Macroeconomic Review_ July 2002

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					Macroeconomic Review, July 2002


       Foreword                                                                                 i

       Monetary Policy Statement                                                             ii-v

1      Macroeconomic Developments                                                              1
       1.1        External Developments                                                         1
       1.2        Domestic Economy                                                              5
                  Box Item A: Characteristics of Growth in the Financial Services Sector       25

2      Financial Market Developments                                                          29
       2.1        International Financial Markets                                              29
       2.2        Regional Financial Markets                                                   31
       2.3        Domestic Financial Markets                                                   33

3      Wage-Price Dynamics                                                                    37
       3.1        External Inflation                                                           37
                  Box Item B: The Importance of Commodity Price Inflation in                   40
                  Explaining Domestic Price Pressures
       3.2        Domestic Price Pressures                                                     49
       3.3        Inflation in Singapore                                                       53

4      Outlook                                                                                56
       4.1        External Outlook                                                             56
       4.2        Domestic Output                                                              60
                  Box Item C: The Singapore Private Residential Property Market:               73
                  Cyclical Behaviour and Recent Developments
       4.3        Aggregate Demand                                                             78
       4.4        Labour Market                                                                80
       4.5        Inflation                                                                    82
       4.6        Assessing the Macroeconomic Policy Mix                                       86

5      Special Feature on Macroeconomic Impact of the FY2002 Budget                           92
       5.1        Introduction                                                                 92
       5.2        Short- to Medium-Term Impact of the Budget                                   92
       5.3        Long-Term Impact of the Budget                                               95
       5.4        Summing Up                                                                   96

       Statistical Appendices                                                                 97

Monetary Authority of Singapore                                                    Economics Department
Macroeconomic Review, July 2002

List of Abbreviations

ACU            Asian Currency Unit
ADM            Asian Dollar Market
BOJ            Bank of Japan
CPF            Central Provident Fund
CPFIS          Central Provident Fund Investment Scheme
CPI            Consumer Price Index
DLI            Domestic Liquidity Indicator
DSPI           Domestic Supply Price Index
ECB            European Central Bank
ED             Economics Department
ERS            Economic Restructuring Shares
FDI            Foreign Direct Investment
FI             Fiscal Impulse
FY             Fiscal Year
F&B            Financial and Business Services
GDP            Gross Domestic Product
GFCF           Gross Fixed Capital Formation
GLC            Government-Linked Companies
GST            Goods and Services Tax
ICT            Information and Communications Technology
IIP            Index of Industrial Production
IMF            International Monetary Fund
IPO            Initial Public Offering
JGB            Japanese Government Bond
MEQ            Machinery and Equipment
MMS            Monetary Model of Singapore
MNC            Multi-National Corporation
m-o-m          month-on-month
NIE            Newly Industrialising Economy
NII            Net Investment Income
NODX           Non-Oil Domestic Exports
NORX           Non-Oil Re-Exports
NPL            Non-Performing Loans
OECD           Organization for Economic Cooperation and Development
OPEC           Organization of Petroleum Exporting Countries
PCPI           Primary Commodity Price Index
q-o-q          quarter-on-quarter
RCA            Revealed Comparative Advantage
SA             Seasonally Adjusted
SAAR           Seasonally Adjusted Annualised Rate
SGS            Singapore Government Securities
STI            Straits Times Index
S$NEER         Singapore Dollar Nominal Effective Exchange Rate
T&C            Transport and Communications
UBC            Unit Business Costs
ULC            Unit Labour Costs
YA             Year of Assessment
y-o-y          year-on-year
3MMA           3-Month Moving-Average

Monetary Authority of Singapore                                        Economics Department
Macroeconomic Review, July 2002                                                      i

The Macroeconomic Review is published twice a year in
conjunction with the release of the MAS Monetary Policy
Statement (MPS). The purpose of the Review is to provide
information on the Economics Department's analysis and
assessment of the GDP growth and inflation developments in
the Singapore economy, and in doing so, to share with market
participants, analysts, and the wider public, the basis for the
policy decision articulated in the MPS.

The Review begins by providing an update of recent economic
developments in the external economic environment,
international financial markets and domestic economy, in
Chapters 1 to 3. In the commentary and analysis, we have
tried to focus on month-on-month or quarter-on-quarter
comparisons in order to highlight the momentum effects, as
the economy emerges from the downturn. These have drawn
on the Economics Department’s internal estimates of various
seasonally adjusted series. Chapter 4 then follows with a
discussion of the factors that will impinge on the short-term
outlook for the Singapore economy. This issue of the Review
also contains a number of special focus items, including an
analysis of the medium-term implications of the FY2002
Budget in Chapter 5.

The production of the Review is coordinated by the Monetary
Policy Division and incorporates contributions from the
External Economies and Financial Surveillance Divisions. The
next issue of the Review will be released in January 2003.

Monetary Policy Division
Economics Department
Monetary Authority of Singapore

18 July 2002

Monetary Authority of Singapore                                   Economics Department
Macroeconomic Review, July 2002                                                                                            ii

Monetary Policy Statement
July 2002


1        At the beginning of 2002, MAS announced that it would maintain a zero per cent appreciation path
for the exchange rate policy band, centred on the level of the trade-weighted Singapore dollar nominal
effective exchange rate (S$NEER) prevailing at that time. Furthermore, as the economic uncertainty arising
from the September 11 incident had diminished and financial markets had stabilised, the exchange rate
policy band was narrowed.

2        Since then, the S$NEER has largely fluctuated within the upper half of the policy band in H1 2002.
(Chart 1.) It initially strengthened over the first two months of the year, as the improved economic outlook
led to portfolio inflows into the local and regional equity markets. The S$NEER subsequently eased and
fluctuated within a narrow range.

                                                                        Chart 1
                                                      Nominal Effective Exchange Rate (S$NEER)
                          Index (6 Jul 2001 = 100)




                                                           Jul        Sep       Nov   Jan    Mar   May
                                                           2001                       2002

3       On a bilateral basis, the Singapore dollar strengthened against the US dollar, but depreciated
against the Euro and Yen in H1 2002. (Chart 2.) After weakening against the US dollar in February and
March, the domestic currency appreciated in the second quarter of the year, to end some 4.9% higher at
end-June 2002 compared with end-2001. Against the Euro and the Yen, however, the Singapore dollar fell
by 6.1% and 4.5% respectively over the same period. Among the Asian currencies, the Singapore dollar
also weakened against the Rupiah and the Won, but remained largely unchanged against the Baht and the
New Taiwan dollar.

Monetary Authority of Singapore                                                                          Economics Department
Macroeconomic Review, July 2002                                                                                                                 iii

                                                                            Chart 2
                                                            Singapore Dollar Bilateral Exchange Rate
                                                                  Against Various Currencies

                                                                             (a) Industrial Countries
                                                                   Appreciation of
                          Index (2 Jul 2001 = 100)


                                                                   Depreciation of
                                                                        S$                                           Euro
                                                          Jul          Sep       Nov       Jan        Mar       May
                                                           2001                            2002

                                                                         (b) Regional Countries
                                                        110        Appreciation of
                          Index (2 Jul 2001 = 100)


                                                                   Depreciation of                                   Rupiah
                                                          Jul          Sep       Nov       Jan        Mar       May
                                                           2001                            2002

4       Domestic interest rates continued to trend lower in the first half of 2002, with the three-month
interbank rate easing from 1.25% at end-2001 to 1.06% at end-Q1 2002 and 0.88% at end-Q2. (Chart 3.)
This was in line with easy liquidity conditions in the domestic money market and the soft global interest rate

                                                                                  Chart 3
                                                                               Interest Rates

                                                        6           Prime Lending Rate
                                   Per Cent Per Annum


                                                               Banks' 12-month
                                                        3     Fixed Deposit Rate
                                                                                                  3-month SIBOR (US$)

                                                                                         3-month Domestic Interbank Rate
                                                            Jan        Apr       Jul       Oct        Jan      Apr
                                                            2001                                      2002

Monetary Authority of Singapore                                                                                               Economics Department
Macroeconomic Review, July 2002                                                                             iv


5       The external environment has improved significantly since the beginning of 2002.                The
strengthening in the global economy was led by the US, reflecting robustness in consumer spending and a
reduced pace of inventory liquidation. A turnaround in the global electronics industry also contributed to a
pickup in exports and production among the East Asian economies.

6        Against this favourable backdrop, the Singapore economy continued to recover in the first half of
this year. The Advance GDP Estimates released by the Ministry of Trade and Industry (MTI) on 10 July
2002 show that the recovery momentum has been maintained, with real GDP growth estimated at 10.3%
(quarter-on-quarter, seasonally adjusted annualised rate or SAAR) in Q2 2002, higher than the revised
growth rate of 8.4% in Q1. (Chart 4.) As indicated by MTI’s statement, the uptick in growth in Q2 largely
reflected the exceptional surge in activity in the chemicals cluster.

                                                            Chart 4
                                                          GDP Growth
                                                  GDP (SAAR)

                                                                       GDP (YOY)
                          Per Cent





                                           Q1      Q3     Q1     Q3    Q1     Q3   Q1
                                           1999           2000         2001        2002

7       The recent volatility in international financial markets, particularly the weakness in global equity
markets, has cast some uncertainty on the outlook for the global economy. In our assessment, the recovery
in the industrial countries, while likely to continue for the rest of the year, may proceed at a somewhat
slower pace than in previous upturns. On current indications, global IT spending is expected to grow
modestly by about 3% for the year as a whole, which should provide support for a further improvement in
the domestic electronics sector and its related industries. The output of the chemicals sector is likely to
remain high although production and exports would continue to be fairly lumpy and volatile. Along with the
modest recovery of manufacturing in 2002, the trade-related segments of the services sector are expected
to benefit most from the improvement in the external environment. On balance, real GDP growth could
come in at the upper half of the official forecast range of 2-4% in 2002.


8        The domestic inflationary environment remained subdued in the first half of 2002, with the CPI
registering a decline of 0.8% on a year-on-year basis over Jan-May. Prices continued to adjust with a lag to
the economic downturn last year, and have been held down by the absence of imported inflation and the
slack in the domestic economy.

9        Nevertheless, the price declines have begun to level off, and on a seasonally adjusted basis, the
index rose by 0.4% in the first five months of this year, since hitting a trough in January. The rise in the
price index was mainly on account of higher private road transport costs. Increases in the cost of consumer
services and cyclical-sensitive items caused the MAS underlying CPI, which excludes private road transport
and accommodation, to also trend up slightly.

Monetary Authority of Singapore                                                           Economics Department
Macroeconomic Review, July 2002                                                                                              v

10      Looking ahead, imported inflationary pressures are expected to remain low, reflecting the excess
capacity that remains even as the global economy gradually recovers. Given the slack in the labour market
and rebound in productivity growth, a strong uptick in domestic price pressures is unlikely at this stage of
the business cycle. Even taking into account further increases in several cyclical-sensitive items and
consumer services, including the recent hikes in public road transport fares and electricity charges, we
expect CPI inflation for 2002 as a whole to come in near the mid-point of our forecast range of -0.5% to
0.5%. (Chart 5.)

                                                             Chart 5
                                                 CPI Inflation Forecast for 2002
                                     3                                                       104
                                                   (YOY % Growth)
                                     2                                                       103
                          Per Cent

                                     1                                                       102

                                     0                                                       101
                                                           (Index, SA)
                                     -1                       (RHS)                          100

                                     -2                                                      99
                                          Q1     Q3   Q1      Q3     Q1     Q3   Q1     Q3
                                          1999         2000          2001        2002


11       The domestic economy is expected to continue on its recovery path, although some uncertainty
remains over its strength for the rest of the year. Inflationary conditions should, however, remain generally
subdued. In view of the benign inflationary environment, and to facilitate continued economic recovery,
MAS will maintain its current policy stance of a zero per cent appreciation in the S$NEER for the second half
of 2002.

Monetary Authority of Singapore                                                                            Economics Department
Macroeconomic Review, July 2002                                                                                                                                                                 1

1         Macroeconomic Developments
1.1 External Developments1
Led by the US, signs of recovery have emerged among                                                      Chart 1.1
the major industrial economies.       (Chart 1.1)    The                                       GDP Growth in the US, Euro-zone
continued improvement in global leading indicators,                                                       & Japan
including semiconductor sales and purchasing managers’                                         9

indices, suggests that the world economy will continue to                                                      USA
expand throughout the year, although the pace of                                               6

                                                                           QOQ SAAR % Growth
recovery may ease a little beyond Q1 2002.

