How does Singapore deal with global recession?

How does Singapore deal with global recession?

We are going to take a look at 3 policies Singapore adopt to tackle the problems faced during a global recession. Singapore is vulnerable to external shocks due its high degree of economic openness and dependence on strategic imports. Singapore's trade to GDP ratio in the world is above 400% and because of its geostrategic location and developed port facilities, a large volume of Singapore's exports involve entrepôt trade with 47% of exports consisting of re-exports. Such degree of economic openness renders Singapore susceptible to external economic conditions over which it has no direct control. 


As mentioned, Singapore being a small and open country, is very vulnerable to global recessions as Singapore is very dependent on imports due to the lack of natural resources. Singapore government can improve her export competitiveness through concluding and signing more FTAs (Free Trade Agreements). A Free Trade Agreement (FTA) is a legally binding agreement between 2 or more countries to reduce or eliminate barriers to trade, and facilitate the cross border movement of, goods and services between the territories of the Parties. Signing FTAs will help remove or reduce import tariffs which will enable SG to purchase imported raw materials at lower price. This will cause a fall in cost of production hence causing a fall in price of final goods & services produced thereby enhancing SG's export competitiveness, increasing the quantity demanded, assuming demand for exports to be price elastic causing a rise in export revenue. Singapore also diversifies it's trade links by doing so. For instance, instead of relying mainly on advanced or western countries for trade since these countries are plagued with crisis of late, Singapore can then increase trade with emerging countries in Asia, especially China, which experience strong growth instead. With the signing of FTAs, it expands export markets for SG and increases trading ties & increase export revenue hence enabling SG to be less affected by a slowdown in economic growth of major trading partner such as US or EU. For example, Sg has been actively signing FTAs to gain access to new export markets. In 2010, SG concluded the China-Asean FTA (world's largest free trade area of developing countries, covering a population of 1.9 billion, accounting for US$4.5 trillion in trade volume. In addition, Sg concluded the Gulf Cooperation Council-SG FTA (GSFTA) & SG-Coasta Rica FTA (SCRFTA) in 2013, enabling SG to tap into markets in Middle Eastern countries $ springboard into Latin America (especially Brazil) markets respectively. Image attached below shows some of Singapore's FTA. Hence such policy would there help to cushion SG from contagion effects from global recession brought by globalisation, hence enable SG o benefit more from globalisation.

Singapore does not depreciate its currency during recession. In fact, we adopt a zero appreciation policy to tackle recession.  As if Singapore depreciates her currency, foreign import will be very costly. And since Singapore has little or no natural resources, we depend mainly on imports and trade to survive. Hence we adopt the zero appreciation policy.

With increasing globalization and rising international capital flows, determining the appropriate monetary policy is becoming more complex for small open economies such as Singapore. 

The zero appreciation policy is a unique monetary framework centered on managing the exchange rate, aimed primarily at promoting price stability as the basis for sustainable economic growth. Operationally, the policy framework of the Monetary Authority of Singapore (MAS) is focused on managing the Singapore dollar against an undisclosed currency basket. 

In October 2008, MAS shifted its policy stance to a zero percent appreciation of the S$NEER policy band.  The decision was taken amidst easing external and domestic inflationary pressures, and a weakening global economic environment. 

Chart 1 Nominal Effective Exchange Rate (S$NEER)

For many open economies, the exchange rate is often required to help buffer frequent shocks from foreign exchange markets due to increasingly volatile capital flows. A key challenge for Singapore’s exchange rate-centered monetary policy framework is to ensure that market perceptions of monetary policy changes are not colored by market noise stemming from the operation of increasingly complex financial and foreign exchange markets. A monetary policy framework with more explicit reference to the behavior of economic fundamentals could help the public and market participants to understand better the monetary policy stance, with less explicit attention to short-term changes in the exchange rate. 

Basically, zero appreciation meant that import price rose slightly whilst export prices fell. The explanation of this effect can be couched in terms of depreciation. Price of exports in foreign currency decreases, rendering exports from SG more competitive in global markets. Assuming that the price elasticity of demand for SG exports is price elastic (due to many substitutes available in global market). The fall in price of exports will lead to a more than proportionate increase in quantity demanded of exports thus export revenue rises. While price of imports in SGD increases. Assuming that the price elasticity of demand for SG imports is price inelastic (Singapore is a resource scarce country hence we depend heavily on imported raw materials), the increase in price of imports will lead to a less than proportionate fall in quantity demanded for imports hence import expenditure rises. Assuming marshall lerner condition holds, where the sum of price elasticity of demand for exports and imports is greater than 1, a depreciation of SGD would lead to an increase in net exports. Hence AD increases, cp and via the multiplier effect it will increase real NY and hence stimulating EG and improve SOL thus solving recession problem 

