Feature

Impact of a Global Recession

on a Small Open Economy
SHIN Jang-Sup, Daniel Soh

Singapore is one of the first Asian economies to
sink into a technical recession amid the current
global financial crisis, and its economic contrac-
tion has recently been gathering pace. Its real
GDP marginally declined 0.2% year-on-year in
the third quarter of 2008 and plunged 3.7% year-
on-year in the fourth quarter of 2008 (Figure 1).
The leading index points to accentuated eco-
nomic weakness going forward. The Singapore
government has dragged down its 2009 growth
forecast to as low as minus 5%, and expects the
biggest economic contraction in the country’s
history. Finance Minister Tharman Shanmuga-
ratnam said in his FY2009 budget statement that
Singapore is currently facing its worst crisis in liv-
ing memory.
A SMALL OPEN ECONOMY
VULNERABLE TO GLOBAL
DECELERATION
This rapid contraction of the economy is due to
the fact that Singapore is among the most open
economies in the world and the size of its domes-
tic market is small, with only 4.5 million people.
The economy therefore depends heavily on ex-
ports for demand of its products and services,
and on foreign direct investments (FDI) for sup-
ply of capital. As the global economy deceler-
ates, the Singapore economy receives a double
blow from both the demand and supply side.
The export to GDP ratio in Singapore stands at
a whopping 230.9% in 2007, in marked contrast
to an average of 89.7% in the Asian region (Fig-
ure 2). South Korea and Taiwan, other trade-re-
liant Asian economies, have export to GDP ra-
tios of 45.6% and 73.7%, respectively. Singapore’
s heavy dependence on exports implies that its
pain from the global downturn would be pro-
portional to its reliance on exports. Moreover,
as a regional transportation hub, difficulties

|Figure 1 Singapore’s Economy Geared for a Sharp Downturn ( Unit: %, YoY )

Singapore’s Economic Growth

20.0
Economic Growth Composite Leading Index

15.0

10.0

5.0

0.0

-5.0

-10.0
1Q91 2Q92 3Q93 4Q94 1Q96 2Q97 3Q98 4Q99 1Q01 2Q02 3Q03 4Q04 1Q06 2Q07 3Q08
Source: CEIC Database

April 2009 | SERI Quarterly | 31

Impact of a Global Recession on a Small Open Economy

|Figure 2 GDP Breakdown (as of 2007) ( Unit: % of GDP)

Exports of Goods & Services Private Consumption Expenditure Gross Fixed Capital Formation
250

200

150

100

50

0
China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand

Source: Ecowin Database

facing the Singapore economy are more than
its exposure to trade because other trade-relat-
ed sectors including transportation, logistics
and so on are suffering as well.
Not only is Singapore highly exposed to trade,
its export base also lacks diversity. Exports are
concentrated in a few highly vulnerable seg-
ments, particularly electronics products, which
compose nearly 40% of the country’s non-oil
domestic exports (NODX). Using the Herfind-
ahl index to assess export concentration, Singa-
pore is reported to have the second highest ex-
port concentration (after the Philippines)
among Asian economies (Chart 3). Singapore’s
electronic sector, the country’s major export
sector, has suffered since late 2006 amid a pro-
tracted global technology slump. Hopes of a
technology recovery were dashed with the onset
of the global financial crisis. The North Ameri-

|Figure 3 Diversification of Exports

100 Export Diversification Index

80

60

40

20

0
China Hong Kong India Indonesia Korea Malaysia Philippines Singapore Taiwan Thailand

Source: WTO Database plus own calculations

Notes: The index is calculated using the reciprocal of the Herfindahl Index (HHI) for the composition of export in SITC Rev. 2 classification

32 | www.SERIWorld.org
 SHIN Jang-Sup, Daniel Soh

Not only is Singapore highly exposed to trade,

its export base also lacks diversity. Exports are
concentrated in a few highly vulnerable segments,
particularly electronics products, which compose
nearly 40% of the country’s non-oil domestic exports.

|Figure 4 Singapore’s Electronics Exports ( Unit:%, YoY )

Electronics Exports US New Orders: Computers & Electronics SEMI Book-Bill Ratio (RHS)
30 1.60

20 1.40

10 1.20

0 1.00

-10 0.80

-20 0.60

-30 0.40

-40 0.20
Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09

Source: CEIC Database

|Figure 5 Singapore’s Exchange Rate ( Unit: SGD/USD)

REER NEER vs USD

120 2.00

110 1.75

100 1.50

90 1.25

80 1.00
Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10
Source: BIS Database

April 2009 | SERI Quarterly | 33

Impact of a Global Recession on a Small Open Economy

|Figure 6
worsening from an already alarming fall of
Inward FDI as share of GFCF ( Unit: %)
25.4% year-on-year in December 2008. Singa-
80 pore’s NODX plummeted in parallel, nose-div-
ing 34.8% year-on-year in January 2009, posting
60 the biggest drop ever on record.