          The US economy is recovering,…                                                       0

The US economy regained its role as the world’s principal                                      -3
growth engine in the first quarter of this year, when it
expanded by 6.1% on a quarter-on-quarter seasonally                                            -6
                                                                                                    1998          1999           2000         2001       2002Q1
adjusted annualised (q-o-q SAAR) basis. A reduced pace
of inventory liquidation and continued strength of private                                              Chart 1.2
consumption spending were the main growth drivers,                                             US Consumption and Investment
adding 3.4% points and 2.4% points to the overall Q1                                           30
growth rate respectively, while continued fiscal stimulus
also pushed up government spending and contributed                                             20
1.2% points to growth. The one important weak spot in
                                                                           QOQ SAAR % Growth

Q1 continued to be private non-residential investment                                          10
spending, which contracted by 6.2% reflecting the
overhang of capacity in the manufacturing sector.                                                  0
(Chart 1.2)                                                                                                                        Non-residential
The stronger-than-expected first quarter recovery in the
US has led to decisive improvements in the following                                           -20
indicators in recent months: industrial output, capacity                                               1996    1997      1998    1999    2000    2001     2002Q1

utilisation rate, new orders for durable goods (including
electronic components), consumer spending (especially                                                           Chart 1.3
                                                                                                         US Industrial Production
on houses and cars) and housing starts. Industrial
                                                                                                       and Capacity Utilisation Rate
output improved to -1.6% year-on-year (y-o-y) in May
                                                                                               8                                                          88
2002, up from a trough of -5.9% in October 2001.
However, while the capacity utilisation rate has picked up
                                                                                                                                                                Per Cent, Seasonally Adjusted

in recent months, the pace of improvement was slower                                           4                                                          84
than in previous business cycles. The capacity utilisation
                                                                           YOY % Growth

rate only rose marginally to 75.5% in May, from a trough                                                                        Capacity
                                                                                               0                                                          80
of 74.4% in December 2001, reflecting in part the                                                                               Utilisation
overhang of capacity after the dotcom boom and the                                                             Industrial
other excesses of the 1990s and the gradual pace of                                            -4             Production                                  76
recovery in the high-tech sector. (Chart 1.3)
                                                                                               -8                                                          72
After a strong first quarter, there are indications that                                        1990            1992        1996         1999        2002May
GDP growth has eased somewhat in the second quarter:

      This section is contributed by the External Economies Division, Economics Department (ED), MAS.

Monetary Authority of Singapore                                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                       2

    •   Retail sales fell by 0.9% on a month-on-month
        (m-o-m) basis in May, after a strong 1.3% rise in
        April. Excluding motor vehicles, sales were down
        0.4%, after a 1.0% increase over the same
    •   The latest Conference Board Consumer
        Confidence Index declined to 106.4 in June, from
        110.3 in May.
    •   The growth in industrial production slowed to
        0.2% in May, from 0.3% in April.
    •   The stock market has performed poorly in the
        present recovery, unlike in past upturns. Recent
        concerns over accounting practices in corporate
        America (e.g. Enron, WorldCom) have added to
        selling pressures in the market. They have also
        weighed upon the US dollar this year, and the
        nominal trade-weighted dollar has fallen by 6.2%
        as at June, from its peak in February.

Although the demand for PCs, cellphones and other
consumer electronics items has picked up this year in the
US market, the increase appears to have been
inadequate to fully utilise production capacity in the
sector. As a consequence, there has been significant
downward pressure on prices in the IT sector (as seen,
for example, in the renewed fall in DRAM prices), and a
severe squeeze on profits. Not surprisingly, despite
signs of improvement in the IT industry (such as the
jump in the semiconductor equipment book-to-bill ratio
to 1.26 in May), many CEOs of large IT companies have
continued to warn of shortfalls in sales and profit.                                 Chart 1.4
                                                                               Euro-zone GDP Growth
Going forward, barring a crash in the equity market that               6
hits consumer spending, the US economy is expected to
                                                                                         QOQ SAAR
continue growing at a moderate pace of about 3% in the
second half of this year, and into next year.
                                                            Per Cent

  …lifting growth in the Euro-zone economies...
                                                                                YOY Growth
Growth of the Euro-zone economies has been lifted by a
recovery in net exports. GDP growth was back into
positive territory in Q1 2002, at 0.2% on a quarter-on-
quarter seasonally adjusted (q-o-q SA) basis, compared                 -4
                                                                        1992    1994   1996    1998   2000   2002Q1
to a revised 0.3% contraction in Q4 2001. On an
annualised basis, GDP growth rose to 0.9% in Q1.
(Chart 1.4) However, economic growth remained weak
as domestic demand contracted by 0.5% on a q-o-q SA
basis in Q1, with declines in consumer and business
spending. The key German economy, the largest in the
Euro-zone, remained weak due mainly to sluggish
business investment spending and continued inventory
drawdown.        Persistent wage increases amid low
productivity growth have continued to exert downward
pressure on corporate profits.

Monetary Authority of Singapore                                                               Economics Department
Macroeconomic Review, July 2002                                                                                                                 3

At the same time, there is limited room for further policy
responses. Revenue shortfalls have pushed fiscal deficits
closer to the 3% limit in Germany, and while Euro-zone                                             Chart 1.5
headline inflation has eased to 2.0% in May (right at the                                  Japan’s GDP Components
targeted point), core inflation has continued to rise,                                                 Net Exports
reaching 2.5% in the same month.                                                   3
                                                                                                       Domestic Demand (Public)
                                                                                                       Domestic Demand (Private)

                                                             Percentage Point
                …as well as in Japan.

The recovery in the US has had a significant positive                              -1
impact on the Japanese economy, with the 6.4% q-o-q                                -2
SA increase in real exports supporting Japan’s positive
GDP growth number, the first in four quarters.                                     -3

(Chart 1.5) In Q1, real GDP expanded by 1.4% (q-o-q                                -4
SA) or 5.7% on an annualised basis. Private domestic                                    1997    1998       1999      2000      2001   2002Q1

demand rebounded to positive q-o-q SA growth of 0.4%
in Q1, from -1.5% in the previous quarter. Private
consumption growth held steady at around 1.6% while
non-residential investment contracted by a smaller 3.2%,                                          Chart 1.6
compared with a 12% decline in the previous quarter.                                     Real GDP Growth in East Asia
The upturn has provided some short-term cyclical relief                            15
from Japan’s longer-term structural problems.                                                                      Northeast
Recent indicators showed that nominal retail sales are
starting to turn around on a m-o-m SA basis. Although
                                                             YOY % Growth

sales remained lower compared to a year ago, the rate
of contraction has declined considerably. Helped by
rising exports, manufacturing output growth shot up                                 0
sharply in May, on the back of increased demand for
machinery and transport equipment.                                                  -5

                                                                                         1997   1998        1999     2000      2001   2002Q1
           East Asia is on a recovery path.

Northeast Asia performed very well last year, with China
and South Korea leading the pack, as they were able to
stimulate the growth of their household consumption and                                              Chart 1.7
residential property sectors. (Chart 1.6) China’s GDP                                           Asia Export Growth
growth, for instance, was maintained at a strong 7.3%                              40

last year despite the global downturn. For cyclical                                30

reasons as well as factors related to the long-term
                                                             YOY % Growth (3MMA)

relocation of industries to China, both Hong Kong and                                                  Malaysia
Taiwan performed poorly last year, although the latter                             10
appears to be recovering faster on the back of the                                  0
improvement in the global electronics market. Amid
continued deflation, persistent budget deficits, rising                                                                     Taiwan
unemployment and a weak property market, the                                       -20
recovery of the Hong Kong economy has been slow.                                   -30
A turnaround in exports has helped to kick-start many of                                1997    1998       1999     2000       2001   2002Jun
the economies in Asia. (Chart 1.7) Not surprisingly, the
cyclical recovery this year was strongest in the export-
driven Newly Industrialising Economies (NIEs).        In
Singapore, GDP growth came in at 8.4% on a q-o-q
SAAR basis in Q1, while Korea and Taiwan recorded

Monetary Authority of Singapore                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                                                 4

growth of 7.6% and 6.6% respectively. In the case of
Singapore and Taiwan, this rebound followed a sharp
downturn last year, which was precipitated by a
collapse in electronics exports. On a y-o-y basis, GDP
growth in almost all the economies in Asia either turned
positive in Q1 2002 or remained in positive territory, with
the exception of Singapore (-1.7%) and Hong Kong
(-0.9%). (Chart 1.8)

The ASEAN economies excluding Singapore, being less                                   Chart 1.8
export-dependent, did not show as strong a cyclical                       GDP Growth in the ASEAN Economies
rebound as the NIEs in Q1 2002. Indeed, the ASEAN-42                                     15
economies experienced only a mild downturn last year as                                               Singapore
they had the benefit of a relatively robust agriculture                                  10

sector, which helped to shore up domestic incomes.                                        5
Higher oil revenues also helped Indonesia and Malaysia

                                                                          YOY % Growth
to ride out last year’s downturn. Consequently, private                                   0

consumption was comparatively robust in the ASEAN-4                                       -5
economies. Sales of motor vehicles in Malaysia, for                                             Thailand          Indonesia
instance, were up 15% last year to reach 396,000 units,                                  -10

close to the all-time high of 405,000 sold in 1997.                                      -15
Likewise in Indonesia, sales of motorcycles grew strongly
last year, and continued to rise by a stunning 38% y-o-y                                 -20
                                                                                               1997   1998    1999     2000     2001   2002Q2
to 184,090 units in May this year. Consumer spending in
ASEAN-4 is likely to remain firm this year as sentiment
improves and unemployment stabilises. Also, the export
recovery should underpin income and employment

Private investment spending, however, remained a drag
on GDP growth in Southeast Asia. Investment demand
in the ASEAN economies remained weak due to the
cyclical slowdown last year, lingering excess capacity
problems in the aftermath of the Asian crisis and a
diversion of foreign direct investment (FDI) flows into
China.      Recently, heightened security risks post-
September 11 may also have discouraged FDI inflows
into some of the ASEAN countries.           Overall, the
improvement in external demand will help to lift the
growth of all the Asian economies this year, with the
strongest gains to be seen in China and Korea.

      The ASEAN-4 economies are Indonesia, Malaysia, the Philippines and Thailand.

Monetary Authority of Singapore                                                                                      Economics Department
Macroeconomic Review, July 2002                                                                                                                                                    5

1.2 Domestic Economy


      The Singapore economy began to pick up
                 in Q4 last year…

Following three quarters of sharp contraction in Q1-Q3
2001, the Singapore economy levelled off in Q3 and
started to pick up in Q4 on a q-o-q SA basis. In Q1 and                                                       Chart 1.9
Q2 this year, growth gained further momentum, with GDP                                                   Profile of Real GDP
expanding at a robust rate of 8-10% on an annualised                                          12
basis. In this sub-section, some key features of the 2001                                                             Economic                  Economic
                                                                                                                                                                         99 Q4
                                                                                              10                      Downturn

                                                               trough of cycle (SA levels)
recession and the initial stages of the subsequent upturn

                                                               Differential with respect to
                                                                                                                                                                          87 Q1

are highlighted and brief comparisons are made with the                                       8

corresponding business cycles in 1985-86 and 1998-99.                                         6 84 Q3
                                                                                                                                                            02 Q2

This provides the backdrop for an update of the latest
economic developments in Q1 and Q2 2002, which                                                     00 Q2
follows in the next sub-section.                                                              2                                                            Bottom of cycle
                                                                                                                                                                    01 Q3
                                                                                              0 97 Q2                                                               98 Q3
                                                                                                                                                                    85 Q4
  …following three quarters of severe contraction.                                                  -5     -4     -3    -2       -1         0    1     2     3      4     5
                                                                                                                                                                 No. of quarters

Last year’s downturn was unprecedented in terms of
speed and magnitude, with real GDP plunging at an
average annual rate of 10% for three consecutive
quarters. The onset of the downturn was particularly
sudden. On a q-o-q SA basis, real GDP growth switched
                                                                          Chart 1.10
from +2.5% in Q4 2000 to -3.0% in Q1 2001. This
                                                               Summary of Key Indicators: Peak-to-
compares with shifts of 3.4% points and 2.2% points
                                                                   Trough SA Adjustments
during the corresponding quarters of the recessions in
1985 and 1998 respectively.                                                                                                 Real GDP
                                                                                                                                                      -7.7 (3Q)
The extent of the downturn in 2001 was also                                                        -28.4 (4Q)                                         -3.1 (3Q)
                                                                                                                                      -6              -5.3 (3Q)
unparalleled, with real GDP falling by 7.7% from its peak
                                                                                                    -7.7 (3Q)
                                                                                                   -12.9 (2Q)
in Q4 2000 before levelling off in Q3 2001. This is
                                                                                                     -40        -20     0
                                                                                          NODX                                                                   CPI
significantly greater than the peak-to-trough declines of                                                                                   0    -1   -2    -3

