By Grace Ho, The Sunday Times, 22 Mar 2020
Oil and share prices in free fall. Entire countries closing off borders. Healthcare systems overwhelmed.
With the COVID-19 pandemic exacting a rising toll and uncertainty over how long it will last, the world is finding out the limits to what central banks and monetary policy can do.
Take the United States Federal Reserve's latest moves. Despite slashing US interest rates to near zero, and injecting US$1.5 trillion (S$2.2 trillion) into financial markets, US stocks have been on a roller coaster ride, at one point nearly erasing all of their gains since President Donald Trump took office three years ago.
In a research note on Thursday, DBS Bank said a recession in Singapore "appears inevitable", as it now sees the economy shrinking by 0.5 per cent this year, instead of the 0.9 per cent growth it forecast last month.
The same day, the Monetary Authority of Singapore (MAS) announced a US$60 billion swap facility with the Fed. MAS intends to draw on this facility, in place for at least six months, to provide US dollar liquidity to financial institutions in Singapore.
Some say the aftermath of COVID-19 could last longer than the oil shock in 1973, and subsequent downturns in 1985, 1998, 2001 to 2003 and 2009.
Back then, the Republic's economy recovered fairly quickly because conditions elsewhere improved. It helped that only certain sectors or regions were badly hit.
This is not the case now. Central banks cannot stimulate demand - not when large numbers of people are stuck at home, and business and consumer confidence remains low.
Far more aggressive fiscal policy is needed to cushion the impact, something that Deputy Prime Minister Heng Swee Keat alluded to on March 11 when he said the Government is working on a second stimulus package. Some expect details to be given when Parliament sits on Thursday, 26 March.
As with the $4 billion package announced during the Budget in February, it would aim to help businesses and workers, Mr Heng said, adding that the Government is not ruling out the use of Singapore's past reserves.
If it does so, this would not be the first time. It also has a tried and tested arsenal of fiscal and monetary tools at its disposal.
The Sunday Times looks at what caused past downturns, and how the economy recovered.
1973: OIL SHOCK AFTER BUMPER GROWTH
In the first two decades of its independence, Singapore enjoyed strong double-digit growth.
This came to an end with the 1973 oil shock.
Members of the Organisation of the Petroleum Exporting Countries, led by Saudi Arabia, cut oil production and shipments to the US and other countries perceived as supporting Israel in the Arab-Israeli War.
By the end of the embargo in March 1974, the price of oil had risen nearly 400 per cent - bringing the era of cheap and plentiful oil to an end, and the global economy to its knees.
Although Singapore's growth rate fell, it still averaged over 8 per cent from 1973 to 1979 - high compared with other countries during that same period. Then a newly industrialised economy, it was relatively unscathed even during the second global oil crisis in 1979.
Shoring up growth were its outward market orientation and strong performance in higher value-added electronics, petrochemicals, and component and precision engineering.
1985: STRUCTURAL CRACKS, RISE OF SERVICES
Given Singapore's dependence on the world economy, a slump in world trade in 1985, especially in the US, saw the nation experiencing its worst recession. Unemployment spiked to 6 per cent.
The causes were both internal and external. Worldwide, there was a decline in the petroleum and marine sectors, and slowing demand for semiconductors and electronics in the US.
There were also structural strains in the Singapore economy.
High wage and business costs within Singapore outstripped productivity, resulting in a loss of international competitiveness.
The Government responded by slashing employer contributions to the Central Provident Fund from 25 to 10 per cent, freezing overall wage levels for 1986 and 1987, and reducing corporate income and personal income taxes from 40 to around 30 per cent.
These measures were highly successful. The healthy state of developed countries also meant that Singapore could export its way out of the crisis. Its economy rebounded, growing from 2.1 per cent in 1986 to post 9.8 per cent in 1987.
The crisis led to a fundamental review of prevailing policies and strategies. Structural reforms undertaken in the 1980s that continued into the 1990s included wage flexibility in the labour market, promoting innovation and entrepreneurship, and liberalising services sectors such as finance, telecommunications and utilities.
Modern services rose steadily as a twin engine of growth alongside manufacturing. Its share of gross domestic product increased from 16 per cent in 1965 to 24 per cent in 1985 and 28 per cent in 2010.
1998: A PERFECT STORM
Calling the Asian Financial Crisis a "perfect storm", economist Paul Krugman wrote in Fortune magazine in 1998 that he felt "like a tornado-chaser who has just caught up with a monster twister".
