Singapore’s First Dip into Reserves May Fall Short: Analysts

SINGAPORE ~ Singapore’s unprecedented dip into its vast national savings pool as part of a record stimulus package may not go far enough in the face of the country’s worst recession, analysts said.

But with reserves totaling billions of dollars the government still has plenty of ammunition, they said.

In its national budget last week, Singapore announced a stimulus package of S$20.5 billion (US$13.6 billion), and said $4.9 billion of that would be funded by the past reserves, which have never been drawn on.

“I think this is the right thing to do, in general, because this is why the reserves are there, to help people and the country,” said Ilian Mihov, an economics professor at Singapore graduate business school Insead.

“Singapore is in the fortunate position that, instead of borrowing, you can just use your previously accumulated wealth.”

Singapore has foreign exchange reserves totaling hundreds of billions of dollars, including those in one of the world’s largest sovereign wealth funds.

But the stimulus cash will come from Singapore-dollar savings accumulated from previous years’ budgets, said Annie Koh, a finance professor and dean of executive and professional education at Singapore Management University.

In 2007, for example, the city-state’s budget surplus totaled about $6 billion.

“When we have large surpluses, like in fiscal year 2007, we make sure we save some for rainy days,” Finance Minister Tharman Shanmugaratnam said in his budget speech, adding reserves must only be used in exceptional circumstances.

“The current global financial and economic crisis is the type of severe contingency that our reserves have been accumulated for,” Shanmugaratnam said.

“We remain ready to undertake further measures if necessary over the course of the year and the next few years.”

Standard Chartered Bank said a big worry is that the global slowdown could extend well into 2010 and require Singapore to dig deeper and run another deficit in the 2010 fiscal year.

Singapore will run its largest budget deficit ever, six percent of gross domestic product, to fund the stimulus, the finance minister said.

Given the economic risks, the government is still taking “a very calibrated approach” to cushioning the economy, Song Seng Wun, of CIMB-GK Research, said in a report. That means there is room for “off-budget measures” in the second half of the year if the first-half recession is deeper than expected, he said.

Owi Kek Hean, Singapore head of tax services at accountant KPMG, wrote in The Business Times that “it is uncertain whether the budget will go far enough”. He said he expected further measures in coming months.

“We are likely to experience the deepest recession in the Singapore economy since our independence, arising from the worst global economic decline in 60 years,” Shanmugaratnam said.

Koh said that if the government needs to tap reserves again “there are definitely Singapore dollar funds available.”

Mihov agreed “they have enough ammunition” but in the face of factors outside Singapore’s control, there is only so much the government can do.

The city-state is Southeast Asia’s wealthiest economy in terms of gross domestic product per capita but its dependence on trade makes it sensitive to economic disturbances in developed nations such as key the European and United States markets, which are also in recession.

“Singapore is a very vulnerable economy to fluctuations in the rest of the world,” Mihov said.

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