3-5% experienced during the 1985 and the 1998                                                                                2
                                                                                                                                                      -0.9 (3Q)
                                                                                                                                                      -1.6 (4Q)
downturns, which also lasted three quarters. (Charts 1.9                                             2.1 (4Q)                3
                                                                                                                                                      -2.0 (4Q)
and 1.10)                                                                                            2.6 (5Q)
                                                                                                                                                                 GDP Downturn in
                                                                                                     3.5 (7Q)*               4
                                                                                                                       Unemployment                                      1998

The downturn in 2001 was precipitated by a global            * ED, MAS internal estimates.
                                                              Note: (i) The numbers immediately clockwise of each
electronics slump and a synchronised slowdown in                        axis indicate the extent of the decline, while
          the major industrial countries.                               the duration of the decline is given in the
                                                                   (ii) As the unemployment rate has yet to level off,
The recession in 2001 was sparked off by a sharp                        the number for this series shows the extent of
downturn in IT demand in the US, which in turn                          the rise ‘to date’.
precipitated a global electronics slump and a synchronised
slowdown in all of the major industrial countries. This
resulted in a severe contraction in Singapore’s exports,

Monetary Authority of Singapore                                                                                                  Economics Department
Macroeconomic Review, July 2002                                                                                             6

given the substantial share of electronics manufacturing                       Table 1.1a
in overall GDP. While a downturn in the global IT sector                 Recessions in Singapore
                                                                Peak-to-trough comparisons of indicators across
also featured in the two earlier recessions, Singapore’s                        downturns (%)
exports were not as badly hit during those two episodes.                                    1985       1998      20011/
The 1998 downturn was characterised by a significant          Real GDP                        -5.3       -3.1      -7.7
decline in regional demand following the onset of the               By Sector
Asian financial crisis.   The US and EU economies,            Manufacturing                  -11.2       -5.1       -23.2
                                                              - Electronics2/                -12.6       -7.9       -35.3
however, continued to power on, resulting in a less           - Non-Electronics2/            -12.0       -4.1       -13.8
severe drop in external demand. While the US economy          Services                        -0.6       -2.7        -1.6
did slow markedly in 1985, the effect on the demand for       - Financial Services           -13.4      -12.5        -4.7
                                                              - T&C                           -1.4         --        -0.4
Singapore’s exports was partially offset by stronger
                                                              - Wholesale & Retail           -11.0       -7.2        -9.5
growth in the Japanese economy.                               Construction                   -31.7      -15.1        -9.7
                                                              By Expenditure
                                                              Consumption                     -3.0       -5.9        -4.1
                                                              - Private Consumption           -5.3       -8.0        -4.9
       Wages adjusted flexibly to the shock…                  - Public Consumption            -3.3       -3.6       -13.8
                                                              GFCF                           -28.5      -19.7       -17.3
Real wages adjusted flexibly during the current downturn.     Inventory                        6.4       -8.7       -12.5
                                                              Memo Item
This meant that more of the impact of the output decline
                                                              Non-oil Domestic
was absorbed through changes in productivity rather than       Exports                       -12.9        -7.7      -28.4
through higher unemployment, particularly during the          Non-oil Domestic
                                                               Imports                       -17.9      -20.4       -21.1
early stages of the recession. Chapter 3 of the Review
summarises econometric evidence, which suggests that                         Table 1.1b
wages in Singapore are more flexible than those in the        Initial Stages of Recovery in Singapore
major OECD countries, Korea and Taiwan.                        Contribution to the GDP recovery during the first two
                                                                           quarters after the trough (%)
                                                                                            1985       1998       2001
                                                              Increase in Real                  3.2       3.8          3.3
   …while consumer prices adjusted downwards                   GDP
                  modestly.                                   By Sector
                                                               Manufacturing                   73.8      59.3        88.2
                                                               - Electronics2/                 N.A.      45.8        46.2
Consumer prices have declined by about 1% point since          - Non-Electronics2/             N.A.      13.5        42.0
the onset of the recession, slightly less than that in the     Services                       -13.2      43.6        29.6
earlier downturns. The fall in producer prices in 2001         - Financial Services           -34.1       0.5       -13.8
                                                               - T&C                           19.1      15.9        19.4
was also more muted, as prices of imported goods and
                                                               - Wholesale & Retail            10.8       5.2        26.1
materials had already started to fall prior to the             Construction                   -17.6      -3.3       -13.1
downturn, while a number of the domestic business cost        By Expenditure
reduction measures implemented during the 1998                 Consumption                     58.8      79.3       -57.7
recession was still in effect.                                 - Private Consumption           54.5      35.7         -2.8
                                                               - Public Consumption             4.2      43.6       -54.9
                                                               GFCF                         -127.4      -22.9       -61.9
                                                               Inventory4/                      6.9      -7.2       -11.2
GDP growth turned around in Q4, largely driven by            1/ Decline ‘to date’ for some series.
                                                             2/ ED, MAS internal estimates.
     a reversal in the global inventory cycle.               3/ ED, MAS internal estimates. The cumulative change
                                                                in stocks over the recession period as a percentage
                                                                of GDP during the peak. Negative numbers refer to
The contraction in Singapore’s economy ended abruptly in        inventory drawdown while positive numbers refer to
Q4 2001, with GDP rising by a stronger-than-expected            inventory build-up.
5.6% (q-o-q SAAR), causing a one-off level shift in the      4/ ED, MAS internal estimates. The change in the
                                                                increase of the stocks as a percentage of GDP in the
expected recovery profile. On current expectations, real        trough. Negative numbers refer to inventory
GDP is likely to attain its pre-recession peak in Q4 2002,      drawdown while positive numbers refer to inventory
about seven quarters after the onset of the recession in        build-up.
                                                             N.A.: Not Available. Estimates are not available due to
Q1 2001. This compares with the four quarters it took for          inter alia, series breaks, and re-classification of
real GDP to recover to its pre-recession level following           data.
                                                             Note: All the series have been seasonally adjusted
                                                                    except for the series on inventories.

Monetary Authority of Singapore                                                            Economics Department
Macroeconomic Review, July 2002                                                                           7

the 1998 downturn and the six quarters it took to        However, the robustness of this recovery
do the same in the mid-1980s.                             hinges on final demand picking up on a
                                                                      sustained basis.
The initial surge in economic activity this time
round was largely driven by the reduced rate of        Nevertheless, for the pickup in economic activity to
inventory liquidation, as well as a rise in US         be sustained, final demand in the US and other
consumer     spending.   Consequently,     external    major markets will need to strengthen further
demand for Singapore’s exports started to              before the positive effects of the turnaround in
strengthen in Q4 last year, initiating a tentative     inventory correction dissipate. In the past two
pickup in domestic production. Export orders for       business cycles, the recovery in Singapore’s
electronics products rose markedly, prompting a        economy was driven by sustained increases in
strong rebound in electronics output in Q1 this        foreign demand in the period following the initial
year. Manufacturing output in Q1 was further           pickup in the domestic economy. In addition, the
boosted by a surge in chemical output, as the new      recovery was facilitated by cost-cutting measures,
pharmaceutical and petrochemical plants that came      while the cyclical upturn in productivity helped to
on stream in late-Q4 last year started to ramp up      lower unit labour costs. This placed the economy
production.                                            in a strong competitive position to take full
                                                       advantage of the turnaround in external demand.
The upturn in the global electronics industry          Singapore’s economy is also in a favourable
spurred a pickup in regional trade as well. This has   competitive position now. However, the outlook on
in turn benefited Singapore’s trade-related services   global final demand, though improving, appears to
industries, given our role as a key procurement and    be somewhat more subdued than previously. In
transportation hub for the region.                     the outlook section of the Review, we will take a
                                                       detailed look at the various components of final
In comparison, the key components of domestic          demand in the IT markets and examine the
demand remained weak during the first two              implications on the recovery profile for the
quarters of the pickup and in fact contributed         economy.       Tables 1.1 and 1.2 provide a
negatively to overall growth. The recovery in          comprehensive documentation of the key
private consumption has been fairly weak, lagging      characteristics of the economy around the point of
behind the upturn in output by one quarter, unlike     inflexion during the past three business cycles.
in the two earlier business cycles when it picked up
in the first quarter of the expansion. Investment
has also contracted fairly sharply this time around,
mainly reflecting the contraction in residential
investment expenditures, given the relatively large
supply overhang in the residential property market,
as well as weakness in other construction works.
Thus, the current recovery in overall GDP has been
almost entirely export-led.

Monetary Authority of Singapore                                                    Economics Department
                                                                                      Table 1.2: Recessions and Recoveries in Singapore
                                                2000                               PEAK                                                          2001                                                 2002
                                      Q2                     Q3                   Q4 2000                    Q1                       Q2                      Q3                        Q4             Q1

                                                            - Foreign GDP growth moderated
                                                            - Downturn in the global IT industry, volume of air cargo handled fell
                                                            - Electronics output declined
                                                                                    - NODX fell
                                                                                    - Machinery & equipment (MEQ) investment fell
                                                                                                            - Visitor arrivals declined
                                                                                                            - Re-exports declined
                                  2                                                                         - Manufacturing output declined
                                  0                                                                         - STI index fell sharply
                                  0                                                                         - GDP fell sharply
                                  1                                                                         - Wages began to decline
                                                                                                            - Retrenchments rose markedly
                                                                                                            - CPI inflation started to moderate

Monetary Authority of Singapore
                                                                                                                   - Retail sales volume (excluding motor vehicles) fell
                                                                                                                                                                                                             Macroeconomic Review, July 2002

                                                                                                                                      - Foreign GDP declined
                                                                                                                                      - Private consumption declined
                                                                                                                                      - Unemployment rate began to rise
                                                                                                                                                             - CPI declined
                                                                                                                                                             - Employment declined
                                                1997                               PEAK                                                         1998                                                  1999
                                      Q2                    Q3                   Q4 1997                   Q1                        Q2                     Q3                   Q4                    Q1

                                                             - Visitor arrivals declined
                                                             - STI index fell sharply
                                                             - Retail sales volume (excluding motor vehicles) started to decline
                                                                                 - Downturn in the global IT industry and electronics output declined
                                                                                       - Foreign GDP growth moderated markedly
                                  1                                                    - Volume of air cargo and sea cargo handled both declined
                                  9                                                    - Private consumption fell
                                  9                                                    - Unemployment rate started to creep up
                                  8                                                    - CPI inflation moderated
                                                                                                         - NODX and re-exports both declined
                                                                                                                - MEQ investments declined
                                                                                                                - CPI declined for the first time since Q1 1987
                                                                                                                - Retrenchments picked up sharply
                                                                                                                                         - Employment declined
                                                                                                                                                                  - Wages started to decline
                                                1984                               PEAK                                             1985                                                       1986
                                      Q3                     Q4                   Q1 1985                    Q2                      Q3                       Q4                        Q1            Q2
                                      - Unemployment rate started rising
                                      - Employment declined markedly
                                                           - Foreign GDP growth started to moderate
                                                           - Re-exports declined
                                                           - Electronics output fell
                                  1                        - CPI inflation fell significantly
                                  9                                             - Downturn in global electronics cycle
                                  8                                                           - NODX declined
                                  5                                                                    - Visitor arrivals declined
                                                                                                                - GDP growth fell sharply
                                                                                                                - Private consumption fell
                                                                                                                - MEQ investments declined
                                                                                                                                                              - CPI began to decline

Economics Department

                                                                                                                                                               - Wages began to decline sharply
                                                                                       Table 1.2: Recessions and Recoveries in Singapore (cont’d)
                                             2001                TROUGH                    2001                                                        2002
                                              Q2                 Q3 2001                    Q4                      Q1                       Q2

                                                                                     - Electronics output started to rise
                                                                                              - Foreign GDP growth picked up moderately
                                                                                              - Local manufacturing sector's output improved
                                                                                                    - Visitor arrivals picked up
                                  2                                                                 - Global chips sales picked up
                                  0                                                                 - STI index rebounded sharply
                                  0                                                                             - NODX and re-exports increased
                                  1                                                                             - Volume of air cargo and sea cargo handled picked up
                                                                                                                        - Private consumption picked up
                                                                                                                        - Retrenchment declined sharply by half from its peak in Q4 2001
                                                                                                                        - Wages began to rise
                                                                                                                        - CPI started to rise

Monetary Authority of Singapore
                                                                                                                                                                                                                        Macroeconomic Review, July 2002

                                             1998                TROUGH                    1998                                                        1999                                                    2000
                                              Q2                 Q3 1998                    Q4                      Q1                       Q2                      Q3                    Q4                   Q1

