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COVID-19's Economic Impact Is Worse Than SARS, Global Financial Crisis - How Bad Will It Be?

There’s no knowing when the COVID-19 crisis will end, but Prime Minister Lee Hsien Loong has said that it will “likely last at least this year, and quite possibly longer.”

The economic hit will likely be more serious than the Global Financial Crisis and longer-lasting too, even beyond the end of the pandemic.

– Prime Minister Lee Hsien Loong

In an interview with CNBC, Foreign Minister Vivian Balakrishnan also predicted that the economic impact of COVID-19 will last at least a year.

Recounting the previous SARS outbreak, he said that its economic impact took about six months for it to wear out but this time, “it is going to be longer, and it is going to [affect] all countries.”

Singapore Will Enter A Recession

Although there’s uncertainty over how long and intense the economic downturn will be, the Monetary Authority of Singapore (MAS) has confirmed that Singapore will enter a recession this year.

singapore recession 2020
Source: CEIC, DOS, DBS

Singapore’s economy already contracted 2.2 per cent year-on-year in the first three months, which makes it the first negative quarter since the global financial crisis in 2009.

In its latest half-yearly macroeconomic review, MAS reported that Singapore’s economic growth could dip below the forecast range of -4 to -1 per cent, potentially recording Singapore’s worst-ever contraction.

Even during Singapore’s worst recession during the Asian Financial Crisis in 1998, it only brought economic growth down by 2.2 per cent.

Singapore faces “significant” downside risks, namely the possibility of stricter measures to stem the spread of the virus, weak demand from external partners and weak consumer spending.

According to MAS, a materialisation of these three risks in “any combination” would drag Singapore’s economic growth below its current projected range.

Job Losses Will Increase To About 200,000 This Year

The government-imposed ‘circuit breaker’ rules only bring about more pain for an already-stalling Singapore economy.

Beyond the negative shocks from an impending global recession, the ‘circuit breaker’ further compounds the woes of many local companies and could potentially lead to further increase in job losses.

covid-19 singapore workers
Image Credit: Edgar Su via Reuters

Maybank Kim Eng economists expect the shutdown of non-essential services from April 7 to May 4 to cost about S$10 billion, or 2 per cent of Singapore’s gross domestic product (GDP).

About 1.3 million jobs, or a third of total employment, could be affected given the labour intensive nature of these sectors, they added.

But with the ‘circuit breaker’ extended for another month until June 1, it’s safe to assume that these numbers will also double.

The economists also expect job losses to increase to about 150,000 to 200,000 this year.

This will be the highest (number of) retrenchments in Singapore’s history since independence, far worse than during the global financial crisis, and the Asian financial crisis.

– Maybank Kim Eng economists Chua Hak Bin and Lee Ju Ye

In comparison, there were 10,690 retrenchments in the whole of 2019, according to the Manpower Ministry’s labour market report. The 2008 to 2009 global financial crisis saw around 40,000 retrenchments, while the 1997 Asian financial crisis claimed around 30,000 jobs.

The services sector, which has been hit hard by the Covid-19 pandemic, is likely to bear the brunt of these retrenchments this year, they added.

Around 77 per cent of this sector are Singaporean workers, though the economists predict that more than half of the retrenchments will involve foreign workers.

This is because the government’s Budget measures, such as the Jobs Support Scheme (JSS), are targeted at saving jobs for locals.

While one might argue that there are other measures like the waiving of the foreign worker levy, it’s not sufficient for firms to retain their foreign workers.

Key Businesses And Sectors Affected By COVID-19

The hospitality and food service sector, which performed well in 2019, will see a slowdown due to the lockdowns and travel restrictions as part of COVID-19 measures.

The manufacturing sector, which already contracted by 1.4% in 2019, is expected to witness a further decline in 2020 due to the knock-on impact of industrial production disruption in China.

covid-19 singapore tourism
Image Credit: Roslan Rahman via AFP

The outbreak has also disrupted the travel industry, with Singapore projecting a loss of 18,000 to 20,000 visitors daily.

Recounting his visit to the airport in February, PM Lee said that “flights are down by a third, the shops here are hard hit, and at the same time, the crews have to keep the airport running and stay at their posts and keep Singapore open for business.”

Fast forward to today, Changi Airport has since suspended operations at Terminal 2 and 4 as part of cost-cutting measures.

The Ministry of Trade & Industry (MTI) acknowledged that a sharp fall in tourists is affecting the tourism and transport sectors of the country.

In addition, the dramatic decline of tourism has put a sizeable dent in the earnings of travel, hospitality and retail sectors.

Aviation Industry Will Take Much Longer To Recover

singapore airlines
Image Credit: Nicky Loh via Bloomberg

Singapore Airlines, one of the high-fliers in the airline industry, is now struggling to stay airborne due to the COVID-19 pandemic.

Singapore Airlines Group — comprising Singapore Airlines as a premium airline, its regional sister airline SilkAir and budget carrier Scoot Tigerair — recently announced its first-ever net loss in its 48-year history.

It suffered a net loss of S$212 million in the year ended March 31, compared to a profit of S$683 million in the previous financial year.

In just the last quarter alone running from January to March, after the pandemic struck international travel, it racked up a net loss of S$732 million.

One problem for the airline is its lack of a domestic market, since Singapore is just a small city-state, so they don’t have some form of cushion.

