The economic contraction will lead to a sharp increase in business insolvencies.
Despite massive stimulus measures a recession is expected in 2020
The city-state is the main transport and financial service hub for Southeast Asia. While for a small state the economy is relatively well diversified, it is vulnerable due to its high dependency on international trade and integration in the Asian supply chain and the focus on specific sectors such as pharmaceuticals and electronics.
In 2019 lower global trade, ongoing trade policy uncertainty, less demand from China and the global ICT down cycle had an immediate impact on Singapore's export-driven economy. Exports of high-value tech products declined – especially intermediate goods that are exported to China for further assembly. Economic growth slipped to 0.7% in 2019.
The global coronavirus pandemic has led to a severe contraction in economic activity since the beginning of 2020. Exports are affected by supply chain disruptions and deteriorating external demand, and forecast to contract sharply by 11% this year, mainly due to a major slump in H1 of 2020. Industrial production is expected to contract by about 1.5% in 2020, due to globally widespread lockdowns. The spread of coronavirus, subsequent government measures to contain the outbreak, and the standstill of tourism continue to hit domestic demand. A further spread of coronavirus cases in Singapore itself remains a downside risk.
In order to sustain the economy, the government has launched four large stimulus packages between February and May 2020. Those amount to almost SGD 93 billion (USD 67 billion), or about 19% of GDP, aiming at protecting jobs and supporting businesses with cash flow problems. The packages contain expanded wage subsidies, cash payouts for self-employed and increased payouts for low-income workers. For the most affected industries property and tax reliefs are earmarked, together with support packages and loans for SMEs. Additionally, the central bank has eased its monetary policy to support the economy.
Despite those comprehensive measures, Singapore´s GDP is forecast to contract by about 6% in 2020, or even higher. The depth of contraction mainly depends on the further global spread of the coronavirus pandemic, and how long and how deep the Singaporean economy and the economies of its major trading partners will be affected before a rebound starts, and additional spillovers from the financial markets.
Nevertheless, the city-state continues to be one of the strongest countries in the world in terms of sovereign risk, macroeconomic fundamentals and ample foreign exchange reserves. Given that the coronavirus pandemic could be contained in the coming months, it is expected that the stimulative policies and pent-up demand will lead to a GDP rebound of about 7% in 2021.
Sharply rising business insolvencies
While government measures to support businesses will have a positive effect, business insolvencies are expected to increase sharply in 2020. Mainly affected will the services sector (especially tourism-related businesses, accommodation and food services), consumer durables retail and construction. Service producing industries contracted by more than 15% in Q1 of 2020 compared to the previous quarter.
Construction insolvencies already increased 5% in 2019, as residential and commercial construction output decreased. Small and medium-sized contractors in particular suffered from tight cash flow and deteriorating margin, due to a lack of projects, increasing competition, and higher labour and rental costs. In Q1 of 2020 construction output contracted by more than 20% compared to the previous quarter.
Stable political situation
The PAP is business-friendly, but compared to western standards, personal freedoms are limited. The opposition is weak and fragmented and has very few opportunities to present itself in public. In the last general elections held in September 2015 the PAP won nearly 70% of the votes, securing 83 of the 89 seats in parliament. Next general elections are due July 10th, 2020.
Singapore’s population consists of ethnic Chinese (77%), Malays (14%), Hindu Tamil Indians (8%) and 1% of other nationalities. Income distribution is relatively equal and, in contrast to neighbouring Malaysia, racial tensions are negligible. The biggest potential threat to security is the possibility of terrorist attacks by Muslim extremists, either indigenous or from abroad.