Fourth 'Fortitude' Budget as Singapore emerges from circuit breaker

Singapore was already feeling the weight of the pandemic, with Gross Domestic Product (GDP) declining 0.7% in 1Q2020 — a smaller than expected decline, thanks to a surprising surge in biomedical output as well as an uptake in the finance and insurance industry, the Ministry of Trade and Industry (MTI) said on May 26.

However, MTI warns of a further deterioration in 2Q2020 growth, given “circuit breaker” measures restricting the operations of non-essential services started from April 7. The move has “further dampened domestic activity, along with domestic consumption,” says MTI’s permanent secretary Gabriel Lim.

Besides the obvious damage to the retail and F&B sectors, the heavyweight construction and marine and offshore sectors too were hurt as the bulk of their workers were compelled to stay in their dormitories.

On an external front, sectors such as manufacturing, wholesale trade and transport and storage are being weighed down by disrupted global supply chains and slowdowns in markets of key trading partners. This comes from “significant uncertainties” in the global economy such as the risk of a second wave of Covid-19 infections, which may further hurt global economic activity, says Lim. “In particular, if infections start to rise and strict measures such as lockdowns and movement restrictions are re-imposed, the downturn in these economies could be more severe and prolonged than expected,” he adds.

As such, Enterprise Singapore — a trade agency under MTI — has cut its 2020 forecasts for Singapore’s Non-Oil Domestic Exports (NODX) and total merchandise trade. NODX for the year is expected to come in between –4% and –1%, while total trade is forecast to come in between –12% and –9% to reflect the disruptions to supply chains. This is down from a 0% to 2% growth range previously predicted for both metrics.

For now, MTI sees “pockets of resilience” in its biomedical manufacturing cluster, which has seen an 8.3% growth in 1Q2020 from heightened demand for pharmaceutical and biological products. The services sector, particularly information and communications is also a promising one, following demand for IT and digital solutions as workers and students rely on video conferencing.

Still, growth from these sectors will be insufficient to remedy Singapore’s ailing economy. In fact, the republic is looking at its worst recession since independence, with GDP forecast to fall between –7% and –4% this year, down from the –4% and –1% predicted previously.

The last time Singapore posted a full-year economic contraction was during the dot.com bubble in 2001, when the economy shrunk by 1.1%. Singapore’s worst recession to date was during the 1997 Asian Financial Crisis (AFC) when the economy staged a 2.2% decline.

Against this bleak outlook, the government is injecting another $33 billion in relief measures to help Singaporeans and local businesses weather this storm. The package — officially called the Fortitude Budget — brings the city-state’s total coronavirus relief measures to $92.9 billion or some 20% of GDP. “This is a landmark package, and a necessary response to an unprecedented crisis,” says Heng.

Economists are calling this Budget a “fiscal bazooka” for its better-than-expected, generous offerings. DBS Bank’s senior economist Irvin Seah also describes the Budget as a “forward looking” package. “Beyond helping companies cope with immediate concerns, there are measures to help [them] cope with the new normal after the pandemic. This will enable companies to capitalise on new opportunities when a recovery sets in”.

More than the opportunities it brings, Barclays’ economist Brian Tan says the additional funding will support businesses during Phase 1 of the three-phased approach adopted to ease restrictions, once the circuit breaker ends. Starting June 2, a third of the workforce will resume operations, from the current 17%. However, this means a significant number of businesses will remain shut till the end of June. Tan estimates this additional package, equivalent to 6.2% of GDP,“appears sizeable enough to offset the continued economic drag in Phase 1.” Nevertheless, Tan sees Singapore’s economy contracting by 4.5% this year.

Saving jobs

According to Heng, a key focus of the Fortitude Budget is protecting jobs. Resident unemployment for March has reached 3.3% —the highest in over a decade — and is seen to grow higher. To this end, some $2.9 billion in additional support to businesses and employees will be provided.

To help businesses retain workers, the government will continue its blanket monthly wage subsidy of up to $3,450 for businesses such as retail outlets, gyms and cinemas that cannot reopen on June 2. This translates to a 75% subsidy on gross monthly wages for the first $4,600 of each Singaporean employee till August. The subsidy will revert to the previously announced 25% if these firms reopen before the end of Phase 1.

Meanwhile, the wage subsidy — at a 25% co-payment rate — will continue for all firms for an additional month to end in October. Spanning a total of 10 months, the subsidy will benefit all of Singapore’s 1.9 million local workers across some 140,000 enterprises. In all the Jobs Support Scheme amounts to a total disbursement of $23.5 billion, says Heng.

Such a move lifts a burden off the shoulders of SMEs, especially as June will remain a very painful month for [them],” observes the Association of Small and Medium Enterprises’ president, Kurt Wee.

Meanwhile, there is also help for businesses in the construction and offshore and marine sectors which cannot resume operations on-site. They will receive two more months’ waiver of foreign worker levy. They will also receive a foreignworker levy rebate of $750 for each work permit or S pass holder in June, and $375 in July.

Business costs will be cut further as the planned increase in Central Provident Fund contribution rates for senior workers will be deferred by a year to January 2022. The move also serves to protect the disposable income these individuals hold.