40 Another reason for the faster pace at which Sin-

gapore’s exports is falling relative to that of its
20 Asian peers could be the accumulated effects of a
strong Singapore dollar policy since 2004. In a
0
move to combat inflation, the Monetary Author-
Taiwan
China

Thailand
Philippines

Singapore
India

Indonesia

Korea

Malaysia

ity of Singapore (MAS), the country’s central

bank, has quickened the pace of its currency ap-
Source: UNCTAD Database preciation. Singapore’s effective exchange rate in
nominal and real terms has risen by 7.4% and
7.3%, respectively, since April 2004. MAS’s stance
can semiconductor book-to-bill ratio, which toward a strong Singapore dollar changed when
showed that supply has outpaced demand for signs of recession became evident.
nearly two years, pointed to weaker demand in
December 2008. New orders for computers and
related equipment in the US – a lead indicator ADVERSE EFFECTS OF HEAVY
for Singapore’s electronics exports – showed RELIANCE ON FDI
signs of pronounced weakness. Against such a
backdrop, Singapore’s electronic exports The heavy reliance on foreign direct investment
plunged 38.4% year-on-year in January 2009, (FDI) for growth and employment also be-
the biggest decline in more than seven years, comes an Achilles’ heel of Singapore during this

|Figure 7 FDI in Singapore ( Unit: SGD bil)

14.0

12.0

10.0

8.0

6.0

4.0

2.0

0.0
2005 2006 2007 2008
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

Source: CEIC Database

34 | www.SERIWorld.org
 SHIN Jang-Sup, Daniel Soh

The heavy reliance on global economic downturn, although it was a

boon to the economy when the world market
foreign direct investment was expanding smoothly. Inward FDI account-
ed for 60.0% of total fixed investment (as mea-
(FDI) for growth and sured by the gross fixed capital formation) in
the country in 2007. This contrasts with an av-
employment also erage of 9.8% among other Asian economies
becomes an Achilles’ heel (excluding Hong Kong). FDI in Singapore
plummeted 61.9% in the first three quarters of
of Singapore during this 2008 as compared to the same period a year
ago. Tumbling confidence about economic
global economic prospects worldwide has outweighed the attrac-
downturn, although it tiveness of lower business costs and a stable po-
litical and financial climate in Singapore.
was a boon to the
Along with economic slowdown, unemploy-
economy when the world ment is rising. Job losses in Singapore could
touch a record 100,000 or more in 2009. Employ-
market was expanding ers including those in government supported
smoothly. sectors are forcing their employees to take un-
paid leaves in a bid to reduce costs. Particularly
in the manufacturing sector, many companies
have adopted a four-day work week temporari-
ly. The resident unemployment rate in Singa-
pore has climbed to a seasonally adjusted 3.7%
in December 2008 from 2.4% a year ago. This is
one of the sharpest increases in unemployment

|Figure 8 Singapore’s Unemployment Rate Unit: % (s/ad)

7.0

6.0 Overall Resident

5.0

4.0

3.0

2.0

1.0

0.0
Mar-92 Mar-95 Mar-96 Mar-98 Mar-00 Mar-02 Mar-04 Mar-06 Mar-08

Source: Ecowin Database

April 2009 | SERI Quarterly | 35

Impact of a Global Recession on a Small Open Economy

for Singapore. It is noteworthy that the headline Singapore is a safe haven for capital in the re-
unemployment rate is not an accurate measure gion. Whenever regional economies become
of the jobless condition in Singapore, as foreign unstable, ethnic Chinese businessmen tend to
expatriates (which compose about a quarter of transfer their assets to Singapore for safety. Sin-
the total labour force) tend to leave the country gapore’s huge foreign reserves, whose actual
after they lose their jobs, thereby being excluded amount is not known to market participants,
from official statistics. are also a bulwark against possible speculative
attacks on the Singapore dollar. Singapore’s of-
ficial reserves held by the MAS stood at S$174.2
NO SENSE OF FOREIGN EXCHANGE billion at the end of January 2009. On top of
CRISIS this, the extent of extra ammunition that can be
supplied from the twin sovereign wealth funds
Despite the fact that Singapore is experiencing (SWFs), GIC (Government Investment Corpo-
the worst economic downturn in its history, ration) and Temasek Holdings, is unknown to
there is no sense of foreign exchange (FX) cri- market players. The Singapore government has
sis in the country. In fact, the country has nev- not divulged as yet (and is unlikely to do so) the
er experienced an FX crisis. Even when its amount of actual reserves on the grounds of
neighbouring countries suffered from the protecting “national security”.
Asian financial crisis in 1997/98, the Singapore
dollar remained stable. This stability can be Moreover, the Singapore government virtually
attributed to the combination of Singapore’s prohibits short-selling of Singapore dollars by
geopolitical location, huge (but unknown financial institutions and individuals. Foreign-
amount of) foreign reserves and its unique FX ers are required to seek approval from the Sin-
management system. gaporean authorities if they want to borrow

|Figure 9 SG:NEER Unit: % (s/ad)

