Briefing Notes for the Launch in Singapore, April 2007
GDP Growth performance and prospects
- Growth was strong in 2006 at 7.6 per cent (ESCAP data), while the Singapore Ministry of Trade and Industry put growth at 7.9 per cent. This was up from 6.4/6.6 per cent growth in 2005 boosted by exports in electronics goods. ESCAP forecast is for growth in 2007 at 4.7 per cent. The Singapore Government has forecast the economy to expand by between 4.5 per cent and 6.5 per cent. Singapore-based economic forecasters put growth at 5.4 per cent.
- ESCAP's 4.7% forecast is based on continued high oil prices (though lower than the highs of 2006) and slower U.S. growth. There was also concern for the U.S. information technology market's outlook.
- Overall, Singapore's export performance has remained strong, especially among digital consumer electronics products. Other industries, such as biomedical, chemicals and transport sectors are also showing sound growth into 2007.
- The construction sector has been boosted property prices recovery, as well as plans in place for several major building projects – including two casinos and a new finance district. Investors see an improved outlook for business conditions in 2007.
Inflation and Monetary policy developments
- Consumer inflation was considered tame in 2006 at 1.0 per cent from 0.4 per cent a year earlier. Headline inflation was forecast at between 0.5-1.5 per cent. But there was an outlook for a tightening in domestic prices with signs of higher wages as unemployment fell.
- Inflation is forecast at 1.5 per cent for 2007. Key factors adding pressure include a tightening in the labour market as well as lagged impact from higher commodity prices, although this was partially offset by lower oil prices.
- Money supply growth stood at 6.0 per cent in 2006, down marginally from the 6.2 per cent of the year earlier. But interest rates were forecast to ease against the backdrop of a strong Singapore dollar.
Fiscal Policy developments
- Singaporean government cut corporate taxes for the first time in three years in the February budget. The maximum rate for companies was cut to 18 per cent from 20 per cent and will be effective from the 2008 year of assessment. The corporate tax cut will cost the government S$800 million in revenue.
- The government lifted the good and services tax (GST) to 7 per cent from 5 per cent previously, with the increase effective from July 1. The GST rate increase will lift revenues by S$750 million in 2007 and S$1.5 billion from 2008, according to the finance ministry. Overall, the budget deficit in 2006 eased to 0.1 per cent of GDP, from 0.3 per cent in 2005.
- The government is also bidding to attract S$11.9 million of new investment in services and manufacturing industries. The key aim is present Singapore as a viable alternative to Hong Kong for investment and finance houses.
- Singapore's total trade grew by 13 per cent in 2006, just under the 14 per cent expansion in 2005 to reach $810 billion from $716 billion. Both exports and imports contributed to the growth expanding by 13 and 14 per cent respectively. The growth in total trade was largely due to an 11 per cent increase in non-oil trade.
- Exports as a proportion of GDP rose to 210.1 per cent in 2006, from 196.8 percent in 2005. Imports as a proportion rose to 184.8 per cent of GDP from 171.4 per cent in 2005. The current account balance as a percentage of GDP fell to 25.9 per cent in 2006 from 28.5 per cent.
- External trade remained robust despite high and volatile oil prices, higher costs of commodity imports, and tighter conditions in the financial markets.
- Singapore's external trade is forecast to grow at a more moderate rate of 8.0 to 10 per cent in 2007. Key factors in the outlook include softer outlook for U.S. economy, but strong demand from China as well as in global semiconductor sales, as well as pharmaceuticals will underpin the outlook.
Capital flows, external debt and exchange rates
- Current account surplus stood at 25.9 per cent of GDP in 2006, down from 28.5 per cent in 2005. The overall balance of payments surplus for the full year rose to S$26 billion compared to S$20 billion in 2005. The current account surplus offset capital and financial outflows, leading to official foreign reserves rising to S$211 billion by end-2006.
- The Singapore dollar, in line with other regional currencies, gained 8.4 per cent against the U.S. dollar in 2006, and has appreciated a further 1.0 per cent in 2007.
- Economic growth and inflationary pressures as well as a softer U.S. dollar are likely to pull the dollar close to S$1.50 against the U.S. unit over 2007. The Singapore dollar is a managed float against a basket of currencies and overseen by the Monetary Authority of Singapore (MAS). The dollar has been trading around S$1.53 for most of the early months of 2007.
- ESCAP research says an abrupt fall in the U.S. dollar could lead the U.S. current account deficit to a sustainable 3.0 per cent of GDP within a year. But, ESCAP warns, this correction would come at cost to trading partners such as Singapore, with a sharp appreciation in the Singapore dollar.
- FDI remains strong. Inflows rose to S$272 billion in 2004, latest data available, after an increase of 7.0 per cent to S$251 billion a year earlier, with the trend expected to continue.
Key policy issues and responses
- Singapore's chief concern lies in the U.S. economy's direction over 2007 as well as the global oil price trends.
- Recent budget initiatives, including corporate tax cuts, highlight the Singaporean Government's drive to improve its comparative advantage as an investment destination against concerns of a drift of investment elsewhere to the region, especially China.
- Optimism remains that India and China's economy will see strong growth, while the outlook for Japan appears favourable backed by stronger corporate profits.
- A milder winter in the U.S. has eased pressures on global oil prices. And private sector forecasts for semi-conductor sales are for a moderate slowing to around 9.0 per cent growth after the 10.4 per cent in 2006.
- But there remain threats to the positive picture. Avian flu, and the threat of a pandemic, will require continued vigilance. Outbreaks of avian flu in recent weeks in Indonesia, Myanmar, and Thailand indicates the virus' potential to mutate into a form easily transferred from bird to human, and then human to human, remains.
- Also, a disorderly unwinding of global imbalances, terrorism and the fears of a new oil price shock still leaves the regional economy vulnerable despite the depth of optimism.