                                                                     - Foreign GDP rose
                                                                     - Volume of sea cargo handled increased
                                                                     - Global chips sales picked up
                                                                            - Volume of air cargo handled increased
                                                                            - STI index started to rise
                                                                                        - Visitor arrivals increased
                                                                                        - Retail sales volume (excluding motor vehicles) started to pick up
                                                                                                - Electronics output started to increase
                                  9                                                             - Private consumption rose
                                  9                                                             - CPI picked up
                                  8                                                                    - NODX and re-exports both improved
                                                                                                                        - MEQ investments began to rise
                                                                                                                        - Unemployment rate started to recede
                                                                                                                        - Retrenchments fell markedly
                                                                                                                        - Wages began to rise
                                                                                                                                              - Employment picked up
                                                                                                                                              - CPI inflation rate rose

                                             1985                TROUGH                                                        1986                                                                1987
                                              Q3                 Q4 1985                    Q1                      Q2                       Q3                      Q4                    Q1                   Q2

                                              - Foreign GDP growth started to pick up
                                              - NODX improved
                                                               - Electronics industry output increased
                                                                     - Re-exports rose
                                  1                                  - Visitor arrivals improved
                                  9                                  - Private consumption rose
                                  8                                  - MEQ investments recovered
                                                                                                                      - Unemployment rate started to fall from its peak
                                                                                                                                                - CPI began to rise m-o-m
                                                                                                                                                - Decline in CPI inflation started to moderate
                                                                                                                                                                                         - Wages began to rise slowly

Economics Department

                                  * External Environment Indicators are in blue, Domestic Economy Indicators are in red and Factor/Product Markets Indicators are in black.
Macroeconomic Review, July 2002                                                                                                                                                         10


           The initial stages of the upturn in the
                  manufacturing sector…

    The upturn in economic activity in the last quarter of                                                                              Chart 1.11
    2001 was largely driven by the manufacturing sector,                                                                         Manufacturing Value-added
    with the q-o-q SAAR growth rate surging to 27% from                                                                    40

    -31% in Q3 2001. This strong momentum continued into
    Q1 2002 as manufacturing value-added turned in double-

                                                                                 QOQ SAAR % Growth
    digit growth (SAAR) of 28% during the quarter.
    (Chart 1.11)

      …were supported by both the electronics and
              non-electronics clusters.

    Both the electronics and non-electronics segments                                                                      -40

    bolstered the robust growth in the initial quarters of
                                                                                                                                 2000     Q3         2001          Q3          2002Q1

    recovery. In particular, non-electronics output grew
    strongly in Q1 2002, supported by a surge in
    pharmaceutical output. This was a result of increased
    production of high value-added products, as well as new
    capacities that came on stream in the industry.3

    Similarly, the expansion in the electronics segment was                                                                           Chart 1.12
    boosted in Q1 2002, as the global electronics industry                                                                 Index of Electronics Production*
    started to show firmer signs of a turnaround. The strong                                                               160

    showing in the electronics segment was largely due to
                                                                                     Index 1999=100, Seasonally Adjusted

    significant improvements in the components segments,                                                                   140
    i.e., semiconductors, printed circuit boards and disk                                                                                       Electronics
    drives. However, this upswing masked the continued                                                                     120

    weakness in the end-products segments, comprising
    computers & peripherals, telecommunications equipment                                                                  100
    and consumer electronics. (Chart 1.12) Even though                                                                                             Electronics End
    these industries have shown some slight improvements,                                                                   80
    their recovery pales in comparison to those in the
    components segment.           This largely reflects the
    restructuring that has been ongoing even before the                                                                          1997   1998     1999       2000        2001     2002Q1
    onset of the current downturn. The overall strength in                      * ED, MAS internal estimates.
    the recovery of the domestic electronics industry also                      Note: (i) Electronics Components: disk drives,
    filtered down to its supporting industries, contributing to                           semiconductors and printed circuit boards.
                                                                                     (ii) Electronics End Products: telecom equipment,
    healthy growth in this group of industries in Q1 2002.                                consumer electronics and computers &

         US-based Merck Sharp & Dohme (MSD) opened its US$400 million manufacturing plant in Singapore in September 2001. The
         plant is the first of its kind by MSD in the Asia-Pacific region, and is dedicated to producing active pharmaceutical ingredients
         that are used in the treatment of asthma and arthritis for the global market. Wyeth Pharmaceuticals, another US-based
         company, opened a manufacturing facility here in April 2002. The plant produces mainly hormone replacement therapy
         pharmaceuticals and infant nutrition products, and is Wyeth’s largest in the Asia-Pacific region.

Monetary Authority of Singapore                                                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                                                                     11

      However, a divergence in output of electronics
         and non-electronics was apparent in
                     Apr-May 2002.
                                                                                                                        Chart 1.13
    Production figures in recent months have continued to                                                            Domestic Exports*
    support the view that the manufacturing sector is on the                                         60
    mend. However, unlike the initial two quarters of upturn                                                      Non-oil,
                                                                                                                  Non-electronics               Electronics
    (Q4 2001 and Q1 2002), the recent strong growth in                                               40

                                                                                 QOQ SAAR % Growth
    Apr-May 2002 was skewed towards the non-electronics
    segment. In particular, robust growth in the non-
    electronics segment was contributed by the surge in                                               0
    pharmaceutical output in May 2002, as the new
    capacities that came on stream led to further increases in                                       -20
    production during the month. In comparison, the strong                                                                            Non-oil

    growth momentum of the electronics segment appeared                                              -40

    to have tapered off somewhat in Apr-May 2002,
    following the slower activity in the global electronics                                                1997      1998     1999     2000      2001   2002Q1
    industry.                                                                  * ED, MAS internal estimates.

     The initial upsurge in manufacturing output has
              translated to higher exports,…

    Along with the improvement in production since Q4
    2001, Singapore’s exports have also turned around.
    After four consecutive quarters of decline, non-oil
    domestic exports (NODX) moved into positive terrain in
    Q4 last year. This upswing continued into Q1 2002
    (14% q-o-q SAAR).4 (Chart 1.13)                                                          Table 1.3
                                                                               % Point Contribution for NODX Growth
    Both the electronics and non-electronics segments                             between Q3 2001 and Q1 2002
    contributed to the initial stages of the upturn in export                                                                     Growth (SA)*
    performance.        Table 1.3 shows that electronics                                                                       Q3 2001-Q1 2002
    accounted for the bulk of the 10% increase in NODX                                                                           %          % point
    between Q3 2001 (which was the trough of the cycle)                                                                     contribution  contribution
    and Q1 2002. In terms of export destinations, NODX                         NODX                                               100.0            9.8
    received the greatest boost from the US market,                            By Products
    following the sharp turnaround in its economy. China                       Electronics                                             67.7                   6.6
    has also emerged as an important export destination,                       Non-electronics                                         32.3                   3.2
                                                                               By Markets
    particularly for electronics and chemical products.
                                                                               US                                                      38.1                   3.7
                                                                               EU                                                      -0.2                   0.0
                                                                               Japan                                                    8.6                   0.8
     …facilitated by a turnaround in external demand                           Malaysia                                                 3.5                   0.3
       and a more conducive exchange rate policy.                              Taiwan                                                  11.9                   1.2
                                                                               Korea                                                    3.0                   0.3
    Export recovery in the initial stages of the upturn has                    China                                                   14.5                   1.4
    been facilitated by both a more conducive exchange rate                    * ED, MAS internal estimates.
    policy stance (price effect), as well as an improvement in
    global electronics and foreign demand (income effect),
    although the latter appears to have provided a greater
    boost.     This is shown by an out-of-model partial
    equilibrium exercise that captures the price and income
    effects contributing to export growth over the period Q3

         Some of the seasonally adjusted figures quoted in this Review are ED, MAS internal estimates and are used to facilitate analysis
         and commentary of sequential (or momentum) effects. These include trade, wages, disaggregated sectoral and price data.

Monetary Authority of Singapore                                                                                                     Economics Department
Macroeconomic Review, July 2002                                                                                                                                  12

    2001 (trough of the downturn) to Q1 2002. In the
    baseline scenario, both the trade-weighted exchange
    rate, as well as global electronics and foreign demand,
    are assumed to remain unchanged over the simulation
    period. The effects of the exchange rate policy and an
    improvement in external demand are simulated in two
    alternative scenarios. By holding the exchange rate
    constant, the income effect arising from the
    improvement in demand is estimated. Similarly, the
    price effect of a lower exchange rate is estimated by
    holding the demand factor constant.

    As shown in Table 1.4, Singapore’s exports received a                                   Table 1.4
    6.5% boost from a more conducive exchange rate policy,                   Support for Export Growth between Q3
    coupled with increased global electronics and foreign                              2001 and Q1 2002
    demand. The price effect accounted for about 11% of                                                            % Deviation                % Point
    total deviation from the baseline, while the income effect                                                    from Baseline             Contribution
    contributed a much higher 89%. Given the typical long                                Income
                                                                                                                           5.8                      89
    lags involved in the pass-through between exchange                                    Effect
    rates and exports, the current neutral exchange rate                                  Price
                                                                                                                           0.7                      11
    policy stance should continue to support exports in the
    quarters ahead. Crucial to the continued strength of                                  Effect
                                                                                                                           6.5                     100
    recovery would be a further pickup in foreign and global
    electronics demand.

    However, the strong impetus for exports began to
              lose steam in May-Jun 2002.

    Following the slowdown in production, the initial surge in
    NODX appeared to have moderated in May-Jun 2002.
    This was largely on account of some retraction in
    electronics exports.    While the Index of Industrial
    Production (IIP) has benefited from the increase in high                                Chart 1.14
    value-added pharmaceuticals, this has yet to be fully                     Total Exports by East Asian Economies
    translated to higher export growth.       Some internal                                       110                         Peak
    estimates established that it will probably take one to                                                             Korea = Nov 2000
    two months before the boost to output translates to                                           100
                                                                                                                        Malaysia = Oct 2000
                                                                                                                        Singapore = Oct 2000
    higher exports.5 The slowdown in exports was also                                                                   Taiwan = Oct 2000
                                                                              3MMA (Peak = 100)

    evident in other export-dependent regional economies                                          90
    such as Korea, Malaysia and Taiwan. Like Singapore,                                                                             Malaysia
    exports in these countries generally slowed down in May,                                      80
    after two to three months of positive growth.                                                               Taiwan


    A comparison of Singapore’s export recovery with                                                                                                Singapore
     the other East Asian economies points to a more                                                    Oct 00 Jan 01    May 01    Sep 01      Jan 02     Jun 02
              muted recovery for Singapore.

    Nevertheless, Singapore’s export recovery appeared to
    be lagging behind the other major East Asian economies.
    Chart 1.14 compares the recovery profile of exports on a
    3-month moving-average (3MMA) basis across various

         Empirical estimation of the cross correlogram function between chemical exports and output suggest the former series lags the
         latter by around two months. This finding is consistent with results from regression analysis.

Monetary Authority of Singapore                                                                                               Economics Department
Macroeconomic Review, July 2002                                                                                                                                   13

    East Asian economies, namely Korea, Malaysia,
    Singapore and Taiwan. The chart shows the exports of
    these East Asian economies in US dollar. The series are
    expressed as an index, and take the value of 100 at the
    peak just before the onset of the recession. The data
    reveal that Singapore suffered a less severe decline in
    the initial months of the downturn compared to the rest
    of the East Asian economies. However, the contraction
    in Singapore’s exports intensified, and turned out to be
    the most severe among these economies at the later
                                                                                                                  Chart 1.15
    Singapore's slower pace of recovery is also evident if we                                          Electronics Exports by East Asian
    compare the performance of electronics exports across                                                         Economies
    East Asia. (Chart 1.15) By the 17th month after the                                                110                              Peak
    onset of the downturn, Singapore's electronics exports in                                                                  Korea = Oct 2000
                                                                                                                               Malaysia = Sep 2000
    US dollar terms recorded flat growth on a 3MMA m-o-m                                               100
                                                                                                                               Singapore = Oct 2000
    basis, compared to growth of 8.3% and 2.8% for Korea                                                                       Taiwan = Nov 2000

                                                                                   3MMA (Peak = 100)
    and Taiwan respectively.
                                                                                                                      Taiwan                                 Korea
     To better understand the underlying reasons for                                                   70

    Singapore’s weaker export performance, the shift-
       share technique was applied to the main East
      Asian countries over the period 1988 to 2001.                                                    50
                                                                                                             Sep 00   Jan 01   May 01    Sep 01       Jan 02 Jun 02

    In order to better appreciate the reasons behind the                         Note: (i) Unbalanced series length due to data
    apparent relative weakness in Singapore’s exports, the                                  unavailability.
    shift-share analysis was used to trace the                                         (ii) Domestic export figures are used for
    competitiveness position of our exports vis-à-vis a group
    of East Asian economies.6 Shift-share analysis has been
    used extensively to analyse differences between regional
    and national growth rates in variables such as export
    growth, employment and productivity. When applied to
    the study of export growth, it can be used to assess the
    implications of changes in a country’s international
    competitive position. The shift-share analysis compares
    changes in a country’s exports with the corresponding
    changes in exports of a selected group of reference
    competing economies. The part of the total change in a
    country’s exports that might be ascribed to the rate of
    export growth of the reference group as a whole is
    known as the share effect. Any difference between a
    country’s performance and the share effect is referred to
    as the export differential or shift effect.7 A positive net
    shift implies an improvement in competitiveness for the
    country concerned relative to the reference group as a
    whole, while a negative value implies a deterioration in
    competitiveness. The dynamic shift-share analysis was
    applied to exports of electronics and chemicals of four

         The dynamic shift-share analysis is a joint study by MAS, IE Singapore and NUS. This Review summarises some of the main
         findings of the study. The full study will be released as an MAS Occasional Paper shortly.
         Let Xjt and X*jt denote exports of product j at time t in the home country and the reference economies respectively. The share
         effect, S, is dependent on export j’s growth rate in the reference economies, and its share in the total exports of the reference
         economies, that is, S = Xjt-1 (X*jt-1 / X*t-1) [(X*jt / X*jt-1) – 1]. The difference between the change in the home country’s actual
         exports and the share effect is known as the shift effect, represented by (Xjt - Xjt-1) - S.

