Dwindling demand in major export markets freezes Singapore’s electronics industry
WESTERN markets that for years eagerly sought consumer electronics made in Singapore have fallen off a cliff in the past 12 months. European and American gad-geteers who had repeatedly rushed to stores for new-generation computers, smartphones, and digital cameras now stay at home, out of credit and confidence. The global downturn has hit Singapore head on: the economy, which experienced rapid growth of almost 8 percent in 2007 managed only 1½ percent last year.
This high sensitivity to global events reflects Singapore’s industrial structure and areas of specialization. One-third of the economy—revolving around manufacturing, especially of information technology products, trading services, and some financial activities particularly vulnerable to shifts in investor confidence—is directly affected by advanced economies’ growth.
Another third of economic activity is influenced mostly by regional developments. Both sectors are being hit significantly (see chart), and the shock waves of falling external demand are having an impact on more domestically oriented industries such as construction and utilities.
Commitment to openness
Singapore’s engagement with the international trade and financial systems is exceptional by many metrics, so a large impact is to be expected when the world economy wobbles. Exports account for 230 percent of GDP, and the city-state is a vibrant financial hub in Asia. More than 100 foreign banks, with assets equivalent to nearly six times GDP, use Singapore as a base for regional operations; three domestic banks are also major providers of liquidity to regional firms and multinationals.
But deep economic and financial integration carries with it exposure to global financial shocks and the business cycle of trading partners. For example, a recent IMF study shows that a slowdown in the United States translates into almost a one-for-one decline in the pace of activity in Singapore.
In fact, the current crisis packs a one-two punch for reeling Singapore. Contagion is occurring through both the trade and the financial channels.
Sources: CEIC Data; and IMF staff calculations.
Trade. Exports shrunk by 25 percent in the fourth quarter of 2008 compared with the same period in the previous year, after also contracting in the previous two quarters. The export slump has been broad based. The contraction in electronics exports (which account for one-third of total exports) started in early 2007 and has now become the longest on record. Worse still, the export fall has deepened since early 2008. Meanwhile, shipments of petrochemical and pharmaceutical products that had held up through 2007 have taken a dive. Exports to the United States and the European Union have been particularly affected so far, but exports to Asia, which absorbs more than one-half of Singapore’s total exports, have also started to feel strong headwinds.
Finance. The global financial turmoil has also affected equity prices and credit. Singapore’s stock index fell 50 percent in 2008 and volatility spiked. Interbank lending in U.S. dollars has slowed considerably as global liquidity tightened—and only timid signs of recovery are in sight. With higher bank funding costs, there have been reports of cutbacks on trade financing that could bring wider disruptions in trade activity by putting firms under additional stress.
On the upside, the authorities are taking decisive action to cushion the impact of the global crisis. The central bank has eased the stance of monetary policy and introduced deposit guarantees to shore up confidence in the banking system. On the fiscal front, the 2009 budget is appropriately expansionary and includes a range of tax and spending measures to help businesses and households, including tax rebates, infrastructure spending, and loan guarantees.
Roberto Guimaraes is an Economist and Alessandro Zanello is Assistant Director in the IMF’s Asia and Pacific Department.