Emerging World Economies

Singapore
The country’s economy may shrink in 2009 due to the international financial crisis. The country is affected by the crisis because it has an open economy and income from tourism and exports is falling. But the government is working to lessen the effects of the crisis, including giving credits to industries and helping them reduce costs. Asian policy makers and their counterparts around the world have lowered interest rates and announced stimulus plans to counter the impact of the global financial crisis. Singapore policy makers also need to implement measures to avoid a prolonged slowdown.

As the global economic slowdown continues, Singapore lowered it growth forecasts for the fourth time in a year, and warned of an impending contraction in 2009. The government of Singapore now forecasts an economic contraction of as much as one per cent through 2009, a sharp downward revision from its previous estimate of 4-6 per cent growth.

According to the Trade and Industry Ministry, Singapore’s economy is expected to face a broad-based slowdown in 2009. Singapore may be the first Asian country to enter in recession, after official figures showed that the island country’s economy shrank by a worse-than-expected 6.8 per cent in the three months to September.

The economy is now seen to grow at 2.5 per cent for 2008, down from the previous forecast of three per cent. The heavily export-dependent island economy has seen growth slide as demand from its key trade partners –US and Europe falls.

Shipments to other emerging markets have also dropped significantly. Overseas shipments are expected to fall by seven per cent this year, the Singapore government announced today. As demand for Singapore’s electronics and pharmaceutical products fall, exports could shrink by up to one per cent in 2009. The slowdown in international and regional trade will significantly impact wholesale trade and the transport and storage sectors.

The export-dependent economy has been battered by declining orders for electronic goods and pharmaceuticals from its biggest customers in the recession-hit markets of the US and Europe, as well as emerging nations. The government estimates that overseas shipments will fall as much as seven per cent this year.

The government plans to enhance measures to help local companies secure loans. The government won’t reduce spending even though the budget deficit this year may be three times its initial projection. As the global financial crisis chokes credit, the government has pledged 2.3 billion Singapore dollars ($1.5bn) to help cash-strapped small businesses. These measures seek to ensure that local enterprises have sufficient resources to continue to operate, invest trade and internationalize in an adverse economic climate.

The Singapore dollar is among Asia’s worst performing currencies this quarter after the Monetary Authority of Singapore shifted a ‘’zero-percent appreciation’’ stance last month. It has slid 6.2 per cent against the US currency since the beginning of October. The central bank, which sets monetary policy by managing the Singapore dollar against a secret basket of currencies, in October switched from allowing a gradual rise in the currency to a neutral stance of zero appreciation.

Some commentators expect the central bank to ease policy further by letting the currency weaken ahead of its next scheduled review in April. But the central bank said its policy stance remains appropriate and it has no plans to change it for now. It sees no reason for ‘’undue weakness’’ in the Singapore dollar and will act if necessary to limit excess volatility.

Singapore’s inflation hit a 26-year high of 7.5 per cent in April, May and June. It will continue to ease. However, it will continue to be sticky for the next few months as it will take time for the decline in prices to be reflected in the consumer price index.

The authorities are confident that annual inflation will revert back to 2-3 per cent next year. But Singapore’s central bank said it expects inflation to remain within the 6-7 percent target for 2008, and forecast inflation to ease to 2.5-3.5 per cent in 2009.

The policies to boost the economy would take effect immediately after being announced in an expansionary January budget. The government would partly rely on construction to help growth with project costs coming down.

The budget emphasis will be on jobs as the government expects unemployment to rise, particularly in manufacturing, which accounts for about a quarter of the economy. The government is also trying to diversify away from manufacturing into service industries such as tourism and finance. Moderation of employment growth is expected in the second half of 2008, and through to 2009.

Singapore’s banks have not suffered huge write downs on risky debts unlike peers in the United States and Europe, though top bank DBS Group said it would cut 900 jobs after suffering a 38 percent drop in quarterly profit.

Singapore may face political pressure from the European Union and the United States over its role as a financial centre for rich foreigners, following a landmark deal by offshore haven Liechtenstein with the United States to drop bank secrecy in cases of tax evasion. Singapore’s three local banks DBS, United Overseas Bank and Oversea-Chinese Banking Corp are well capitalised and their asset quality remains strong despite the problems in the United States.

Malaysia
The ongoing global turbulence roiling the financial markets will likely trigger a global recession in 2009 and accordingly forecasts Malaysia’s GDP growth for next year at 3.5%. The world’s largest economy and Malaysia’s single largest trading partner, the United States is likely to experience its first recession since 2001 as the financial crisis continues unabated with adverse impact on bank lending, investment and private consumption. As a result, the US economic performance will cast a long shadow on the rest of the world. Other major economies, namely the Euro and Japan, are also not being spared from the current financial and economic malaise.

Being an open economy, Malaysia and other regional countries are not immune from any crisis, especially one that is unprecedented as the current turmoil. These economies are now bracing for a decline in global trade volume due to an expected drop in external demand. In addition to external trade performance, Malaysian economic growth in 2009 will also be impacted by a slowdown in private investment as risk aversion heightens among investors. As a consequent, business expansion plans are likely to be scaled down while portfolio investors may continue to stay on the sideline as evident by substantial net outflows in 2008.

Although Malaysia has, over the years, diversified its trade pattern with intra-trade with ASEAN countries becoming a significant feature of its economy, the expected moderations in the economies of G3 (US, Euro and Japan) could have knock-on effects on ASEAN economies as well.

