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                                                                            Headed Into Slower Growth In 2009

   We expect a full-year contraction in Singapore’s GDP in 2009 at 0.4%, following from a 2.3% growth in 2008. Weak
   external demand for Singapore’s exports will result in a steep decline in exports, and a knock-on effect in manu-
   facturing. Service industries such as restaurants, hotels and retail will also be hit from falling tourist arrivals. The
   continued volatility in financial markets will weigh on financial services.

   Concerns of inflation will take a backseat in 2009, as worries over the economy’s health take predominance. Fall-
   ing oil price as well as house prices, will help tame inflation. We expect inflation to drop to 1.3% next year, from a
   forecast of 6.5% for 2008.

   Unemployment now becomes a key issue, as companies continue to pare down its staff to cut costs. Unemployment
   for the 3Q08 is still holding steady, at 2.2%, but we expect unemployment to surge to at least 3.3% next year, the
   effects of which will be tempered in part by hiring in the integrated resorts and in the healthcare and education

Buffeted on several fronts, such as tepid external demand        2Q08. A pipeline of construction projects, which were
for exports, lower manufacturing output, rising unem-            projects awarded in the previous quarters of both private
ployment, the Singapore economy is in for a rough ride           and public sectors works, such as the IRs should keep the
ahead.                                                           construction busy into 2009. But demand for residential
                                                                 property, commercial, and industrial space will come
With Singapore’s 3Q08 GDP contracting 0.6% y/y-                  under some pressure as consumers put off committing
dragged down by the worsening services sector and a              to buying property and companies halt expansion plans.
slump in manufacturing output, the country looks head-           We see the construction industry easing, growing about
ed for a slowdown in the first of 2009.                          4% y/y in 2009.

Sluggish Manufacturing                                           Slowing Services
Waning demand from recession-hit US and the EU are               As for the services side, higher than expected declines
adversely affecting demand for Singapore’s exports. A            came from sectors such as wholesale and retail, trans-
large contraction in manufacturing production- at 11.4%          port and storage, hotels and restaurants, and financial
in the 3Q08 compared to -5.2% in 2Q-was pulled down              services. The service industries reported a 5.3% growth
by low electronics and biomedical manufacturing. This            in 3Q, easing from 2Q’s 7.1% y/y. And this is slated to
points to further weakness in the manufacturing sec-             drag on as financial market turmoil affect investor sen-
tor, with anemic global demand for semiconductor and             timent, which in turn impacts on the financial services
pharmaceutical drugs in the short term as key markets            sector. Easing to 6% in 3Q08, the financial services sec-
such as the US and EU import less.                               tor still managed to grow, with domestic and offshore
                                                                 banking segments, as well as commercial bank lending
Oct’s non-oil domestic exports (NODX) suffered the               expanding. However, sentiment-driven activities like
steepest decline in over 6 years, with a 15.3% y/y con-          stock-broking, and wealth management slowed, as in-
traction, the 6th consecutive month of shrinking ex-             vestors shied away from risk, resulting in weak turnover
ports.                                                           in the local stock exchange, debt and forex markets, and
                                                                 wealth advisory services. Moving into the 4Q and next
Bright spots in manufacturing however, will appear in            year, we expect financial services to slow substantially,
the form of new biomedical and chemical plants-the               going into negative territory in 2009, as severe job cuts
Abbott nutritional plant and Novartis tabletting facility        in the sector, lower fees generated by banks, and risk
-which will come on stream in 2009.                              aversion by investors, eat into growth.

The construction sector, which had seen strong growth            The Hotels and restaurants sector, driven by visitor ar-
of 20% last year, still managed to expand, albeit at a           rivals is also set to slow as consumers around the world
slower pace to 12.8% in 3Q08, compared to 19.8% in               tighten purse strings and cut down on discretionary

                                                                                     Quarterly Global Outlook 1Q2009
                                                                                     UOB Economic-Treasury Research           17

