Question No. 795 in Notice Paper No. 243 of 2008

Name and Constituency of Member of Parliament
Mdm Ho Geok Choo, Member for West Coast GRC

Question
To ask the Minister for Trade and Industry how is the sub prime meltdown affecting the Singapore economy, in particular the small and medium enterprises and the construction industry.

Answer
1. Mr Speaker Sir, advance estimates indicate that Singapore’s GDP declined by 0.5 per cent in the third quarter. On an annualized quarter-on-quarter basis, the economy has now registered two consecutive periods of negative growth, which is the common definition of a technical recession. Given the deteriorating external climate and the volatile financial situation globally, growth will likely remain weak for some quarters to come. MTI has revised the GDP forecast for 2008 to around 3 per cent.

2. Singapore’s economy is small, open and closely linked to the global economy. We cannot escape the impact of the global financial crisis and economic slowdown. First, although Singapore banks have largely escaped the direct impact of the crisis because they have less exposure to distressed assets, the segments of our financial services sector which are more sensitive to market sentiments have been affected. This includes trading of stocks, shares and bonds, foreign exchange trading activities, as well as fund management activities. The local stock-market index has dropped by over 40 per cent from the peak in October 2007.

3. Second, the financial market turmoil has clearly affected sentiments in the property market. The number of residential property sales transactions has fallen sharply. In the third quarter of 2008, the private property price index also registered the first quarter-on-quarter decline since the first quarter of 2004. This will weigh down on related real estate activities.

4. Third, the financial crisis has weakened consumer demand around the world, and this has affected our manufacturing and domestic exports. In the third quarter of 2008, Singapore’s non-oil domestic exports fell by 8.5 per cent, with the biggest declines in electronics and pharmaceuticals. Our tourism sector has also been hit. Visitor arrivals fell by about 6 per cent in July and August 2008. Also, growth in retail sales has slowed down. Excluding motor vehicles, real retail sales grew by just 2.5 per cent in the first eight months of 2008, compared to 8 per cent last year.

5. Mdm Ho Geok Choo asked about the impact on our SMEs and the construction industry. This slowdown has inevitably affected SMEs in the manufacturing sector who are facing lower demand and profits. SMEs in certain services clusters such as retail and F&B may also be facing slower growth. Other services segments are holding up so far, and overall growth in the services sector is estimated to be 6.1 per cent in the third quarter.

6. In the area of financing, our banks are fundamentally sound. They do not face liquidity issues as serious as in other countries and still have credit available for lending. Nevertheless banks have become more cautious. Default rates, while still stable, are also likely to increase. We will however, ensure that credit is available to our SMEs through our Local Enterprise Finance Scheme (LEFS), Loan Insurance Scheme (LIS) and Microloan Programmes. For instance the amount of outstanding LEFS and LIS loans to SMEs for the first eight months of 2008 has grown by more than 55% over the same period last year. We will ensure that our SMEs will be able to continue financing their business operations and investing in capability upgrading with these loans.

7. The situation in the construction sector is slightly different. The sector is estimated to grow by 7.8 per cent in the third quarter of this year, compared to 18 per cent in the first half of this year. Part of this growth moderation is because of supply-side constraints. A shortage of contractors, a tight labor market for skilled engineers and project managers, and longer waiting times for construction equipment have all resulted in construction firms dragging out their projects over a longer period of time. Weaker market sentiments have also dampened the outlook for private sector construction demand, and the stream of new private projects to be launched has slowed.

8. However, total public sector construction demand is projected to remain robust; at between $10.5 billion and $13.5 billion for 2008 as the Government proceeds with several essential infrastructural projects such as the MRT Downtown Line, the Marina Coastal Expressway and Gardens by the Bay. As such, strong public sector construction demand is expected to provide some cushion and offset the possible decline in private sector construction demand.

9. Let me now address the employment outlook. Employment growth in the first half of 2008 has thus far been healthy, with 144,600 jobs added. However, there are signs that the economic slowdown has started to impact the labor market. Employers are exercising more caution in their hiring, with most employers preferring to keep their headcount steady. Given that the economic weakness is expected to continue into 2009, moderation in employment growth is expected in the second half of 2008 through to 2009.

10. The slowing economy and more cautious hiring have contributed to an increase in the overall unemployment rate[1] from 2.0 per cent in March 2008 to 2.3 per cent in June 2008.The unemployment rate for 2008 as a whole is likely to be higher than the 2.1 per cent in 2007, which was a record low in 10 years. Retrenchments so far have stayed at roughly the same level as in previous quarters, though this could go up if the economic weakness persists. The Government will continue to keep a close watch on the labor market situation and already has various measures in place to assist retrenched workers and the unemployed. For instance, the WDA has implemented the Place and Train programme which assists job seekers in securing jobs in industries such as construction, marine, aerospace and healthcare before they undergo relevant training. In 2007, the WDA also helped 68,000 workers to upgrade and certify their skills through its Workforce Skills Qualifications (WSQ) system.

11. In 2006 and 2007, EDB client companies committed $27.5 billion worth of investments, which will create a total of 55,400 new jobs when fully operationalized. Additional job opportunities will also be created in SMEs that support these companies. Many of these investments will continue to come on-stream in the year ahead. For example, in this quarter alone, companies such as Halliburton, Qualcomm, Soitec and Marvell will all be launching their operations officially in Singapore. While we cannot expect overall job creation to be as robust as the past two years, these pipeline of investments coming on-stream will create new job opportunities that will benefit Singaporeans.

12. Mr Speaker Sir, the impact of the evolving global financial crisis and slowdown has already started to flow through to the Singapore economy and companies. We must be prepared for weaker growth in the next few quarters, and possibly longer depending on when the global economy recovers. However, Singapore’s financial and economic fundamentals remain sound. This will enable us to weather the current storm, and emerge strong and resilient.