Being dependent on international long-haul destinations is also not advantageous because it is expected to be the last stage of recovery in the airline market after domestic and regional.

International travel will remain restricted as long as COVID-19 is still a problem in the world, and any operation they do would require other governments to lift travel restrictions and border control.

As global demand for air travel collapsed due to the border controls and other travel restrictions to curb the spread of COVID-19, the airline had been forced to slash its passenger capacity by 96 percent since April and engage in cost-cutting measures such as a voluntary no-pay leave scheme.

This is troubling since the airline is a key player in Singapore’s aviation sector, accounting for more than half of the passengers that passed through Changi Airport last year.

The aviation sector is also a key pillar of Singapore’s economy, accounting for more than 12 percent of the nation’s GDP, and closely linked to other sectors of the economy, such as tourism, manufacturing and logistics.

Our aviation sector has significant linkages to the rest of the economy. If it collapses in a crisis, it will be very hard for the aviation industry to rebuild after the crisis is over, and the recovery of the rest of the economy will be impeded.

We must therefore ensure that this temporary shock to our air hub does not become a permanent one.

– Deputy Prime Minister and Finance Minister Heng Swee Keng in Parliament

This is why the government has been anxious to help the airline get back on its feet as soon as possible.

Singapore’s sovereign fund Temasek, which owns about 55 percent of the airline, has been backing it in its effort to secure funding to overcome its short-term financial liquidity challenges.

The airline recently announced it will undertake a rights issue raising S$8.8 billion using a combination of new ordinary shares and mandatory convertible bonds, the latest in a slew of funding it has secured.

However, as SIA’s core revenue is very much reliant on the premium segment, it will most likely struggle in the near-term, especially if the world suffers a severe recession as projected by the International Monetary Fund.

Trade-Related Activity Will See A Further Slump

singapore trading
Image Credit: Global Meat News

Singapore has already been hit by declining trade volumes in the midst of the US-China trade conflict in 2019, and is now facing a further drop in trade in goods.

Total trade decreased over the year in April — a decline of 12.8 per cent, a further drop from the 0.2 per cent fall in March.

COVID-19 has impacted every link in global supply chains, from the availability of raw materials, intermediate components and finished goods, to the storage, delivery and sale of these items, and the movement of labour.

Unlike local disasters, global disasters impact suppliers all over the world and result in a competition for resources globally — this can be seen from the competition globally for masks.

Since Singapore has one of the highest degrees of global value chain (GVC) participation in the world, it is highly dependent on the smooth functioning of the global production network.

In particular, a majority of Singapore’s imports are not directly absorbed in Singapore but are further processed and absorbed in foreign countries. Of these foreign contents used in Singapore’s production for exports, the US, Japan, and China are the three largest sources of imports.

This means Singapore is subject to significant supply-side shocks taking place in these large economies due to COVID-19. At the same time, Singapore is also subject to significant demand-side shocks in the regional and global markets due to restrictions on human mobility and business shutdowns.

Over the last 20 years, China has grown in importance as both an upstream and downstream partner for Singapore. Since China is the regional hub and accounts for about 18 per cent of global trade in parts and components, the cost of the disruption in the short run will be high.

This also means that Singapore’s recovery from the impacts of COVID-19 depends a lot on the restarting of the Chinese economy.

Trying to move up the supply chain and thus reduce reliance on other economies for intermediate inputs is of limited efficacy in the current situation. COVID-19’s impact is global and the hardest-hit nations are almost identical to the list of the world’s ten largest economies in the world.

What Is The Gov’t Doing To Stimulate The Economy?

Rather encouragingly, the Singapore government’s reaction has been swift and activated the recession stimulus playbook:

  • Addressing financial system risk: The MAS announced in March that it will draw on its new currency swap line with the US Federal Reserve to provide up to US$60 billion of funding to banks in Singapore. Even prior to the above announcements, large Singapore banks had already taken the initiative and announced various debt deferments, restructuring and moratorium measures to ease the financial burdens of its customers.
  • Alleviate real economy problems: The government unveiled a Resilience Budget totalling S$48.4 billion targeted at saving jobs and protecting workers and livelihoods. This came on top of the previous S$6.4 billion package to cushion the impact of the COVID-19 pandemic. To put this into perspective, the total package announced by the government is worth nearly S$60 billion, which is about 11 per cent of Singapore’s GDP.

But could these support packages be enough to nurse the fallout from temporary business closures and disruptions, and prevent further job losses?

How will companies recover once the government’s financial aid (like the Jobs Support Scheme) stops and when their reserves are used up?

While we take comfort in knowing that more supplementary Budgets may be on the table as the government has expressed that it’s ready to propose further draws on past reserves when necessary, are we putting ourselves at risk of a sovereign debt?

A strong national reserve is definitely fundamental to Singapore’s efforts to counter the negative shocks to its economy, and to ensure that its social fabric and economic structure remain intact.

Overall, Singapore is likely to undergo a V-shaped recovery as the need to allow economic activities to resume means a new normal of social distancing will likely remain in place until a vaccine against the virus comes along, and this will constrain the pace of recovery.

Regardless, the days ahead will reman daunting. There could be more pain before signs of stabilisation.

For now, all we can do is hope for the best and prepare for the worst.

Featured Image Credit: Maverick Asio/SOPA Images/LightRocket via Getty Images

 

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