The storm broke through the clouds in mid-1997, when the Thai baht experienced speculative attacks. Its collapse in July sparked panic that caused other regional currencies such as the Philippine peso, Indonesian rupiah and Malaysian ringgit to also face selling pressure.
Soon, foreign investors lost confidence in economies that they considered to have weak fundamentals. Excessive foreign borrowing and unsound banks - which either collapsed or had to be rescued - dragged regional economies down.
Singapore, with its extensive trade and financial links, took a beating. With Asian countries accounting for over half of Singapore's trade, economic growth plunged from around 8 per cent in 1997 to 1.5 per cent in 1998.
Explained economists Mahinda Siriwardana and David Schulze in a 2000 paper: "Singapore's remarkable openness exposes the country particularly to contagion via trade linkages."
The Government unveiled a $10.5 billion aid package to alleviate the burden on households, as well as tax rebates.
Wage cuts also played a role. Employers' CPF contribution rate, which had been progressively restored to 20 per cent by 1994, was slashed to 10 per cent. It was later progressively restored in 1999 and 2000, to 16 per cent. The National Wages Council encouraged a monthly variable component for pay to enable firms to adjust labour costs quickly and effectively.
Other business costs such as foreign worker levies, land and factory rentals and vehicle-related costs were also cut. The Local Enterprise Finance Scheme was extended to boost working capital flows to businesses.
2001-2003: DOT.COM BUST, SEPT 11 AND SARS
The terrorist attacks on New York's World Trade Centre on Sept 11, 2001, sent global markets into a tailspin. Just a year earlier, the dot.com bubble had burst as Internet start-ups in the US folded.
Investor confidence was further eroded by accounting scandals and the resulting bankruptcies, such as Enron in 2001 and WorldCom in 2002. By the end of 2002, stocks had lost US$5 trillion in value.
Singapore, Hong Kong, Taiwan and Malaysia suffered full-blown recessions. In July 2001, the Government announced a $2.2 billion package to help with business costs, including tax and rental rebates.
In October 2001, the Government provided another boost: an $11.3 billion package that included tax cuts and emergency cash for the poor and jobless. The building of public infrastructure was also hastened to stimulate the economy.
But just as the economy was finding its feet in 2003, the SARS epidemic struck. The tourism, travel and services sectors bore the brunt of the fallout as visitors stayed away.
In April that year, the Government pumped $230 million into a SARS relief package for the travel and tourism sectors; in August came a $1 billion package of rebates, incentive schemes and infrastructure projects to help businesses, low-income earners and the unemployed.
In October, the CPF employer contribution rate was cut from 16 to 13 per cent to ease business costs and save jobs. Monetary policy was also eased to support recovery, with the exchange rate depreciating through much of 2003.
The recovery came soon enough as SARS was mainly limited to Asian cities. Singapore's growth bounced back to 9 per cent in 2004.
2008-2009: GLOBAL FINANCIAL MELTDOWN
For years, banks in the US bundled bad home loans with good ones and sold them as mortgage-backed securities. The rot showed up in 2006 when the housing bubble burst, leading to mass evictions, unemployment and failed businesses.
Two years later, this snowballed into a full-blown banking crisis with the collapse of investment bank Lehman Brothers. Widespread failures in financial regulation and supervision led to the biggest financial crisis since the Great Depression in the 1930s.
In January 2009 - earlier than convention dictates - the Government introduced a historic Budget. The size of the $20.5 billion Resilience Package was unprecedented in the history of independent Singapore.
It comprised $5.1 billion to preserve jobs through schemes such as Jobs Credit with cash grants for employees' wages; $5.8 billion to stimulate bank lending through the Special Risk-Sharing Initiative in the form of bridging loans and risk-sharing schemes for trade financing; tax rebates and other concessions amounting to $2.6 billion; another $2.6 billion in targeted help and support for households and the community; and billions in infrastructure projects brought forward.
The Finance Ministry said then in a press release: "The current global financial and economic crisis is unprecedented, and it is uncertain how long it will last. This is the type of severe contingency that our reserves are accumulated for, and justifies a draw from past reserves."
Then President SR Nathan gave his approval for the Government to draw $4.9 billion from past reserves to help fund the Resilience Package.
Although the projected deficit that year was a whopping $8.7 billion, that amount eventually shrank to $819 million, thanks to higher revenues from an exceptionally sharp rebound.
Driven by a surge in manufacturing activity, the economy grew by 14.7 per cent in 2010 - surpassing the previous record of 13.8 per cent set in 1970, and bouncing back strongly from a 1.3 per cent contraction in 2009.