However, the silver lining in the Malaysian economy is the steady domestic demand, primarily supported by private consumption, which, while expected to moderate to 4.4% in 2009 from an estimated 6.3% this year following the impact of higher consumer prices and waning consumer sentiment, is anticipated to be a bulwark against a weakening global economy. Domestic demand in 2009 is expected to be underpinned by an accommodative monetary stance and a relatively stable labour market.

In addition, Malaysia is in a more resilient position to cope with present economic challenges as reflected by huge surplus in the current account of balance of payment, a high level of external reserves and sound banking system that will help weather current economic challenges.

As of September, the amount of external reserves stood at RM379.3 billion, sufficient to finance 9 months of retained imports and is 4.1 times the total short-term external debt. This is in stark contrast with the situation during the Asian Financial Crisis in 1997 when external reserves dropped to as low as 2.9 months of retained imports in October that year.

The country’s financial institutions’ ability to provide ample liquidity is also a critical factor to insulate the Malaysian economy from a credit crunch. A loan-deposit ratio in the banking system that continues to remain below 80 per cent in the last 4 years also augurs well for its role to support lending activities. Additionally, there is no visible strain in the domestic financial market as is evident by the benign spread between inter-bank and Treasury Bills.

Further underscoring the strength of the country’s financial institutions is the declining trend of net non-performing loans (NPL).

Meanwhile, Malaysia’s economy grew at a faster-than-expected rate of 4.7 per cent in the third quarter, driven by domestic demand. It was, however, its slowest pace of growth since mid-2005, as a sharply deteriorating global economy slowed down exports. Economic growth may slow to between 3.5 per cent and 4.5 per cent in the final quarter.

However, full-year growth to be within its forecast of between five and 5.5 per cent. It was a decent third quarter growth. The full effects of the global financial crisis will only be felt by Malaysia in 2009. Inflation, which peaked at 8.4 per cent in August, is falling and expected to come in at below three per cent in the second half of 2009.

South Korea
South Korea’s economic expansion is expected to slow significantly in 2009 as the global financial crisis drags down gross domestic product growth to its lowest level since the Asian financial crisis in the late 1990s.

The Bank of Korea projects Korea’s economy to grow two per cent in 2009 -- from a growth of 3.7 per cent in 2008 as the twin pillars of domestic consumption and exports weaken. That rate hasn’t been seen since the economy contracted by 6.9 per cent in 1998 at the height of the Asian financial turmoil. Private consumption is seen to increase 0.8 in 2009 after a 1.5 per cent expansion in 2008. In 2010; demand is expected to recover to 2.5 per cent.

Exports, a key engine of growth for the trade-driven economy, are forecast to rise more moderately at 1.3 in 2009, compared with a 3.6 per cent increase in 2008. In line with the weaker economic performance, inflation is expected to be more moderate at three in 2009 and 2.6 per cent in 2010 after accelerating 4.7% in 2008. South Korea’s current account balance, meanwhile, is likely to recover to a surplus of $22 billion next year from a deficit of $4.5 billion in 2008, aided by a drop in oil prices and lower imports on the back of tepid domestic demand.

The flow of the domestic economy will be affected by the global financial crisis, the depth of the global economic slowdown and the timing of its recovery.

In the absence of any strong indications that the global problems will recede soon, along with sluggish domestic consumption, it will be difficult for South Korea’s economy to regain its momentum, the central bank added.

The Bank of Korea’s outlook for the economy next year is in line with the International Monetary Fund’s 2% forecast and slightly more pessimistic than the Organization for Economic Cooperation and Development’s 2.7 per cent in 2009. Still, the revised estimate remains far more optimistic than what some private economists are predicting. Swiss bank UBS, for example, sees South Korea’s economy declining three per cent in 2009.

South Korea’s economy has not contracted on an annual basis since 1997, when it was hit by the Asian financial crisis that forced the government to seek a $58 billion bailout from the International Monetary Fund. The central bank estimated, however, that growth would recover in 2010 to four per cent. Deteriorating economic data have raised alarm bells that Asia’s fourth-largest economy could contract next year on an annual basis for the first time since 1997, when the country was in the throes of the Asian financial crisis. Exports fell 18.3 per cent in November from the same month last year.

South Korea’s central bank carried out its biggest ever interest rate cut, slashing borrowing costs by a full percentage point to a record low in a bid to stave off possible recession. The Bank of Korea lowered the benchmark seven-day repurchase rate to three per cent from four per cent at a regular policy meeting. There is now judged to be a strong likelihood that growth will fall sharply as a result of the worldwide economic slowdown along with the financial market unrest including the credit crunch. The rate cut marked the fourth time the central bank has lowered borrowing costs in the past two months and exceeded the 0.75 percentage point emergency cut on Oct. 27, previously the largest ever.

Most economists had expected further rate cuts after a quarter percentage point reduction in November, though not of such magnitude.

After the re-eruption of the US financial crisis in September, the South Korean administration promised to inject 133 trillion won (about $91 billion) into the financial system to ease liquidity. By the end of November, only 50 trillion won had been released. In October, 321 firms went bankrupt, up from 118 in September, as the lack of credit took effect. A $16 billion package to help small and medium exporters has failed to end the cash shortage, because banks are reluctant to apply for BOK funds out of fear that they will be seen as having a cash-flow problem.