In another massive boost to shore up employment, the government introduced the SGUnited Jobs and Skills Package, offering close to 100,000 opportunities in three aspects: 40,000 new jobs, 25,000 traineeships and 30,000 paid skills training placements.

“While we will try to preserve jobs in the midst of this crisis, we cannot protect every job. However, you have my assurance that the Government will protect every worker,” says Heng. “Our promise to workers is this: As long as you are willing to pick up new skills and adapt, to access available opportunities to work or learn, the Government will provide our strongest support to help you”.

To Chua Hak Bin, Maybank Kim Eng senior economist, these measures would mitigate what would otherwise be a “severe market outlook”, which could be accompanied by a sharper increase in the unemployment rate and retrenchments. From a previous estimate of 80,000 jobs lost this year, Chua projected losses of between 150,000 and 200,000 as the economy worsens. With the latest government support, Chua now sees 100,000 to 150,000 job losses.

Similarly, OCBC Bank’s chief economist Selena Ling has lowered her unemployment forecast to 3–3.5%, from an earlier prediction of 3.5–4%. “That said some of these job opportunities are temporary in nature. But hopefully, a proportion of the traineeships may translate into actual permanent jobs when the recovery is more entrenched,” she muses.

On the other hand, Barnabas Gan, economist at United Overseas Bank (UOB), points out that the measures will merely cushion s “further fall”. Drawing reference to the 2003 SARS outbreak and 2009 Global Financial Crisis, Gan notes that unemployment levels still rose, despite government measures to save jobs. As such he is maintaining his unemployment forecast at 3.5%, with upside risks. “Based on historical evidence, unemployment rate will likely rise given a higher rate of retrenchments, and business insolvencies may also likely rise despite the measures given,” he adds.

Digital boost

Bearing in mind the nature of the global crisis, and how open Singapore’s economy is, Ho Meng Kit, Singapore Business Federation (SBF) CEO, says “there is only so much the government can do”. However, he believes the government’s $500 million in support for businesses’ digital transformation efforts will prove helpful. Under the scheme, eligible businesses will receive a payout of up to $5,000 if they adopt PayNow Corporate and e-commerce solutions.

The initiative will be first introduced to the F&B and retail sectors which have been the most affected by the circuit breaker measures. “We will enhance our support for businesses which are ready to take their basic payment and invoicing functions digital. This will be coupled with support to keep their business running and even acquire new revenue lines,” said Heng.

Businesses with basic digital capabilities looking to deepen their digitalisation take up, will get more support when they use advanced digital tools. Such goals will be supported under the $5,000 parker in the additional tier of the Digital Resilience Bonus. Another $250 million will be set aside to support businesses digitalise in partnership with platform solution providers and industry champions. Such moves include the development of offline-to-online business models and the creation of new domestic revenue streams. Others who are currently not using digital tools will be given a gentle nudge. This is part of the government’s stance that “those who are willing to transform will not be left behind”.

Citing a study by management consultancy McKinsey, Heng says that what would have taken five years in consumer and business digital adoption, has been compelled to be achieved in just two months.

With the right support, more can be achieved. “The support for digital transformation is timely, and it now focuses on businesses to adopt and transform more aggressively as we will not return to pre-Covid ways of working and engaging with customers,” says Ajay Sanageria, KPMG’s deputy head of tax.

At what cost?

As generous and forward-looking as the Fortitude Budget is, it comes at a cost: it requires the draw of an additional $31 billion from past reserves. And together with the support measures announced in the previous Budgets this year, the government is looking at dipping into $52 billion from past reserves. This marks the republic’s second draw on past reserves this financial year. President Halimah Yacob had previously allowed a draw up to $21 billion, for the earlier Budgets. “Our past reserves are our strategic asset, built up through the prudence and hard work of our people across generations. The government has always upheld the principle that our past reserves are to be used only in exceptional circumstances” Heng says.

UOB’s Gan puts this into perspective saying the republic need not fret over its fiscal standing from this unprecedented Budget. While the level of Singapore’s reserves has not been disclosed, Gan says that total foreign exchange reserves alone amount to $400 billion, putting the city-state’s $74.3 billion deficit from the Covid-19 relief measures at about 15–20% of these foreign reserves.

DBS’s Seah goes on to say he does not see it as a problem for the republic to incur a deficit or draw from the reserves for the second time. This is as the funds will support a near-term economic recovery, which will be a slow and gradual process. He is looking at a recovery spanning 24 months — longer than the 18 months during Singapore’s worst recession of the AFC.

After such time, Gan expects the government to rebuild its deficit with increases in the goods and services tax (GST). The government said in February that it will delay the planned increase in GST to sometime between 2022 and 2025. This is an update from Heng’s 2018 Budget stating a raise in GST from 7% to 9% sometime between 2021 and 2025.

Given the bleak outlook, this appears a faraway possibility. It seems fortitude is truly a virtue the nation needs to overcome the adversities at hand. As Heng puts it, Singapore needs to “stay united as one people, remain resilient in the face of adversity, stand in solidarity with one another and move forward with fortitude”.