118.0
SG:NEER Mild Pt of Policy Brand Higher Brand Lower Brand
116.0
114.0
112.0
110.0
108.0
106.0
104.0
102.0
100.0
98.0
96.0
Jan-01

July-01
Jan-00

July-00

Jan-02

July-02

Jan-03

July-03

July-05

July-07

Jan-08

July-08
Jan-04

July-04

Jan-05

Jan-06

July-06

Jan-07

Jan-09

Source: Reuters Database plus own calculations

36 | www.SERIWorld.org

Despite the fact that
Singapore is
experiencing the worst
economic downturn in its
history, there is no sense
of a foreign exchange
(FX) crisis in the country.
This stability can be
attributed to the
combination of
Singapore’s geopolitical
location, huge foreign
reserves and its unique
FX management system.
more than S$5 million. And offshore Singapore
dollar denominated deposit facilities are not al-
lowed. Local banks are submissive to the gov-
ernment’s policy directions, although they do
not need to seek approval in borrowing Singa-
pore dollars for exchanging to foreign curren-
cies. With these partial capital controls in place,
the Singapore government manages its FX
movements through a ‘basket system’, rather
than leaving them “free floating”.
It can therefore be safely said that FX rates of
the Singapore dollar are mainly determined by
the Singapore government, not by the market.
Figure 9 shows that Singapore’s nominal effec-
tive exchange rate is well supported at the lower
SHIN Jang-Sup, Daniel Soh
bound of the estimated MAS policy band, albe-
it continued capital outflows. The Singapore
dollar depreciated against the US dollar since
the global financial meltdown in September
2008. However, its depreciation was lower than
the average of other Asian currencies. So far the
system has minimized the disruptive effects of
large swings in the currency. This helps to an-
chor confidence and inject the necessary ingre-
dients for financial stability.
SINGAPORE’S POLICY RESPONSES
TO THE CRISIS
As a small open economy, conventional fiscal
and monetary policies are less effective in Sin-
gapore than in other bigger countries, because
their multiplier effects to boost the economy are
smaller. The most effective policy tool for Sin-
gapore is its FX rate policy. This is why the Sin-
gapore government adopts an exchange-rate
based monetary policy system. The MAS has
managed the nominal effective exchange rate
(NEER) to steer the Singapore economy since
the early 1980s.
In the wake of the current global financial cri-
sis, the MAS was quick to abandon its four-
year-long strong Singapore dollar policy. At its
policy review on October 10, 2008, the policy
stance was shifted to zero appreciation (or neu-
tral bias) for the country’s effective exchange
rate from a policy that allowed for gradual ap-
preciation, in a bid to lift export competitive-
ness and shore up confidence. So far MAS has
refrained from moving towards depreciating
the Singapore dollar because of concerns that a
surprise move ahead of the scheduled policy
review will precipitate a loss of confidence.
Considering Singapore’s high exposure to
trade, there is ample room for the exchange rate
to move lower at the next policy review in April
2009 - a typical move in previous episodes of
April 2009 | SERI Quarterly | 37
Impact of a Global Recession on a Small Open Economy

|Figure 10 Singapore’s Fiscal Position ( Unit: SGD bil/%)