spending. Tourist arrival figures for October released                      Headed into Contraction in 2009
by the Singapore Tourism Board show visitor arrivals to
Singapore dropped 8.1% y/y, and a decline in arrivals             GDP y/y % change
has been seen since June. With revenue from tourism ex-             16
pected to shrink, this does not bode well for the service           14                    UOB forecast
industries.                                                         12
       All Sectors Look to be Weakening in 1H09,                     6
        Before slowly Climbing Back up in 2H09                       4
            Manufacturing                                            0
            Services                                                -2
      30                                                              1961 1969 1977 1985 1993 2001 2009
      25                          UOB forecast
      15                                                      Source: CEIC, UOB
       5                                                     in the 4Q09.
      -5                                                     Inflation Headed Downwards
                                                             Inflation, which had been a bugbear in the previous quar-
                                                             ters, has now been sidelined by concerns on growth. The
       Sep 06   Jun 07   Mar 08   Dec 08   Sep 09            plunging price of oil, which has fallen some 68% from
                                                             a high of US$145 earlier this year, has helped tame in-
 Source: CEIC, UOB                                           flation. With house prices, food, transport and utilities
                                                             prices declining, that should set the stage for inflation
Contraction in 2009                                          to come down in 2009. From January 09 to March 09,
Keeping in mind the continued deterioration and high         electricity tariffs will be cut by 25%, in the first quarter
risk in the external environment, we are forecasting a       of next year, to 22.93 cents per kWh, from 30.45 cents
0.4% contraction in GDP for 2009. Looking at past cri-       per kWh before the October increase. As such, we are
ses for comparison, during the Asian financial crisis, the   expecting inflation to drop to 1.3% next year, from a
economy contracted for three consecutive quarters, from      forecast of 6.5% for 2008.
2Q 98 to 4Q98. The economy shrank 1.6% y/y in 2Q98,
4.2% y/y in 3Q98 and 2% in 4Q98, before rebounding                CPI Set to Fall as Electricity Tariffs are Cut by 24.7
to a 3.2% y/y in the next quarter of 1Q99.
                                                                  CPI y/y change
During the technology bubble of 2000, the economy
contracted for 4 successive quarters, from 2Q01 to 1Q02.           7

A contraction of 0.9%y/y was seen in 2Q01, 6.5% y/y in             6
3Q01, 6.1% y/y in 4Q01, and 0.6% in 1Q02. As for the               5
SARS period, a contraction occurred only in one quarter,           4
in 2Q03, with the economy shrinking 1.8% y/y.                      3
This time round, even though we are expecting a small              1                       UOB forecast
growth of 0.8% in 4Q08, we see the first half of 2009              0
contracting by about 3.4% in 1Q09 and 2.3% in 2Q09.                Jan 07      Jul 07   Jan 08    Jul 08    Jan 09
We expect a slow and modest upturn starting to creep in
in 3Q09, and the economy will slowly start expanding          Source: CEIC, UOB

        Quarterly Global Outlook 1Q2009
18      UOB Economic-Treasury Research

Unemployment to Rise                                            Unemployment Rate Peaked During Previous Crises
Total unemployment rate remained at a seasonally ad-
justed 2.2% in 3Q, unchanged from 2Q, but higher than                        Total unemployment
                                                                             Resident unemployment
a year ago. Resident unemployment rate rose to 3.3%
from 3.1% in 2Q. Total employment grew by 55,700 in
3Q08, lower than the 71,400 in 2Q08, and 58,600 in                 6
                                                                       and Total in %, s/ adj
3Q07, according to the MOM. 2346 workers lost their                5
jobs in the 3Q, compared to 1798 in 2Q, and 1827 a                 4
year ago.
The outlook is not looking rosy, and we expect the to-                                             4.8
tal unemployment rate to go up to at least 3.3% and                1                3.3
higher in 2009. With job cuts being announced in the               0
financial services, manufacturing and transportation sec-          Jun-94      Dec-97     Jun-01    Dec-04   Jun-08
tors, almost on a daily basis, the prediction is not too
far-fetched. The 3.3% unemployment rate is also in line       Source: CEIC, UOB
with what happened in prior crises. The unemployment
rate hit 3.3% in the 1998/1999 period, during the Asian      Loans Growth Under Pressure
Financial Crisis. It then went up to 3.6% in 2000, during    Loan demand will not see the same stellar growth rates
the bursting of the technology bubble. Unemployment          of over 20 % in 2008. Singapore’s loans demand has
peaked at 4.8% during the SARS period. Comparing the         typically mirrored the GDP growth pattern. Loans to
unemployment rate now to the past events, the numbers        non-bank customers shrank in 1986, 1999 and 2002 in
imply that there is more room for the unemployment rate      tandem with the recessions in the economy, implying
to climb much further. A 1 percentage point increase in      that we could see similar flat growth for loans next year
the resident unemployment rate is equivalent to losing       as the economy braces for further growth slowdown.
19,000 jobs, based on a resident workforce of 1.93 mil-      But we believe loans growth will still be supported by
lion.                                                        the building and construction sector- which still has a
                                                             backlog of projects which were awarded in the previous
So far, swelling the ranks of the unemployed, are those      quarters but not started yet. Other sectors such as rigs
mainly from the financial services and manufacturing. In     builders, property market, and the financing demand for
the coming quarters, we will continue to see more jobs       the integrated resorts in Singapore should also still keep
being shed from these sectors, as banks and manufac-
                                                             the loans demand propped up. Although loans growth
turing firms scale down on operations here, as well as
in retail and service. The construction sector could also
see jobs being cut as less construction projects come           Loans Growth Coming Under Pressure Next Year as
onstream. In light of continued job losses, we see the                  Economy Slows Further Next Year
unemployment rate rising to 3.3% and even further next                      Loans growth (end of quarter)
year.                                                                       GDP growth
Some mitigating factors come in the form of a S$600 mil-                                            y/y% change
lion spending by the government over the next two years
on worker training programs to protect local jobs. Some
government ministries such as education, health and the
military will also bring forward their hiring plans.              10