Monetary Authority of Singapore                                                                                                  Economics Department
Macroeconomic Review, July 2002                                                                                                        14

reference economies (Singapore, Malaysia, Taiwan and
Korea) to the three main developed markets (US, EU and
Japan) over the 1988 to 2001 period.

  The results show that Singapore generally did
 well for the electronics segment in the developed
                markets until 1995…

The results reveal that Singapore's electronics exports
generally performed well over the period 1988 to 1995,
as they registered positive net shifts at the expense of
the other reference economies.        (Chart 1.16)    In                                    Chart 1.16
particular, Singapore was often the top exporter amongst                       Net Shifts in Electronics Exports to
the reference economies.       The robust performance                                  Developed Markets
during this period could have been supported by large                          6000

foreign investments in the electronics sector. There                           4000                                         Malaysia
were also spillovers from the ASEAN economies, which
were expanding strongly during the period. However,                            2000

the general trend of positive net shifts for Singapore

                                                                 US$ Million
reversed around 1996. In fact, Singapore was the only
economy among the reference economies to experience                            -2000
negative net shifts throughout 1997-2001.             In                       -4000
comparison, Malaysia, Korea and Taiwan registered                                                                       Singapore
positive average net shifts (in descending order of                            -6000

magnitude) during the same period.                                             -8000
                                                                                       88     90       92    94   96   98     00 01

The large positive net shifts recorded by Singapore
during 1988-95 were boosted mainly by the disk drive,
printer and PC segments, as there was rapid expansion
of the local disk drive industry. There were several huge
foreign direct investments, with MNCs such as Seagate in
particular expanding their capacity substantially. By
1995, Singapore attained a leading share of the global
hard disk drive output volumes, at about 33%. Other
products such as printed circuit boards and
semiconductors also experienced higher positive net
shifts between 1988-95.         In comparison, domestic
exports of consumer electronics and telecommunications
equipment experienced mostly small negative net shifts
throughout the period of the study. Singapore has been
moving away from these relatively lower value-added
electronics exports since the beginning of the 1990s.

    …after which Singapore’s competitiveness
         position started to deteriorate.

The same segments that supported the robust expansion
in exports in the earlier years, i.e., disk drive, printer and
PC, then contributed to the deterioration in export share
after 1995. Most notably, because of an oversupply
situation in the global disk drive industry, several
major disk drive manufacturers consolidated their
manufacturing operations in Singapore in the late 1990s.
Some manufacturers shifted their operations from

Monetary Authority of Singapore                                                                             Economics Department
Macroeconomic Review, July 2002                                                                                                                                 15

    Singapore to other lower cost locations during that
    period. Other electronics products such as printed circuit
    boards also started to show negative net shifts after                                   Chart 1.17
    1996. An exception is the semiconductor segment,                          East Asia’s Share of Singapore’s NODX
    which managed to register positive net shift in 2000,                                                45
    after plunging into negative territory since 1997.
    Nevertheless, this positive net shift was not sustained                                                          East Asia (Excl Japan)

                                                                               % Share to Total NODX
    into 2001.                                                                                           35


       Singapore’s export base is shifting towards

    production of higher-end intermediate electronics                                                    20
                                                                                                                         Southeast Asia
       components which are mainly exported to
                  markets in East Asia…                                                                                  Northeast Asia
    While Singapore’s electronics exports have been                                                           1997       1998      1999       2000   2001   2002Q1

    experiencing a loss of competitive advantage in the                      Note: (i) Northeast Asia includes the NIEs and China
                                                                                   (ii) Southeast Asia includes Thailand, Malaysia
    developed markets, it has been compensated to some                                  and the Philippines
    extent by a shift in export focus to other East Asian                         (iii) East Asia includes Northeast Asia and
    economies. This is consistent with the fact that East                               Southeast Asia (excluding Japan)
    Asia’s share of Singapore’s NODX has been trending up
    in recent years. (Chart 1.17)

    MNCs typically decentralise their electronics production
    process to the regional economies so as to capitalise on
    the comparative advantages of each country.                                                                    Chart 1.18
    Increasingly, Singapore is taking on the role of producing                                                Singapore’s Exports of
    higher-end     intermediate     electronics   components                                             Semiconductors and End Products
    (typically semiconductors), which are then shipped to the                                            25

    other East Asian countries for assembly into final
    products for export to the developed markets. Indeed,                                                20
                                                                                 % Share to Total NODX

    the share of semiconductors in our exports has been
    trending up,8 while the share of end products such as                                                15
    telecommunications equipment has been persistently
    declining. (Chart 1.18)                                                                              10

                                                                                                                Electronics End Products*
      …as confirmed by estimates of the RCA index.
    This shift towards higher-end components is confirmed                                                     1997        1998     1999       2000   2001   2002Q1

    by the Revealed Comparative Advantage (RCA) index.9                      * Comprises PCs, telecom equipment and consumer
    The RCA index of a product, say j, is a ratio of the export
    of the product as a share of country i’s total exports, to

         The fall in 2001 is a cyclical decline due to the global electronics downturn. With semiconductors accounting for the bulk of
         new investments in Singapore’s electronics industry, the share of semiconductors in total domestic exports should increase in
         the future.
         Our results are also confirmed by a World Bank study in 1999, which using the RCA index, concluded that assembly operations
         for components tend to be established in the relatively low wage Asian countries, while countries like Japan, Taiwan and
         Singapore have an advantage in the production of these components. The study also revealed that Singapore’s trade intensity
         in components with Indonesia, Malaysia and Thailand was relatively high, indicating strong complementarities between
         Singapore and these countries. More generally, the study noted that East Asia’s exports of components to the region increased
         more than ten-fold between 1984 and 1996, while total East Asian exports grew only by a factor of three. [Ng and Yeats
         (1999), “Production Sharing in East Asia: Who Does What for Whom, and Why?”, Policy Research Working Paper No. 2197,
         World Bank.]

Monetary Authority of Singapore                                                                                                      Economics Department
Macroeconomic Review, July 2002                                                                                                                  16

the corresponding share of world exports in the product,
that is:                                                                                       Chart 1.19
                                                                                         Singapore’s RCA Indices
RCAij = [xij/xi]/[xwj/xw] *100                                                   450

where xij and xwj represent the value of product j                               400
exported by country i and the world respectively; xi and                                                           Semiconductors
xw are total exports by country i and the world                                  350

                                                                      Per Cent
The RCA index shows the relative intensity of a country’s
                                                                                                            End Products
manufacture of a product over other countries.                                   250
Chart 1.19 shows that Singapore’s RCA index for end
products has generally been falling, while that for                              200
semiconductors has increased over the past five years.                                  1995    1996        1997        1998     1999   2000

As shown in Chart 1.20, while the semiconductor RCA
index for Korea fell in 2000, the index for Singapore held
up fairly well during the same period. Moreover, the
index has also been consistently higher than that for                                       Chart 1.20
Taiwan.                                                                            RCA Index for Semiconductors

 Meanwhile, chemicals are also emerging as a new                                 400
            source of export growth.                                                                                       Korea
                                                                      Per Cent

Singapore’s chemical industry has recently been
promoted heavily with the objective of diversifying the                          200
country’s export basket. Singapore’s chemical exports                                                          Taiwan
experienced positive net shifts in certain years in the late                     100
1990s and early 2000s. However, chemical exports tend
to be volatile relative to other components of domestic                            0
exports due to the small size and infancy of the industry,                              1995    1996        1997        1998     1999   2000

resulting in frequent swings between high and low              Note: The 1995 data for Taiwan is unavailable.
growth rates. Consequently, this has resulted in sharp
swings in their net shifts. (Chart 1.21) In particular, the
net shift of chemical exports surged in 2001, on the back                                     Chart 1.21
of capacity expansions of pharmaceutical plants in                                Net Shifts in Chemical Exports to
Singapore. The chemical industry in Singapore is fairly                                 Developed Markets
young, with the biomedical and petrochemical segments                            3000
taking off only in the late 1990s. Going forward, as the
petrochemical segment becomes more mature and
deepens its inter-linkages with the related downstream                           1800
petrochemical plants, the chemical industry is expected
                                                               US$ Million

to represent a more important and steady source of
export earnings.                                                                 600
                                                                                        88     90      92          94      96      98    00 01

Monetary Authority of Singapore                                                                              Economics Department
Macroeconomic Review, July 2002                                                                                                                   17

             SERVICES SECTOR –

     Counterbalancing forces have caused the services
         sector to be less volatile relative to the
                  manufacturing sector.

 Growth in the services sector has on average been less
                                                                                             Chart 1.22
 volatile than that in manufacturing. (Chart 1.22) This is
                                                                                  Manufacturing and Services Sectors
 due to counterbalancing influences within the services
 sector. In 2001, for instance, weakness in the trade-
 related services cluster, which was adversely affected by
 the global electronics downturn, was offset to some                                        20

 extent by the boost to the communications segment from                                     15

 the ongoing liberalisation measures.

                                                                             YOY % Growth


      The services segments were grouped into five                                           0

      broad categories according to their underlying                                         -5          Manufacturing

                    drivers of growth.                                                      -10

 In an attempt to better understand the underlying                                                1970     1975   1980    1985   1990   1995   2001

 support for growth in the services sector, the services
 industries have been grouped into five broad categories,
 according to their underlying drivers or underpinnings of
 growth. This grouping was done solely for the purpose of
 helping to understand the dynamics of growth in the
 services sector in recent quarters.10

 The main characteristics of the five clusters that emerged
 from this categorisation are summarised in Table 1.5.
 Based on these groupings, the domestic-oriented and the
 financial and business services-related clusters each
 account for around one-quarter share of the services
 producing sector. The share of the trade-related cluster
 is also significant at 17%, while the tourism-related
 cluster accounts for up to 8% of services value-added.
 “Other services”, which comprises the rest of the services
 industries such as communications and land transport
 make up another quarter of the services producing sector.

        These are based on internal ED estimates and used for commentary purposes only in the Review; data releases on the services
        sector continue to follow the categorisation adopted by the Department of Statistics.

Monetary Authority of Singapore                                                                                          Economics Department
Macroeconomic Review, July 2002                                                                         18

                                           Table 1.5
                   Services Industries Grouped by Common Drivers of Growth
  Clusters                                   Key Indicators/Factors Underpinning Growth
               1. Entrepôt Trade       Global Chip Sales: Electronics exports accounted for 67% of total
               2. Air Transport        exports in real terms in 2001, with significant shares in both
                  (Cargo)              domestic exports and re-exports.
               3. Sea Transport        East Asian Exports: Transhipment cargo constituted a significant
                                       share of airfreight and sea cargo in 2001, pointing to the important
                                       role Singapore plays as a transhipment hub for the region.

                                       Tourist Arrivals: This is the main driving force that determines the
               1. Air Transport
  Tourism-                             growth in hotels, restaurants and air passenger travel industries.
   related                             East Asian GDP: As visitors from the East Asian countries
               2. Hotels and
                                       contributed up to 60% of total arrivals into Singapore in 2001,
                                       stronger economic growth in these countries will benefit the
                                       tourism-related industries.