10.0 4
Fiscal Balance(LHS) Fiscal Balance to GDP Ratio
5.0 2

0.0 0

-5.0 -2

-10.0 -4

-15.0 -6

-20.0 -8
2002 2003 2004 2005 2006 2007 2008 2009
Source: CEIC Database

crises. It is widely believed that the MAS is like- ary 2009, which was initially scheduled in Feb-
ly to widen the boundaries of the policy band ruary, in order to expedite fiscal stimulus in the
as well amid increased uncertainty during the economy. And it dug into its $200 billion re-
crisis to allow for greater flexibility in manag- serves for the first time and delivered a S$20.5
ing the exchange rate. billion “Resilience Package” for FY2009. This
was the biggest budget ever unveiled in Singa-
The change in FX policy stance has been ac- pore. The traditional stance of basic budget bal-
companied by an unprecedented fiscal stimulus ance (excluding transfers to endowment funds
package. The Finance Ministry brought for- and contributions from Net Investment Re-
ward the announcement of the budget to Janu- turns) was abandoned. Instead, a large deficit of
S$14.9 billion is expected in FY2009, markedly
larger than a revised deficit of S$2.8 billion in
|Figure 11 Corporate Income Tax ( Unit: %) FY2008. The basic fiscal deficit is expected to
50.0
amount to nearly 6% of GDP in 2009, signifi-
cantly raised from around 1.1% of GDP in 2008.
40.0
The budget aims at the supply side of the econo-
30.0
my because conventional demand-boosting
20.0
stimulus would wane fast due to import leakag-
es. Singapore is a huge consumer of imports (for
10.0 both its consumption and production needs),
with the import to GDP ratio at 202.0% in 2007
0.0
compared to an average of 80.8% in the Asian re-
Ireland

Hong Kong

Switzerland

Sweden
Singapore

Malaysia

UK

USA

gion. The main focus of the budget is to boost

employability of people. The package will inject
Source: Singapore Budget Highlights FY09 S$17.9 billion to help businesses cope with the
economic crisis via a series of innovative mea-

38 | www.SERIWorld.org

The Singapore
government is also
driving down business
costs to help companies
through an exceptional
economic downturn in a
concerted effort to
prevent a surge in
corporate failures and
discourage the dismissal
of workers.
sures to reduce business costs and cash flow
problems, in a bid to discourage the dismissal of
workers. Another S$2.6 billion will be infused di-
rectly to households to alleviate their hardships.
The Singapore government is also driving down
business costs to help companies through an ex-
ceptional economic downturn, in a concerted
effort to prevent a surge in corporate failures
and discourage the dismissal of workers. The
government introduced a Jobs Credit Scheme
that will temporarily lower the cost of hires for
companies in 2009. Employers will receive a 12%
cash grant on the first S$2,500 of each month’s
wages for each employee on their Central Provi-
sion Fund (CPF) payroll. The highest marginal-
corporate income tax will also be cut to 17%
SHIN Jang-Sup, Daniel Soh
from 18%. Currently, corporate income tax in
Singapore is among the lowest in the world. The
effective tax rate is much lower than the head-
line rate because the Partial Tax Exemption
scheme is widely applied.
In order to ease the credit crunch and stimulate
bank lending in the economy, the government
launched the Special Risk-Sharing Initiative
(SRI) to take on a significant share of bank-
lending risks and ensure that viable companies
will continue to have access to credit to sustain
their operations. The SRI will include a new
bridging loan programme (BLP) and trade fi-
nance schemes. The new BLP will extend gov-
ernment support to a broader segment of the
credit market, particularly mid-sized compa-
nies. Meanwhile, the existing SME loan support
program will be extended to more companies.
The new trade finance schemes will help ex-
porters obtain loans and trade insurance on the
scale they need. The collapse in Singapore’s ex-
ports was attributed in part to the severe dis-
ruption in trade financing amid the turmoil in
global banking. Letters of credit are estimated
to fund as much as 40% of global trade.
Complementing the measures to boost employ-
ability, the government has also announced
plans to aggressively expand recruitment in the
public sector and government-supported sec-
tors including childcare, tertiary education and
restructure hospitals. In total, 18,000 jobs will be
created over the next two years. In addition, the
government will double the Goods & Services
Tax (GST) credits for households in 2009. A per-
sonal income tax rebate of 20% (capped at
S$2,000) will be given for 2009. The measures
will allow the government some flexibility in
providing relief to individuals without locking
down rates and crimping on further tax revenue
potential.
To ease the risks of property market bust, the
April 2009 | SERI Quarterly | 39
Impact of a Global Recession on a Small Open Economy

government will give a 40% property tax rebate SERI Quarterly Archives
for commercial assets, defer property tax for
approved development land and ease rules. Vol. 1 No. 1 January 2008
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measures to combat the recession. -P
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However, as a small open economy, there is SERI Case Study
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SHIN Jang-Sup is a Professor of Economics at the National Phenomenon
University of Singapore. His publications include A Paradigm SERI Interview
Shift for the Korean Economy (Chonglim 2008, Korean), Re-
-F
 an Gang: Where is the Chinese Economy
structuring Korea Inc. (Routledge, 2003), The Economics of the
Latecomers (Routledge, 1996). Contact: ecssjs@nus.edu.sg Headed?
SERI Case Study
Daniel Soh is an economist and FX strategist heading the
- The Reorganization of Global Steel Industry and
North Asia team at Forecast, a London-based leading online
analytical company. Previously, he was an Asian economist at the Implications for POSCO
Centennial Group, a Washington-based strategic advisory firm. •D
 ownload the above articles for free at www.SERIWorld.org
Contact: D.soh@forecastweb.com   

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