Also, the 2009 budget announcement –which is expect-               5

ed to include handouts for the needy and for businesses            0
will be brought forward to January 22, nearly one month           -5
ahead of usual budget announcements. The budget mea-             -10
sures will take effect in 1Q09, even before the beginning         Mar 82 Mar 87 Mar 92 Mar 97 Mar 02 Mar 07
of the new fiscal year. Nonetheless, there is currently no
                                                              Source: CEIC, UOB
plan to cut the GST rate.

                                                                                  Quarterly Global Outlook 1Q2009
                                                                                  UOB Economic-Treasury Research      19

has remained firm so far, cooling property market and               schemes to support an additional S$2.3 billion of loans
easing economic growth should mean that loans growth                from 1 December 2008 onwards, will also help in sus-
will come under pressure next year. Nonetheless, pipe-              taining loan growth somewhat. The government will take
line construction projects and government infrastructure            on increased risk sharing in loans to local companies,
spending should keep construction sector supported.                 higher loan limit and widening of the eligibility criteria
                                                                    (see box for added measures). We believe loans growth
The government’s enhancements to its business financing             will cool to around 2-3% next year.

                                                   GDP by Industry (y/y %)
                                                   3Q-07    4Q-07        2007      1Q-08     2Q-08     3Q-08
                                                                           y/y% change
                Real GDP                            9.5      5.4          7.7       6.9       2.3       -0.6

                Sectoral Breakdown
                Goods-Producing Industries         11.6      2.9          7.2      12.6       -2.0      -7.9
                Manufacturing                      11.0      0.2          5.8      12.7       -5.2     -11.4
                Construction                       20.1      24.3        20.3      16.9       19.8      12.8
                Services-Producing Industries       8.5      7.7          8.1       7.7       7.1       5.3
                Wholesale/Retail Trade              6.8      6.0          7.3       5.5       6.0       4.3
                Transport & Storage                 5.0      5.4          5.1       5.4       5.8       4.0
                Hotels/Restaurants                  4.9      2.5          4.4       3.1       2.0       -0.2
                Information & Communications        6.6      6.1          6.3       6.8       7.8       7.7
                Financial Services                 20.1      15.9        16.9      14.0       10.6      6.0
                Business Services                   7.5      8.7          7.8       8.6       7.7       7.3
                Source: MTI

                                      Business Financing Enhancements Announced Include:

  •    New Bridging Loan Programme that will allow companies with more than 10 employees to borrow up to
       S$500,000. The default risk is shared equally by the government and the financial institutions.

  •    Small businesses with no more than 10 employees will have access to SPRING’s Micro Loan Programme. The
       limit of this loan will be doubled to S$100,000.

  •    The government’s risk sharing on SME loan defaults will increase to 80% from 50%.

  •    The government’s investment quantum cap under SPRING’s Start-up Enterprise Development Scheme will be
       raised to S$1 mn from S$300,000 and that for SPRING’s Business Angel Scheme will be permanently raised
       to S$1.5mn from S$1mn..

  •    The government will temporarily co-match $2 for every $1 for start-up investors, up from 1:1 previously.

  •    To allow larger companies to tap SME financing such as the Loan Insurance Scheme (LIS) and the Local Enter-
       prise Finance Scheme (LEFS).

  •    To help firms with overseas expansion, the eligibility criteria under the existing Internationalisation Finance
       Scheme (IFS) will be widened. Turnover caps will be raised to S$300 mn for non-trading companies, private
       non-trading companies and listed trading companies. Government default risk sharing will increase to 80%
       from 70%. The turnover caps for LIS will be removed for exporter/trading firms.

  Source: MTI

         Quarterly Global Outlook 1Q2009
20       UOB Economic-Treasury Research