Keeping out of trouble

"Running a government is not much different to running a company just keep your books well," advises Singapore finance minister Richard Hu. The former Shell Singapore chairman an engineer by training has been at the helm of the republic's finances for the past 13 years and has so far managed to avoid the worst of the region's troubles.

But the good times are well and truly over and the government is now anxious to prepare its citizens for the sort of hardships facing many of its neighbours there is even talk of recession in the pristine streets.

"You cannot avoid being shaken if you are standing in the eye of a hurricane and we might have to accept some recession," concedes Hu. GDP grew 7.8% last year, but the forecast for this year is 0.5 to 1.5%. After robust first-quarter growth of 6.1%, it fell off dramatically in the second quarter to 1.6%. Second-half growth looks likely to be negative.

The Singapore dollar may have held its own better than the Malaysian, Thai or Indonesian currencies in fact it has appreciated slightly against a trade-weighted basket of regional currencies but it has still fallen 18% against the US dollar since July last year, leading to questions about export competitiveness. July's 2.3% year-on-year drop in non-oil exports, incorporating a 5% drop in electronics exports, served to underline the concern. "We are relatively better off than our neighbours," says Hu, "but unfortunately we are very heavily dependent on them and what is happening in the US and Europe."

The de facto central bank, the Monetary Authority of Singapore, is keeping a tight rein but does not feel the need for precipitate action. "We are quite comfortable with exchange rates," says Khor Hoe Ee, senior executive director in the MAS economics department. The composition of the basket of currencies is reviewed every three to five years and was last adjusted in 1996. The next review is expected in one to two years.

"There is a lot of risk out there in the external environment but as long as the US economy and Europe holds up then I think we can probably survive this turbulent period quite well but with difficulty," says Khor.

The US and Europe account for around 60% of Singapore's exports, with the rest being traded in the region. Oversupply in the world electronic components market has been a major factor in Singapore's difficulties. Despite insisting that much of the fall in exports was a result of demand-driven factors, rather than lack of competitiveness, Hu and his team have been working on ways to cut corporate costs, kicked off in the June budget with a S$2 billion (US$1.18 billion) package of tax and government levy reductions, along with promises of increased government spending on infrastructure.

Hu describes the package as "relatively modest" but warns: "If the present trend continues we might have to do something more substantial towards the end of the year in reduction of government tax and additional government spending."

He is priming Singaporeans for a possible cut in employers' 10% contributions to the Central Provident Fund, the state-run pension system. Similar cuts were used in 1985 to boost competitiveness. "This time round it's different," says Hu. "The downturn is due to less demand so using CPF cuts may not have the same effect. The primary monetary stance is to keep prices stable and minimize imported inflation. The inflation rate was 2% last year, and is forecast at less than 1% for 1998."

Singaporeans have long been used to full employment, but unemployment is now expected to hit 2% to 3% this year, although foreigners, who make up a high proportion of the workforce, are likely to absorb a fair proportion of the shocks.

Internationalization

With goods exports declining, Singapore is revitalizing its long-standing drive to become a regional financial centre, holding up Hong Kong as its rival. A key plank of the strategy was reforms announced in August that go part way towards the shadowy goal of "internationalizing" the Singapore dollar, by liberalizing capital markets.

Foreign companies will now be allowed to raise bonds denominated in Singapore dollars with the proviso that proceeds must be swapped out for use offshore. In addition, listing requirements have been relaxed for foreign companies issuing Singapore-dollar-denominated shares on the Stock Exchange of Singapore, and Singapore companies have been authorized to borrow in the local currency for overseas projects.

"Our aim is to develop Singapore as an international financial centre, but we want to do it gradually. We want to allow the internationalization of the Singapore dollar as our economy grows so it does not get out of control. Given our relatively more comfortable position we can afford to relax our stance," Hu says.

The MAS seems to have a slightly different approach. "We have not changed our policy. We still do not aim to internationalize our currency," says Yeo Lian Sim, assistant managing director for markets and investments at the MAS.

The hope is that the latest moves, coupled with a change of stance requiring government-linked companies to raise money directly from the markets, rather than through the state, will help develop a domestic bond market. Opening up the market could affect the currency's value but the MAS does not appear unduly worried. "What we are doing is providing more assets that foreign investors or speculators might want to speculate in," says Yeo. "If they wish to speculate they can speculate. There is nothing much we can do about that. That is why we are moving in steps and stages. We will see how the market develops." Yeo admits interest rates could be pushed up by greater demand for the Singapore dollar, but she points out that "interest rates are the lowest in the region".

Since Singapore has such a small economy the authorities are worried that it will not be able to absorb the huge foreign capital inflows it could face if it did open up completely.