With the COVID-19 pandemic exacting a rising toll and uncertainty over how long it will last, the world is finding out the limits to what central banks and monetary policy can do.
Take the United States Federal Reserve's latest moves. Despite slashing US interest rates to near zero, and injecting US$1.5 trillion (S$2.2 trillion) into financial markets, US stocks have been on a roller coaster ride, at one point nearly erasing all of their gains since President Donald Trump took office three years ago.
In a research note on Thursday, DBS Bank said a recession in Singapore "appears inevitable", as it now sees the economy shrinking by 0.5 per cent this year, instead of the 0.9 per cent growth it forecast last month.
The same day, the Monetary Authority of Singapore (MAS) announced a US$60 billion swap facility with the Fed. MAS intends to draw on this facility, in place for at least six months, to provide US dollar liquidity to financial institutions in Singapore.
Some say the aftermath of COVID-19 could last longer than the oil shock in 1973, and subsequent downturns in 1985, 1998, 2001 to 2003 and 2009.
Back then, the Republic's economy recovered fairly quickly because conditions elsewhere improved. It helped that only certain sectors or regions were badly hit.
This is not the case now. Central banks cannot stimulate demand - not when large numbers of people are stuck at home, and business and consumer confidence remains low.
Far more aggressive fiscal policy is needed to cushion the impact, something that Deputy Prime Minister Heng Swee Keat alluded to on March 11 when he said the Government is working on a second stimulus package. Some expect details to be given when Parliament sits on Thursday, 26 March.
As with the $4 billion package announced during the Budget in February, it would aim to help businesses and workers, Mr Heng said, adding that the Government is not ruling out the use of Singapore's past reserves.
If it does so, this would not be the first time. It also has a tried and tested arsenal of fiscal and monetary tools at its disposal.
The Sunday Times looks at what caused past downturns, and how the economy recovered.
1973: OIL SHOCK AFTER BUMPER GROWTH
In the first two decades of its independence, Singapore enjoyed strong double-digit growth.
This came to an end with the 1973 oil shock.
Members of the Organisation of the Petroleum Exporting Countries, led by Saudi Arabia, cut oil production and shipments to the US and other countries perceived as supporting Israel in the Arab-Israeli War.
By the end of the embargo in March 1974, the price of oil had risen nearly 400 per cent - bringing the era of cheap and plentiful oil to an end, and the global economy to its knees.
Although Singapore's growth rate fell, it still averaged over 8 per cent from 1973 to 1979 - high compared with other countries during that same period. Then a newly industrialised economy, it was relatively unscathed even during the second global oil crisis in 1979.
Shoring up growth were its outward market orientation and strong performance in higher value-added electronics, petrochemicals, and component and precision engineering.
1985: STRUCTURAL CRACKS, RISE OF SERVICES
Given Singapore's dependence on the world economy, a slump in world trade in 1985, especially in the US, saw the nation experiencing its worst recession. Unemployment spiked to 6 per cent.
The causes were both internal and external. Worldwide, there was a decline in the petroleum and marine sectors, and slowing demand for semiconductors and electronics in the US.
There were also structural strains in the Singapore economy.
High wage and business costs within Singapore outstripped productivity, resulting in a loss of international competitiveness.
The Government responded by slashing employer contributions to the Central Provident Fund from 25 to 10 per cent, freezing overall wage levels for 1986 and 1987, and reducing corporate income and personal income taxes from 40 to around 30 per cent.
These measures were highly successful. The healthy state of developed countries also meant that Singapore could export its way out of the crisis. Its economy rebounded, growing from 2.1 per cent in 1986 to post 9.8 per cent in 1987.
The crisis led to a fundamental review of prevailing policies and strategies. Structural reforms undertaken in the 1980s that continued into the 1990s included wage flexibility in the labour market, promoting innovation and entrepreneurship, and liberalising services sectors such as finance, telecommunications and utilities.
Modern services rose steadily as a twin engine of growth alongside manufacturing. Its share of gross domestic product increased from 16 per cent in 1965 to 24 per cent in 1985 and 28 per cent in 2010.
1998: A PERFECT STORM
Calling the Asian Financial Crisis a "perfect storm", economist Paul Krugman wrote in Fortune magazine in 1998 that he felt "like a tornado-chaser who has just caught up with a monster twister".