                                       Consumer Confidence: Sentiment on current and future economic
               1. Domestic Trade
                                       and labour market conditions affects private consumption
  Domestic-    2. Real Estate
                                       Overall GDP: The strength of activity in both the real estate and
                                       domestic trade industries tends to lag the domestic economic
                                       growth cycle.

                                       Liberalisation and Re-structuring Measures: More avenues for
             1. Financial
                                       growth within the financial sector have been created along with the
                                       push to develop the debt market, local fund management industry
             2. Business
 Financial &                           and other activities including wealth management and
  Business                             bancassurance. Insurance business has benefited from the
               (excluding real
  Services-                            liberalisation of the Central Provident Fund Investment Scheme
   related                             (CPFIS). As financial services activities increase, more support from
                                       business services is required.
                                       Global Economic Outlook: This affects the forward looking
                                       components such as stock broking, investment advisory and forex
                                       trading, as well as investment in IT business services.

                                       Factors are unique to each industry, e.g.:
               1. Communications
                                       Communications has been driven by liberalisation measures
               2. Land Transport
   Other                               resulting in the aggressive promotions in mobile, IDD and Internet
               3. Other Services
  Services                             packages.
                  such as education,
                                       Land Transport is affected by a wide range of factors, from
                  social work and
                                       business conditions that affect demand for lorry transport & leasing
                  health services
                                       services to public expenditure on MRT trips and buses.

Monetary Authority of Singapore                                                  Economics Department
Macroeconomic Review, July 2002                                                                                                                                    19

     The recovery in Q1 2002 was largely driven by the
              trade-related services cluster...

 The services sector as a whole improved by 4.0% in Q1                                       Chart 1.23
 2002 on a q-o-q SAAR basis, following the 1.5% increase                       SAAR Profiles of the Services Clusters*
 in Q4 2001. Using the groupings in Table 1.5, the recent
                                                                                                                                    Financial &
 upturn can be traced to support by the trade-related,                                                                              Business
 domestic-oriented and tourism-related clusters, which

                                                                                QOQ SAAR % Growth
 contributed 4.5, 2.2 and 2.2% points respectively to                                               30
 services value-added in Q1 2002. (Chart 1.23, Table 1.6)                                                         oriented                      Other
 Meanwhile, weakness in the financial & business services-                                                                                     Services

 related, as well as the “other services” clusters dragged                                           0
 down the sector’s growth by 3.9% points and 1.0% point
                                                                                                          1997     1998      1999     2000        2001    2002Q1

     …which exhibited a rebound in all its three main                         * ED, MAS internal estimates

 The strong rebound in trade-related services in Q1 can be
 attributed to a recovery in all its three main components:
 (i) domestic manufacturing trade-related segment,
                                                                                                Table 1.6
       entailing services activities that are directly linked to
                                                                                  Percentage Point Contributions by
       the domestic manufacturing sector;
                                                                                 Services Clusters to Services Sector
 (ii) hub-related segment involving services activities that
                                                                                       SAAR Growth, Q1 2002*
       reflect Singapore’s role as an intermediary for trade in
                                                                                                          % Point
       the region; and                                                                                  Contribution
 (iii) ancillary services allied to transport. (Figure 1.1)                     Services Clusters
                                                                                                        (to a total of
 As Figure 1.1 illustrates, different types of air and sea                     Trade-related                 4.5
 cargo activities are associated with each of these                            Domestic-oriented             2.2
 components of the trade-related cluster.                                      Tourism-related               2.2
                                                                               Financial & Business          -3.9
 The domestic manufacturing trade-related segment                              Other Services                -1.0
 accounts for only a small share of the trade-related                         * ED, MAS internal estimates
 services cluster, and processes mainly domestic cargo.11
 Transport service providers (both air and sea) as well as
 port and terminal service providers (such as PSA and
 CAAS) will directly benefit from an increase in domestic
 manufacturing output as they provide transportation and
 supporting services12 to facilitate the trade of goods that
 are manufactured in Singapore.

 Not surprisingly, it is the hub-related services segment,
 which handles re-export cargo13 and transhipment

         Domestic cargo refers to exports of Singapore origin and comprise (a) primary goods grown or produced in Singapore and (b)
         goods that have been transformed, i.e., manufactured, assembled or processed in Singapore including those with imported
         materials or parts.
         These include supporting services to water transport such as ship brokering services, shipping agents (freight), port operation
         services, and ship leasing services. Also included are supporting services to air transport such as airline agencies (freight),
         airport operation services, and airport terminal services.
         Re-export cargo refers to all goods that are exported from Singapore and which have less than 25% value-added content. They
         include goods that have undergone minor processing, such as re-packing, splitting into lots, sorting or grading and the like.

Monetary Authority of Singapore                                                                                                Economics Department
Macroeconomic Review, July 2002                                                                                                        20

                                                     Figure 1.1
                                   Components of the Trade-related Services Cluster

                                            Trade-related Services                                       Services Allied to

               Domestic                                                    Hub-related Activities

       Air & Sea Transport
       Of Domestic Export                          International                                           Air & Sea
              Cargo*                                  Trading                                              Transport

                                  Entrepôt                     Offshore                   Re-export                    Transhipment
                                                               Trading                      Cargo                          Cargo

     * Includes imports that are meant for domestic production purposes, while imports for re-exports are included under hub-related

cargo,14 that forms the bulk of the trade-related                       include the provision of transportation and
services cluster. This segment is dominated by                          supporting services for re-export and transhipment
international trading activity, involving entrepôt and                  trade.
offshore trade15 and reflects the middleman’s role
in buying and selling of goods that are principally                     The third group, services allied to transport, is
manufactured overseas.            Participants include                  another small but important segment of the trade-
manufacturers who use Singapore as a                                    related services cluster. Participants are mainly
procurement hub to support their production plants                      trade logistics companies providing ancillary
in the region, as well as Singapore-based trading                       support such as freight forwarding, packing and
companies that trade in commodities such as oil                         crating and other services for the trading
and minerals. Other hub-related services activities                     community in Singapore.

          Transhipment cargo generally refers to cargo moved between ships or airlines, without leaving the sea or airport terminal.

          For entrepôt trade, the goods will physically pass through Singapore. This is not so for offshore trading.

Monetary Authority of Singapore                                                                              Economics Department
Macroeconomic Review, July 2002                                                                                                                 21

In Q1 2002, hub-related activities posted stronger
   growth than domestic manufacturing trade-
               related activities.                                        Chart 1.24
                                                               Real Non-oil Re-exports, Non-oil
The recovery in the global electronics industry has          Domestic Exports and Air Transhipment
significantly improved the performance of our trade-                        Cargo*
related services cluster. Besides the positive spillovers                           120

from the pickup in the domestic manufacturing sector,                                                     Air
hub-related services activities have also benefited from                                                 Cargo

                                                              QOQ SAAR % Growth
the improvement in the external conditions. In fact,                                                                  Real Non-oil
hub-related activities posted stronger growth than                                                                      Exports Real Non-oil
domestic manufacturing trade-related activities in Q1                                40
2002. This is reflected in the better performance of non-
oil re-exports (NORX) which surged by 36% on a SAAR
basis, compared to the 13% growth in NODX in that                                     0

quarter. (Chart 1.24) In addition, both air and sea
transhipment cargo also benefited from the turnaround
in external trade in Q1, with air transhipments surging by                                1997      1998       1999    2000     2001   2002Q1
more than 24% on a SAAR basis in Q1.                         * ED, MAS internal estimates

  The sharper pickup in re-exports compared with
  domestic exports was mainly due to electronics                                                Chart 1.25
                    exports,…                                                        Real Electronics Re-exports and
                                                                                            Domestic Exports*
The outperformance of NORX relative to NODX in Q1                                   80
                                                                                                 Real Re-exports
2002 is even more evident, taking into consideration the                                          of Electronics
breakdown between electronics and non-electronics
exports. Re-exports of electronics (in real terms) rose by
                                                              QOQ SAAR % Growth

49% on a SAAR basis in Q1 2002, way above the 8.1%
increase in domestic exports of electronics. (Chart 1.25)
The sharp rebound in re-exports of electronics was                                   0
boosted mainly by the surge in semiconductors to the
East Asian economies such as Malaysia. Hence, the                                                               Real Domestic
                                                                                                                 Exports of
buoyant growth of Singapore’s electronics re-exports,                               -40                          Electronics
which are mainly intermediate products used as inputs in
the production process, can be ascribed to the strong                                     1997     1998        1999    2000     2001   2002Q1
rebound in the region’s manufacturing sector. For non-       * ED, MAS internal estimates.
electronics exports, it was domestic exports that saw
higher growth in Q1 relative to re-exports, as domestic
exports were partly lifted by the robust growth of
chemical exports. (Chart 1.26)                                                          Chart 1.26
                                                                               Real Non-oil Non-electronics
                                                                             Re-exports and Domestic Exports*
 …highlighting Singapore’s role as a service hub in
            the regional supply chain.                                                                   Real Non-oil,
                                                                                                       Domestic Exports
It appears that the loss of some domestic manufacturing
                                                                QOQ SAAR % Growth

                                                                                                            Real Non-oil,
activity to low-cost production bases overseas will not                                                    Non-electronics
necessarily have a negative impact on the trade-related                                                      Re-exports

services cluster. In particular, some Singapore-based

manufacturers who have outsourced significant portions
of their production to ASEAN countries in recent years                                0
have retained their headquarter operations here. Hence,
Singapore’s role in the regional production chain has
increasingly shifted from being a manufacturing centre to                           -50
                                                                                          1997      1998       1999    2000     2001   2002Q1
a    regional    headquarter     providing services    to
                                                             * ED, MAS internal estimates
manufacturing facilities in the region.

Monetary Authority of Singapore                                                                                  Economics Department
Macroeconomic Review, July 2002                                                                                                                                22

In fact, with the increasing dominance of electronics
products in our re-exports, Singapore appears to have
been able to carve out a role as a service centre for
linking the important electronics production activities                      Chart 1.27
within the region. The share of electronics products in        Share of Electronics in Re-exports and
total re-exports (in real terms) rose by about 2.5 times                 Domestic Exports
over the past decade, from 24% in 1990 to 58% of total                             90                                                           70
re-exports in 2001 in real terms. (Chart 1.27) In
                                                                                                                 Share of
comparison, the share of electronics products in                                   80                         Electronics in                    60
domestic exports rose by 1.8 times, from 41% in 1990 to                                                      Re-exports (RHS)
74% in 2001. It is thus imperative that Singapore                                  70                                                           50

                                                               % Share

                                                                                                                                                     % Share
continues to attract global electronics companies to set
up their manufacturing headquarters here so as to                                  60                                  Share of                 40
strengthen our role as a service hub, while the inevitable                                                          Electronics in
relocation of lower-end manufacturing industries takes                             50                               Exports (LHS)               30
place over time.
                                                                                   40                                                           20
                                                                                         1990        1993           1996          1999   2001
  Tourism-related and domestic-oriented clusters
    also experienced a turnaround in Q1 2002.

