Economy and Trade
The island republic of Singapore, which is linked to the southern tip of Malaysia by a causeway, is one of the world’s most prosperous and technologically advanced cities. Although 77% of the population is Chinese, English is widely spoken, and is the language of business and administration in the former British colony. The economy has weathered various regional crises, including the 1997 Asian markets slump, and the 2003 Sars virus outbreak. An open, trade-driven economy, Singapore is highly geared towards the global economic cycle. Exports in 2007 accounted for 230% of GDP and net exports for 28% of GDP. Major industries include petroleum refining, electronics, oil-drilling equipment, rubber products, processed food and beverages, ship repair, financial services, and pharmaceutical manufacturing. The country is seeking to reduce its reliance on the manufacture and export of electronics by developing its services sector, as well as its chemical, petrochemical, and biotechnology industries. The People’s Action Party has ruled the country since independence in 1959.
Economic Policy over 12 Months
In response to the rapidly deteriorating economic situation, the government unveiled a US$13.3 billion stimulus package in January 2009, to be partly financed by drawing upon US$3.2 billion of Singapore’s vast foreign reserves (which amounted to US$177.5 billion at the end of February 2009). The government will record a budget deficit equal to 3.5% of GDP in the 2009–2010 (April–March) fiscal year, an unusual occurrence for the usually prudent Singaporean government.
Most of the fiscal package consisted of property, consumer, and business tax rebates, as well as a cut in corporation tax from 18% to 17%. However, the stimulus package is unlikely to have much impact on the economy. Domestic demand is far too small to offset lower external demand. In addition, hundreds of thousands of foreign workers are likely to leave Singapore in 2009 as the job market dries up, further cutting private spending.
The move follows a US$3.5 billion stimulus package for individuals and households in the 2008–2009 fiscal year, including a personal income-tax rebate of 20%. Key business measures included support for R&D activities, tax incentives to enhance business competitiveness, and further measures to promote Singapore’s financial-services and maritime sectors.
The key objective of Singapore’s monetary policy is to maintain price stability and it does this through the exchange rate. This reflects the fact that in the small and open Singapore economy, where imports and exports amount to more than twice the GDP, the exchange rate is the most effective tool in controlling inflation. The central bank (the Monetary Authority of Singapore, or MAS) manages the exchange rate against a trade-weighted basket of currencies of Singapore’s major trading partners and competitors. The trade-weighted exchange rate is maintained broadly within an undisclosed target band, and is allowed to appreciate or depreciate depending on factors such as the level of world inflation, and domestic price pressures.
In its semi-annual review on October 10, 2008, MAS eased policy by shifting to neutral from a policy of allowing a gradual appreciation of the trade-weighted currency. Earlier in the year, monetary policy had been tightened. In April 2008, MAS adjusted its exchange-rate band upwards by around 2%, in response to inflation concerns and upward pressures on the exchange rate. Inflation had risen significantly on the back of international and homegrown cost pressures, reaching a 26-year high of around 7% during January–April 2008.
Economic Performance over 12 Months
Singapore has enjoyed strong economic growth in recent years, expanding by 7.8% in 2007, and 7.6% in 2006. However, growth slumped in 2008, reflecting the impact of the global economic slowdown on this very open and trade-dependent country. Thus, the economy expanded by just 1.1% over the course of the year, and, by the end of the year was shrinking rapidly—GDP contracted by 4.2% in the fourth quarter.
All major sectors, except for construction, business services, and information and communications, saw contractions, according to the Ministry of Trade and Industry. The ministry blamed a decline in private-sector investments, and private consumption expenditure for dragging down total domestic demand. Declines in global demand for electronics products, pharmaceuticals, and chemicals are also weighing heavily on the manufacturing sector. Retail spending fell throughout the fourth quarter, while house prices declined by 6.1% from the preceding three months.
Singapore’s exposure to international trade and shipping is also taking a heavy toll. Cargo throughput at the port of Singapore, a major source of income for the country, fell by 18.4% on an annual basis in December 2008. Container traffic fell by 13.1% during the same month. One of Singapore’s largest shipping operators filed for bankruptcy in January 2009, while the country’s largest builder of oil rigs received no new orders in the fourth quarter of 2008.
The outlook for 2009 appears bleak. In February 2009, officials forecast that the economy would contract by between 2% and 5% during the year, due to “the pessimistic global economic outlook.” In March 2009, however, the country’s influential former prime minister, Lee Kuan Yew, whose son, Lee Hsien Loong, is now the premier, warned that Singapore’s economy may contract by as much as 10% in 2009 if exports continue to fall sharply. Between January 2008 and January 2009, Singapore’s exports declined by 35%, the largest fall on record.
The recession will have a significant impact on unemployment, according to the local bank, DBS. The unemployment rate averaged 2.3% in 2008, but DBS said in March 2009 that a total of 99,000 workers could lose their jobs during the recession, with the manufacturing sector shedding around 58,000 posts. DBS forecast that unemployment would reach 4.8% by the end of 2009, and peak at about 5% by the middle of 2010, which would amount to a 20-year high. Prime Minister Loong has also accepted that the jobless rate could reach 5%.
However, inflation is on a downward path, easing to 2.9% in January 2009 (compared with the same month in 2008), its slowest pace in 16 months, as oil prices fell and the deepening economic slump hurt demand for goods and services. The consumer price index rose by 4.3% in December 2008 on an annual basis.
Support for Inward Investment and Imports
The government is keen to attract foreign investment, and, with the exception of restrictions in financial services, professional services, and the media, Singapore maintains a predominantly open investment regime. The World Bank report, Doing Business 2009, ranked Singapore as the easiest country in the world in which to do business. A government body, the Economic Development Board of Singapore (EDB), acts as a one-stop agency for those interested in investing in the country.
Singapore is generally a free port and an open economy, and more than 99% of all imports enter the country duty-free. Information on importing goods into Singapore can be found on the website of the Singapore Customs Service.
Tax Exemptions
Singapore has range of incentives to help businesses establish and expand their operations in the country. For example, it provides full or partial exemption on withholding tax for royalty payments, or technical assistance fees payable to non-residents. This includes royalties, fees, and contributions to R&D costs paid for the transfer of technology and knowledge to Singapore. For more information on all the incentives offered by the government, see the guide published by the EDB:
For detailed information on the tax regime in Singapore, see the website of the Inland Revenue Authority of Singapore.
Statistics
GDP growth: 1.1% (2008, government figures)
GDP per capita: US$52,000 (2008, est.)
CPI: 2.9% (January 2009, government figures)
Key interest rate: 10.5% (March 2009)
Exchange rate versus dollar: Singapore dollars per US dollar—1.415 (2008, est.)
Unemployment: 2.3% (2008 average, government figures)
FDI: US$225.7 billion (2008, est.)
Current-account deficit/surplus US$28.42 billion (2008, est.)
Population: 4,608,167 (July 2008, est.)
Source: CIA World Factbook except where stated
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