The Government may also implement counter-cyclical fiscal policy to stabilise these external shocks in the short run through the implementation of expansionary fiscal policy via increase in the government expenditure. This will help boost the economy, through shifting of the AD curve rightwards immediately, ceteris paribus. Indeed, in 2009 the Singaporean Government has helped Singapore grow out of recession from the US Subprime Mortgage Crisis by increasing Government Expenditure. The Government Fiscal budget position has to be in surplus in order to finance the heavy expenditure that is to be injected into the economy. Also, apart from increasing injection from the Government to boost the economy, a portion of the fiscal budget surplus can be used in the form of Long-Run Supply-Side policy, in terms of Research and Development, so as to increase potential growth of Singapore. This is due to increase in productive capacity of the nation. This will in turn decrease the unit cost of production hence there would be a fall in prices of final goods and services, thereby enhancing Singapore's export price competitiveness, increasing quantity demanded for exports more than proportionately, assuming demand for exports to be price elastic, there will be an increase in export revenue.

For example, the Singapore Government has implemented the $13. 7 billion Resilience Package in 2009, to help the economy grow out of recession. The Resilience Package has five components consisting of:

1)	Jobs for Singaporeans To help Singaporeans stay employed, Government will spend $5.1 billion by: •    Introducing the Jobs Credit Scheme •    Enhancing the Skills Programme for Upgrading and Resilience (SPUR) •    Providing the Workfare Income Supplement (WIS) Special Payment •    Expanding recruitment across the public sector
2)	Stimulating Bank Lending To ensure that viable companies continue to have access to credit to sustain their operations and keep jobs, government will spend $5.8 billion to stimulate bank lending by: •    Enhancing existing bank lending schemes •    Introducing the Special Risk-Sharing Initiative (SRI) comprising a new Bridging Loan Programme and risk-sharing schemes for trade financing
3)	Enhancing Business Cash-flow and Competitiveness Government will spend $2.6 billion to support business cash-flow and strengthen Singapore’s competitiveness through: •    Tax concessions and measures •    Easing cash-flow and sharpening Singapore’s competitiveness
4)	Supporting Families $2.6 billion will be spent to provide additional support for families and communities during this downturn through: •    Direct assistance for Singaporean households •    Increased targeted help for vulnerable groups •    Additional support for Charitable Giving and the Community
5)	Building A Home for the Future Government will spend $4.4 billion to develop Singapore as a global-city and best-home for Singaporeans by: •    Bringing forward infrastructure projects •    Rejuvenating public housing estates •    Enhancing sustainable development programmes •    Upgrading education and health infrastructure

Apart from the Resilience Package, Singapore has also achieved breakthroughs in terms of research and development, such as R&D and through building better infrastructure. This helps to create a better positive economic outlook so as to attract more Foreign Direct Investments into the country, to help boost our economy out of recession. For example, 

•    The Land Transport Authority (LTA) will spend $3,068 million on rail projects. The key on-going projects include the Circle Line and the Downtown Line. A new platform and track will also be built at the Jurong East MRT station to serve the North-South Line.

•    LTA will invest $1,171 million to expand our road network. Major projects include the Marina Coastal Expressway, the widening of Central Expressway (CTE), the extension of Bartley Road to Tampines Avenue 10, the upgrading of the Woodsville Interchange and a road tunnel from Sentosa Gateway to Kampong Bahru Road/Keppel Road.

•    MOT will provide $714 million to continue with the expansion of the Pasir Panjang Terminal to provide capacity for the future growth of our port and hence maintain our position as the world’s largest trans-shipment hub.

•    The Jurong Town Corporation (JTC) will allocate $385.83 million to develop industrial infrastructure, including the infrastructural works for the Jurong Rock Cavern which is an underground oil storage complex; the upgrading of Seletar Airport to support an aerospace maintenance, repair and overhaul (MRO) hub; and the development of One-North, a 200-ha work-live-play-learn ecosystem for the biomedical science, infocomm and media industries.

•    JTC will set aside $1.07 billion for land-related expenditure to create new industrial space to support the long term growth of Singapore’s manufacturing sector. This includes reclamation and development of land in areas like Tuas View Extension and Jurong Island, as well as excavation costs for creating the underground caverns.

•    The Agency for Science, Technology and Research (A*STAR) will have a budget of $1.04 billion to strengthen R&D capabilities in FY2009. A*STAR will work closely with the Ministry of Health and the National Medical Research Council to integrate basic, translational and clinical research for the biomedical sciences. In FY2009, A*STAR will continue to intensify efforts to catalyse greater commercialisation of technologies, leveraging on the multi-disciplinary capabilities of Science and Engineering Research Council (SERC)’s Research Institutes.

In conclusion, it depends on whether government have the financial capabilities to implement the policies. In 2009, government had already incurred a deficit of more than 10million as shown in figure below hence government may not have the extra financial capabilities to fork out extra cash to boost the economy.

Effectively, it depends on few other conditions such as size of economic downturn, duration and the root cause. Also, it also depends on the efffectiveness of the policy. For Singaopre, LRSS is most efficient policy in Singapore. However, due to the long gestation period for the Long-Run Supply-Side policies to bear fruit, governemnt complement it with other demand management policies.