Among the other broad clusters identified in Table 1.5,
the tourism-related and the domestic-oriented clusters                                        Chart 1.28
also made important contributions to services sector                               Indicators of the Tourism-related
growth in Q1 2002. Tourism activity saw its growth                                              Cluster
rebounding to 28% on a q-o-q SAAR basis in Q1 2002,                                100                                                          90
from the 21% decline in Q4.       The improvement in Q1                                                      Hotels
was largely due to the dissipation of the fear of air travel                                               Occupancy
                                                               QOQ SAAR % Growth

following the events of September 11, as well as the                                                       Rate (RHS)

hosting of several mega-scale events such as the                                    50                                                          80

Singapore Aerospace in February. This was reflected in

                                                                                                                                                     Rate %
the 42% surge in the number of air passengers travelling
through Changi Airport in Q1. Tourist arrivals also                                     0                                                       70
recovered in Q1 2002, growing by 24% on a q-o-q SAAR                                                                    Visitor
basis compared to the almost 30% contraction in Q4 last                                                                  (LHS)
year, contributing to an increase in the average hotel
occupancy rate in Q1 to 74%. (Chart 1.28)                                          -50
                                                                                            1997   1998      1999      2000       2001   2002Q1

The more favourable external environment has also
started to filter down to the domestic-oriented cluster.
Retail sales continued to grow in Q1 on a q-o-q SAAR
basis, albeit at a slower pace of 4.5% in Q1 compared
with the 13% increase in Q4 2001. (Chart 1.29)                                                         Chart 1.29
                                                                                                   Retail Sales Volume

 Meanwhile, the financial services industry slowed
  down sharply in Q1 2002, dragged down by the
                                                               QOQ SAAR % Growth

              insurance segment…

In comparison, the financial services sector tumbled by
19% on a q-o-q SAAR basis in Q1 2002, the sharpest                                  0

decline since Q3 1999. (Chart 1.30)          This plunge
reflected in part the tapering off of the boost from the                           -20

CPFIS, which was implemented in Q1 last year. The
recent downward revision of projected returns for                                  -40
                                                                                         1997       1998      1999         2000      2001       2002Q1
traditional life insurance products, coupled with signs of
an impending upturn in the global economy, could have

Monetary Authority of Singapore                                                                                  Economics Department
Macroeconomic Review, July 2002                                                                                                                          23

also prompted consumers to shift their portfolio towards
financial products with potentially higher returns.                                                     Chart 1.30
                                                                                                    Financial Services
   …and the commercial banking segment which
     was hit by weaker fee-based activity…                                           80

                                                                QOQ SAAR % Growth
Activity in the Asian Dollar Market (ADM), commercial
banking and foreign exchange trading segments were
also sluggish. Both the ADM and commercial banking                                   20

segments contracted on a sequential basis in Q1 2002,                                 0
reflecting weaker fee-based and credit lending activity.
(Chart 1.31 and Chart 1.32) While non-interest income                               -20

was a source of growth for the ADM in 2001, it fell on a                            -40
sequential basis in Q1 2002. This was attributed to a                                      1997     1998      1999         2000       2001     2002Q1

marked slowdown in fee-based activity, including the
underwriting of non-S$ denominated bond issuance,
which declined significantly compared to the record
amount issued in 2001.         Fee-based income in the                                                 Chart 1.31
commercial banking segment also weakened in Q1 2002,                                               Asian Dollar Market
after maintaining a fairly consistent performance in 2001.
                                                                                    140                                                          20
                                                                                                  Outstanding                       Non-S$
                                                                                                   Non-bank                       Denominated
            …and slower lending activity.                                           120             Lending                       Bonds Issued
                                                              US$ Billion

                                                                                                                                                       S$ Billion
Meanwhile, credit demand continued to lag economic                                  100                                                          10
recovery, as borrowing by non-bank corporations and
consumers was subdued during the early stages of an
upturn, given the excess industrial capacity and                                     80                                                          5
uncertain labour market conditions respectively. In the
commercial banking segment, the level of outstanding
                                                                                     60                                                          0
loans fell in March 2002 for the fourth consecutive                                        1999            2000            2001              2002Q1
month. This was partly attributed to the sharp
moderation in loans to the transport, storage and
communications sector, which had helped to underpin
commercial bank credit last year.        Lending to the                   Chart 1.32
consumer-related categories and other industrial             Change in Commercial Banks’ Loans to
segments also either grew at a reduced pace or                         Non-bank Sectors
contracted during the quarter. (Chart 1.32) Similarly,
                                                                                                     Consumer Loans           Industrial Loans
non-bank lending in the ADM fell by US$1.4 billion in Q1.                           1.5

This could have been the result of an increasing share of                           1.0
the smaller corporate financings being met by bond
issuances, on the back of developments in the
                                                              S$ Billion

infrastructure of the bond market and the low interest                              0.0

rate environment.                                                                   -0.5

In comparison, the stock broking and investment
advisory segments rose substantially. Activity in the                               -1.5

stock broking and investment advisory segments grew                                 -2.0
substantially during Q1 2002, in tandem with emerging                                      Feb
                                                                                                   Apr      Jun      Aug     Oct      Dec

signs of a firmer domestic economic recovery.
                                                             Note: Consumer-related loans refer to housing loans and
(Chart 1.33) However, their contributions to overall               credit to professional and private individuals, while
financial industry growth were modest, capped by their             industrial loans consist of loans extended to the
smaller sizes vis-à-vis the other segments. Box Item A             building and construction, manufacturing,
                                                                   commerce and transport and communications
discusses how the various segments affect growth in the            segments.
overall financial industry.

Monetary Authority of Singapore                                                                                   Economics Department
Macroeconomic Review, July 2002                                                                                                24

  Notwithstanding the strong growth in Q1, the
services segments generally saw their momentum
          of growth slowing in Apr-Jun.

In tandem with the moderation in electronics-related
manufacturing activities in Singapore and in the region,                                         Chart 1.33
trade-related services such as entrepôt trade and cargo                                        Stock Broking
activities generally experienced slower growth in Apr-                                          SES Volume    SES Value
May. However, the average growth of re-exports of
electronics continued to outpace that of domestic
exports, albeit at a reduced rate as compared to Q1 this

                                                                Billion Units/S$
year.                                                                              60

Growth of tourism-related services such as hotels and                              40
restaurants also moderated on a m-o-m SA basis in Apr-
May as tourist arrivals recorded almost flat growth over                           20
the same period. In April, domestic-oriented services
were weighed down by a 10% decline in retail sales,
mainly reflecting a sharp fall-off in motor vehicle sales,                              1999     2000         2001        2002Q1
which account for more than a quarter of the retail

In the financial services industry, overall activity showed
little signs of revival. Following a surge in activity in Q1,
the stock broking segment was plagued by poor market
sentiments in Q2, arising from the alleged overstating of
profits by US corporations. As a result, average daily
stock trading volume and value in Q2 tumbled sharply by
29% and 34% respectively from Q1.

The performance of commercial banking remained
sluggish. Despite the rise in domestic non-bank loans
over Apr-May 2002, much of the growth continued to
rely upon the resilient housing mortgage segment.
Moreover, the commercial banking segment continued to
be constrained by tight interest margins, on the back of a
low interest rate environment and a domestic banking
system flushed with liquidity. Meanwhile, fee-based
income was capped by a further fall-off in initial public
offerings (IPOs) in the local bourse, with the number of
new listings in Q2 halving from seven in Q1.

In comparison, foreign exchange trading rose for the
fourth consecutive month in May, underpinned by
heightened volatility in the major industrial currencies.
Investment advisory business was also boosted by the
reallocation of portfolios in the wake of the sharp decline
of equity prices. In the ADM, the structural decline in
offshore non-bank lending, which first started in mid-
1997, appeared to have bottomed out, with the
outstanding level stabilising at around US$79 billion,
down from US$188 billion in June 1997.

Monetary Authority of Singapore                                                                         Economics Department
 Macroeconomic Review, July 2002                                                                                                                                                                                        25

                                                                                     Box Item A
                                                              Characteristics of Growth in the Financial Services Sector

The importance of the financial services sector in the overall economy has been rising over the past decades, with
the average share of the sector increasing from 9% in the 1980s to 12% of real GDP in 1991-2001. This occurred
even as average annual growth of the sector moderated by about half over the two periods, while its volatility, as
measured by the standard deviation, dropped sharply from around 13% in the 1980s to 8.6% in 1991-2001.
These developments reflect in part the typical evolution of an industry in the developmental profile, from higher
growth and stronger variability during the initial period of growth to a more stable and sustainable growth pattern
at a more advanced stage. (Tables A1 and A2) More recently, the progressive implementation of liberalisation
measures first announced in 1998 has brought about changes to the composition of activity in the financial
services sector. This box item will briefly review the various characteristics of growth of the financial services
sector, and its contribution to the overall growth in the economy.

                                                                                         Table A1
                                                                       Compound Annual Growth of Major Sectors (% p.a.)
                                                     Manufacturing                Construction                  Commerce                                     T&C                    Financial                Business
     1980-1990                                           7.2                          4.3                          6.6                                       9.0                      14.2                     8.2
     1991-2001                                           5.6                          9.4                          7.0                                       7.9                       7.6                     7.1

                                                                                       Table A2
                                                               Standard Deviation of Major Sectors’ Real GDP Growth (%)
                                                     Manufacturing                Construction                  Commerce                                    T&C                     Financial              Business
     1980-1990                                           7.6                         18.9                          5.1                                      3.1                       13.1                   6.4
     1991-2001                                           7.7                         11.2                          7.0                                      2.4                        8.6                   3.0

Diversification within the financial services industry…

The financial services sector comprises four major segments (banking, insurance, investment advisory, and stock
broking), which accounted for nearly 77% of value-added in 2001. Activity in the two largest segments, banking
and insurance, generated nearly 63% of the average annual value-added in 1997-2001; this was about 3% higher
when compared to the earlier period over 1991-96. (Chart A1) The banking segment can be further
disaggregated into two sub-segments, ACU and commercial banking. Activity in the ACU dominated in the first
half of the 1990s, but this was reversed subsequently. In both these segments, there has also been a gradual
shift from interest income to earnings from fee-based activities, such as bond issuance, wealth management, and

                                                              Chart A1                                                                              Chart A2
                                                 Share of Financial Value-added                                                         Average % Point Contribution
                                            50                                                                                                   5
          Ave % Share to Financial Sector

                                                                               1991-1996          1997-2001                                                                     1991-1996        1997-2001
                                                                                                                      Ave % Point Contribution

                                                                                                                        to Financial Sector


                                            0                                                                                                    -1

























        * Includes commercial banking and ACU.

        Growth of net fees and commissions in the ACU and commercial banking segments has consistently outperformed interest
        income since 1999.

Monetary Authority of Singapore                                                                                                                                                           Economics Department
 Macroeconomic Review, July 2002                                                                                                    26

The insurance business, having benefited from the changes made to the CPFIS, saw its share rise from 14.5% in
1991-96 to 18.3% in 1997-2001. The share of the stock market segment was stable at around 10% in both
periods. However, this segment displayed the greatest volatility, with a standard deviation (of growth) of 73.7%,
compared to the overall sector standard deviation of 8.6% over 1991-01.2/ (Table A3) In fact, both the
investment advisory and stock broking segments had a disproportionate contribution to the fluctuations in overall
financial sector growth. (Table A4) In comparison, the remaining segments had somewhat stabilising influences
that provided offsetting contributions to growth within the industry. These diversification effects were also
evident in the average contributions of the various segments to overall financial sector growth. (Chart A2) For
example, the decline in activity in the ACU, and foreign exchange trading, coupled with lacklustre performance in
stock broking and investment advisory in recent years, have pulled down annual financial services sector growth
from an average of 10.4% during 1991-96 to 4.3% over 1997-2001. However, this decline was somewhat offset
by the strong contributions from the commercial banking and insurance industries, as they benefited from the
recent liberalisation measures.

                                                   Table A3
                    Standard Deviation of Various Segments’ GDP Growth in 1991-2001 (%)
        Total Financial                                     Investment
                                     Banking                                           Insurance              Stock Broking
           Services                                          Advisory

               8.6                      7.8                     60.2                      24.6                     73.7

                                               Table A4
           Effect of Various Segments on Overall Financial Sector Volatility in 1991-2001 (%)
                                          Standard deviation of overall financial sector growth excluding
       Total Financial
          Services                                      Investment
                                    Banking                                       Insurance           Stock Broking

              8.6                     15.5                       8.3                       8.6                      7.7

…reflect natural complementarities among different categories of financial activities…

These seemingly diverse segments within the financial services sector actually represent a combination of three
major types of activities – financial intermediation to provide financing for capital expenditure and consumption,
management and underwriting of risk, and investment of current savings to reap future returns. The integral
nature of these activities implies that an acceleration of activity in one segment often stimulates activity in the
other segments, generating the “buzz” in the financial services sector.3/

These complementary linkages within the financial services sector largely stem from the practice of managing risk
and return for different asset classes across various stages of the business cycle. See Chart A3, which highlights
some stylised facts associated with the different activities dominating at each phase of the economic cycle. For
example, during the initial acceleration phase in economic activity, receding risk aversion typically results in a
portfolio reallocation from safe, low-yielding bank accounts, to riskier but high-yielding assets such as equities and
cyclical funds. Thus, it is not surprising that the correlations between segments in the financial sector have
generally been low or negative in the past decade (Table A5), and have resulted in a balanced pattern of growth
for the whole industry.

       During the 1990s, there were several industry-specific structural factors that would have resulted in either a one-off distortion
       of growth rates or a shift in trend growth, which would amplify the volatility of the segment. For example, in the 1993 bull
       market, the liberalisation of CPF rules on stock investments and the Singapore Telecom floatation fuelled retail investors’
       interest, triggering off a surge in stock broking activity for that year. Excluding this phenomenal growth, the stock broking
       segment remains volatile with a standard deviation of 23.3%.
       The analogy used is that of a garden, where a diversity of flowers (type of activities) would attract more bees (financial
       institutions), which would in turn, cross-fertilise the flowers (exchange of ideas, and increased transactions) to generate more
       flowers (activities).

