these other commitments is hard to quantify right away.

They include forbearance for consumer and corporate borrowers, extension and broadening of risk coverage on bank loans, easing of statutory requirements for lending, and the various measures to boost credit flow by the Monetary Authority of Singapore on top of an exceptional policy easing.

Still, the economy is likely to be in recession at least through this year and rising unemployment as well as numerous defaults and bankruptcies are to be expected.

While necessary to contain the spread of the coronavirus, the one-month circuit breaker measures through this month alone will impede economic growth in the second quarter and pull the economy into a deeper recession.

DBS Bank estimates that the latest set of containment measures could potentially push 2020 gross domestic product (GDP) down to the grimmer end of the Government's forecast range of 1.0 to 4.0 per cent contraction.

The bank's base-case scenario stands at minus 2.8 per cent, already signalling the worst slump in Singapore's history.

Maybank predicts that shutting down non-essential services for a month may cost $10 billion, or about 2 per cent of Singapore's GDP. The bank has cut its 2020 growth estimate to minus 6.0 per cent from an earlier forecast of minus 2.3 per cent.

By comparison, Singapore's economy shrank 3.1 per cent during the global financial crisis of 2008 and 2.2 per cent in the Asian financial crisis of 1997.

While the enhanced Jobs Support Scheme and other income relief measures in the Solidarity Budget may save some jobs at the margin, retrenchments may rise to between 150,000 and 200,000 this year, Maybank analysts Chua Hak Bin and Lee Ju Ye wrote in a report released on Monday.

Ms Selena Ling, head of treasury research at OCBC Bank, said: "If the global and domestic Covid-19 pandemic does not stabilise within the one-month circuit breaker, then the Solidarity Budget may not be sufficient either and we will see a potential spike in the unemployment rate in the coming months."

Ms Ling believes that many businesses may fall by the wayside amid the global recession as government spending will not fully offset the precipitous drop in demand for goods and services.

The self-imposed economic shutdown is not the only attribute that makes this global slump different.

Recessions typically follow a period of boom and help clear away the excesses built up over that time.

Both the Asian and global financial crises were borne out of years of vigorous expansion that encouraged unbridled debt accumulation by households and companies and lending by banks.

This downturn has come after a period of lukewarm growth and is eating into relatively frail household and corporate balance sheets.

Yet, leverage, has still increased.

Standard Chartered Bank estimates Singapore's total credit at 305 per cent of GDP, with business borrowings at about 122 per cent and household debt at 63 per cent.

Still, Singapore as an economy and most of its top companies, particularly banks, are on solid financial footing and can weather the storm on their own.

For example, the capital adequacy ratio (CAR) of Singapore's financial sector stands at about 16.7 per cent, according to StanChart.

CAR is a key barometer of financial soundness and measures the proportion of a bank's capital to its risk-weighted credit.

The Bank for International Settlements requires lenders to maintain a ratio of 8 per cent or higher.

Also, the non-performing loans ratio - the amount of bad or doubtful credits in a bank's loan portfolio - is at just 1.4 per cent.

That is way lower than in any other country in the region, be it India, Indonesia, China or Thailand.

The Republic has robust reserves and is at the top of the sovereign credit-rating spectrum of all international rating agencies, allowing it to borrow cheaply if needed.

While proposed government spending for Covid-19-related measures now equals about 12 per cent of GDP and overall budget deficit will be 8.9 per cent of GDP, they have not raised any red flags.

Fitch Ratings research arm Fitch Solutions believes there are no immediate risks to Singapore's public finances from the large increase in proposed expenditures and the potential rise in spending that may follow, given the ample fiscal reserves successive governments have built up since independence.

"The large fiscal leeway afforded by the reserves stands Singapore in better stead than most economies in the world, some of which are already running out of fiscal space," Fitch Solutions said.

But some of these countries that will find themselves unable to support their economies are Singapore's trading partners.

So even if Singapore manages to fix everything at home, it will remain exposed to the deteriorating environment abroad.

United Overseas Bank (UOB) expects non-oil domestic exports to drop 5 per cent this year.

"Headwinds to Singapore's export environment remain exogenous in nature, meaning that it will be affected mainly by the disruption to global supply chains and negative demand shocks," said UOB economist Barnabas Gan.

The damage to household finances and the health scare may also keep many holiday travellers at home, suggesting tourism and related industries will be on government lifeline for much longer.

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A version of this article appeared in the print edition of The Straits Times on April 09, 2020, with the headline Long hard fight ahead against economic impact of pandemic. Subscribe