The storm broke through the clouds in mid-1997, when the Thai baht experienced speculative attacks. Its collapse in July sparked panic that caused other regional currencies such as the Philippine peso, Indonesian rupiah and Malaysian ringgit to also face selling pressure.
Soon, foreign investors lost confidence in economies that they considered to have weak fundamentals. Excessive foreign borrowing and unsound banks - which either collapsed or had to be rescued - dragged regional economies down.
Singapore, with its extensive trade and financial links, took a beating. With Asian countries accounting for over half of Singapore's trade, economic growth plunged from around 8 per cent in 1997 to 1.5 per cent in 1998.
Explained economists Mahinda Siriwardana and David Schulze in a 2000 paper: "Singapore's remarkable openness exposes the country particularly to contagion via trade linkages."
The Government unveiled a $10.5 billion aid package to alleviate the burden on households, as well as tax rebates.
Wage cuts also played a role. Employers' CPF contribution rate, which had been progressively restored to 20 per cent by 1994, was slashed to 10 per cent. It was later progressively restored in 1999 and 2000, to 16 per cent. The National Wages Council encouraged a monthly variable component for pay to enable firms to adjust labour costs quickly and effectively.
Other business costs such as foreign worker levies, land and factory rentals and vehicle-related costs were also cut. The Local Enterprise Finance Scheme was extended to boost working capital flows to businesses.
2001-2003: DOT.COM BUST, SEPT 11 AND SARS
The terrorist attacks on New York's World Trade Centre on Sept 11, 2001, sent global markets into a tailspin. Just a year earlier, the dot.com bubble had burst as Internet start-ups in the US folded.
Investor confidence was further eroded by accounting scandals and the resulting bankruptcies, such as Enron in 2001 and WorldCom in 2002. By the end of 2002, stocks had lost US$5 trillion in value.
Singapore, Hong Kong, Taiwan and Malaysia suffered full-blown recessions. In July 2001, the Government announced a $2.2 billion package to help with business costs, including tax and rental rebates.
In October 2001, the Government provided another boost: an $11.3 billion package that included tax cuts and emergency cash for the poor and jobless. The building of public infrastructure was also hastened to stimulate the economy.
But just as the economy was finding its feet in 2003, the SARS epidemic struck. The tourism, travel and services sectors bore the brunt of the fallout as visitors stayed away.
In April that year, the Government pumped $230 million into a SARS relief package for the travel and tourism sectors; in August came a $1 billion package of rebates, incentive schemes and infrastructure projects to help businesses, low-income earners and the unemployed.
In October, the CPF employer contribution rate was cut from 16 to 13 per cent to ease business costs and save jobs. Monetary policy was also eased to support recovery, with the exchange rate depreciating through much of 2003.
The recovery came soon enough as SARS was mainly limited to Asian cities. Singapore's growth bounced back to 9 per cent in 2004.
2008-2009: GLOBAL FINANCIAL MELTDOWN
For years, banks in the US bundled bad home loans with good ones and sold them as mortgage-backed securities. The rot showed up in 2006 when the housing bubble burst, leading to mass evictions, unemployment and failed businesses.
Two years later, this snowballed into a full-blown banking crisis with the collapse of investment bank Lehman Brothers. Widespread failures in financial regulation and supervision led to the biggest financial crisis since the Great Depression in the 1930s.
In January 2009 - earlier than convention dictates - the Government introduced a historic Budget. The size of the $20.5 billion Resilience Package was unprecedented in the history of independent Singapore.
It comprised $5.1 billion to preserve jobs through schemes such as Jobs Credit with cash grants for employees' wages; $5.8 billion to stimulate bank lending through the Special Risk-Sharing Initiative in the form of bridging loans and risk-sharing schemes for trade financing; tax rebates and other concessions amounting to $2.6 billion; another $2.6 billion in targeted help and support for households and the community; and billions in infrastructure projects brought forward.
The Finance Ministry said then in a press release: "The current global financial and economic crisis is unprecedented, and it is uncertain how long it will last. This is the type of severe contingency that our reserves are accumulated for, and justifies a draw from past reserves."
Then President SR Nathan gave his approval for the Government to draw $4.9 billion from past reserves to help fund the Resilience Package.
Although the projected deficit that year was a whopping $8.7 billion, that amount eventually shrank to $819 million, thanks to higher revenues from an exceptionally sharp rebound.
Driven by a surge in manufacturing activity, the economy grew by 14.7 per cent in 2010 - surpassing the previous record of 13.8 per cent set in 1970, and bouncing back strongly from a 1.3 per cent contraction in 2009.
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