Monetary Authority of Singapore                                                                         Economics Department
                                                                               Chart A3: Management of Risk and Return over the Economic Cycle

                                  Growth negative & deteriorating              Growth negative but improving
                                  •   Life insurance activity benefits         •   Receding risk aversion leads to
                                      somewhat, as consumers                       switch of funds from low-yielding
                                      overweight their investments in              bank account and highly rated
                                      assets with more stable returns.             bonds to equities, cyclical-sensitive
                                                                                   funds and lower credit ratings
                                  •   Portfolio strategies gear toward
                                      investing in government securities,
                                      defensive stocks, safe-haven             •   Corporations secure long-term
                                      currencies and capital-guaranteed            financing for refinancing and
                                      funds.                                       capital expansion at low interest
                                                                                   rates, by issuing fixed-rate long-

Monetary Authority of Singapore
                                  •   Bond issuance activity is boosted
                                                                                   term debt.
                                                                                                                                                                                                                 Macroeconomic Review, July 2002

                                      by low interest rates, as
                                      corporations tap the fixed-income        •   Speculators and arbitrageurs use
                                      market for re-financing.                     financial tools to speculate on how
                                                                                   economic events will unfold.
                                  •   Alternative investing strategies, like
                                      hedge funds, could become
                                      popular among the high-worth
                                      individuals and institutional
                                  •   Demand for credit contracts, as                                                      Growth positive & accelerating             Growth positive but slowing
                                      companies operate at excess                                                          •   In expectation of a prolonged          •   Sentiments turn cautious, and
                                      capacity and consumers cut their                                                         expansion, both consumers and              investors sell down their riskier
                                      expenditure due to fear of                                                               companies increase their                   portfolios.
                                      retrenchment.                                                                            obligations against future income,
                                                                                                                                                                      •   Uncertainty over the pace of
                                                                                                                               by incurring more debt to finance
                                                                                                                                                                          downturn results in more hedging
                                                                                                                               their current expenditures.
                                                                                                                           •   Given the rising valuations of
                                                                                                                                                                      •   Speculative activity rises in tandem
                                                                                                                               equities, firms tap the stock market
                                                                                                                                                                          with different assessments of the
                                                                                                                               for additional funding, via private
                                                                                                                                                                          extent of slowdown across sectors
                                                                                                                               placements and IPOs.
                                                                                                                                                                          and geographical regions.
                                                                                                                           •   Financing constraints for start-ups,
                                                                                                                                                                      •   Demand for credit is likely to slow
                                                                                                                               entrepreneurs, and less credit-
                                                                                                                                                                          down, albeit at a later stage, when
                                                                                                                               worthy corporations ease
                                                                                                                                                                          the economic slowdown hits final
                                                                                                                               considerably with the receding
                                                                                                                               likelihood of default.
                                                                                                                           •   General insurance benefit from the
                                                                                                                               boom in other sectors of the

Economics Department
Macroeconomic Review, July 2002                                                                                        28

                                                   Table A5
                            Correlations of Growth between Segments (1990-2001)
                                       Stock           Investment                      Commercial
                                                                       Insurance                            ACU
                                       Market            Adviser                         Bank
       Stock Market                      1

       Investment Adviser               0.44               1

       Insurance                       -0.12              0.39             1

       Commercial Bank                  0.19              0.23           -0.24             1

       ACU                             -0.13             -0.28           0.04            -0.78               1

…and provide support to growth in the overall economy.

A case in point were the events during the most recent downturn. Even as segments such as stock broking, ACU,
and investment advisory were hit particularly hard, activities in the commercial banking and insurance segments
continued to record stronger growth compared with 2000. The overall financial sector thus posted a positive
growth of 2.2% in 2001, providing a boost to the overall economy. More generally, the correlations between the
financial services industry and the other sectors of the economy have been relatively low in the past two decades.
(Table A6)

                                                Table A6
                       Correlations of Growth between Major Sectors (1980-2001)
                            Business      Commerce         Financial    Construction     Manufacturing           T&C
      Business                 1

      Commerce               0.37                1

      Financial              -0.05              0.3              1

      Construction           0.54               0.12           0.14            1
      Manufacturing          -0.04              0.74           0.15        -0.21                 1
      T&C                    0.34               0.68           0.15        0.35                0.68               1

Simulation results from the Monetary Model of Singapore (MMS) confirm the potential of the financial sector to
insulate the economy from the effects of an external downturn. The MMS simulations take into account the inter-
linkages and interactions between the various sectors within a general equilibrium framework, and the dynamic
adjustments of the sectors to various shocks to the economy. For example, the simulations show that, after two
   Monetary Authority shock for
years, a negative 5%of Singaporeone year to the manufacturing sector has a smaller impact on the financial sector
than that on the other sectors. In fact, the sum of squared deviations (from baseline) cumulated over four years
after the shock, for the financial sector is almost 20% smaller than that for the other sectors of the economy.
The results therefore show that the financial sector is relatively less affected over the short to medium term by an
external shock. Hence, a sufficiently sophisticated financial system, that efficiently provides a range of services
and functions, results in important diversification benefits for the overall economy.

Monetary Authority of Singapore                                                                      Economics Department
Macroeconomic Review, July 2002                                                                                                       29

2           Financial Market Developments
2.1 International Financial Markets16
After a strong rebound in Q4 2001, concerns over the
strength of the global economic recovery, transparency
and accounting practices of US corporations, as well as
geopolitical developments in the Middle East weighed                                         Table 2.1
heavily on financial markets during the first half of 2002.                       Key Financial Market Indicators
                                                                                                Level as at   Level as at
Reflecting the more moderate recovery expectations and                                          31 Dec 01     28 Jun 02
potential risks, central banks have generally left interest
rates unchanged, as inflationary conditions remain                                              Interest Rates
largely contained. (Table 2.1)                                                Federal Funds
                                                                                                  1.75%         1.75%       0 bps
                                                                               Target Rate
In the foreign exchange market, the US dollar                                BOJ Overnight
depreciated, as weaker US growth prospects, large                                                0.002%        0.002%       0 bps
                                                                               Call Rate
current account deficits and a series of corporate
                                                                              ECB Minimum
accounting scandals raised questions about the dollar’s                                           3.25%         3.25%       0 bps
                                                                              Repo Bid Rate
strength and precipitated a re-evaluation of assets’
attractiveness. The Euro/USD has been approaching                                          Foreign Exchange Rates
parity while further weakness against the Yen was only                          USD/Yen          131.66        119.59        -9%
capped by intervention by the Bank of Japan (BOJ).                              Euro/USD         0.8895        0.9914       +11%
                                                                                Euro/Yen         117.14        118.58        +1%
Movements in the bond and equity markets have also
reflected concerns about the strength of the recovery                                           Equity Indices
and increased risk aversion. After the sharp recovery                            NASDAQ           1950          1463        -25%
post-September 11, equity markets in industrial countries                        S&P 500          1148           990        -14%
have declined this year, in some cases approaching or
                                                                                   Dow            10022         9243         -8%
falling below their lows in September 2001.         This
reflected investors’ concerns over weak corporate                                  DAX            5160          4383        -15%
earnings, heightened fears of more terrorist attacks in                           FTSE            5217          4656        -11%
the US as well as scepticism about corporate accounting                         Nikkei 225        10543         10622        +1%
practices. Increased risk aversion and expectations of a
                                                                                     10-year Government Bond Yields
delay in the tightening of US monetary policy also
resulted in lower long-term government bond yields.                                 US             5.05          4.80       -25 bps
                                                                                Germany            5.00          4.94       -6 bps
                                                                                  Japan            1.37          1.32       -5 bps
     Short-term interest rates for the G3 economies
                 remained unchanged.

Following the Fed’s aggressive 475 bps reduction in its
target rate last year to a 40-year low of 1.75%, the Fed
has left rates unchanged, given the uncertainty over the
strength of the US recovery and the benign inflationary
environment.      (Table 2.2)    Through the past two
quarters, market participants continued to postpone their
expectations for rate hikes, as the data provided mixed
signals about the strength of the economic recovery.

        Sections 2.1 and 2.2 are contributed by the Financial Surveillance Division, ED, MAS.

Monetary Authority of Singapore                                                                           Economics Department
Macroeconomic Review, July 2002                                                                                                                       30

The BOJ further “eased” its monetary policy in February                                    Table 2.2
2002 by pledging to provide liquidity irrespective of                            Short-term Interest Rates for
banks’ current account balances at the BOJ, a departure                             the G3 Economies (%)
from the previous ¥10-15 trillion target. The central                                        Federal
                                                                                                           Japan               ECB
                                                                           End of             Funds
bank also increased its outright monthly purchase of                                                      Overnight         Reference
                                                                           Period            Target
long-term government bonds from ¥800 billion to ¥1                                                        Call Rate           Rate
                                                                 2002 Jan                     1.75            0.001           3.25
The European Central Bank (ECB) left its target reference       2002 Feb                      1.75            0.001           3.25
rate unchanged at 3.25% through the first half of this
year. However, the ECB has recently signalled possible          2002 Mar                      1.75            0.012           3.25
hikes as upside risk to price stability has emerged due to
                                                                 2002 Apr                     1.75            0.002           3.25
high monetary and wage growth.
                                                               2002 May                       1.75            0.002           3.25

 The US dollar weakened against the Yen and the                  2002 Jun                     1.75            0.002           3.25
   Euro, reflecting concerns over US economic
    prospects as well as accounting practices.

The US dollar weakened by 9% and 10% against the                                       Chart 2.1
Yen and the Euro respectively as at 28 Jun 2002,                           Yen and Euro Against the US Dollar
compared with end-2001. (Chart 2.1) Several factors                        114                                                  1.00

were cited for the steep fall – the widening current                       117                                                  0.98
account and federal budget deficit as well as poor equity                  120                                                  0.96
market performance in the US due to doubts over the

                                                                                                                                       US$ per Euro
                                                                           123                                                  0.94
reliability of corporate disclosure and accounting
                                                               ¥ per US$

                                                                                          Yen per US$
practices. In addition, the Yen was boosted by the rising                  126         (LHS, Inverted Scale)                    0.92

trade surplus, although the US dollar’s decline against                    129                                                  0.90
the Yen was moderated by the BOJ’s intervention.                           132                                US$ per Euro      0.88
                                                                           135                                                  0.86

                                                                           138                                                  0.84
   Bond yields generally declined, due to weak                                   Jan   Feb      Mar     Apr    May    Jun
     equity markets and deferred rate hike                                                             2002

In H1 2002, yields on the US Treasuries fell as a result of
a flight to quality on renewed Middle East tensions,
volatile equity markets as well as deferred expectations                     Chart 2.2
of a tightening in US monetary policy given the absence       Yields on G3 10-year Government Bonds
of inflationary concerns. (Chart 2.2)                                      5.6                                                   1.6
                                                                                                 Japan (RHS)
A similar movement was seen in German Bunds, though                        5.4                                                   1.5
they ended the period relatively unchanged due to
concerns over an early ECB rate hike following hawkish                     5.2                                                   1.4
                                                               Per Cent

                                                                                                                                       Per Cent

comments from the ECB officials.
                                                                           5.0                                                   1.3
                                                                                                                 US (LHS)
In Japan, the Japanese Government Bond (JGB) yields
moved in a different direction relative to those in other                  4.8

industrial countries through the first four months of the                               (LHS)
year.    Disappointing macroeconomic data and little                       4.6                                                   1.1
                                                                             Jan       Feb      Mar     Apr     May    Jun
progress in non-performing loans (NPLs) resolution                                                     2002
raised expectations of future government borrowing
needs and pressured the JGBs in early 2002. Towards
the end of the period however, yields fell despite the
Japanese economy showing signs of a recovery and

Monetary Authority of Singapore                                                                         Economics Department
Macroeconomic Review, July 2002                                                                                                       31

Moody’s downgrade of its long-term sovereign rating as
JGBs benefited from a fall in Japanese equities.

  With the exception of Japan, equity markets in
    industrial countries have remained weak.

Through the first half of 2002, G3 equity markets
remained weak, ending the period some 8-25% lower.
(Chart 2.3) Equities were weighed down by concerns
about corporate accounting practices, high valuations as                                   Chart 2.3
well as geopolitical risks. Given highly geared balance                       Industrial Countries’ Stock Market
sheets and continued excess capacity in the industry,                                       Indices
technology stocks were particularly hit hard. Profit                          120

warnings by several high profile IT firms also raised                                         Japan
                                                                                            (Nikkei 225)
questions about the sustainability of any recovery in                         110                                             US
corporate profits and the resumption of business

                                                             1 Jan 2002=100
investments.                                                                  100

The Nikkei performed relatively better on signs of a                          90
                                                                                                      US (NASDAQ)
cyclical upswing in the Japanese economy and the short
covering of some market participants after the imposition                                                           Germany
of an “uptick rule” in March 2002. This rule prohibits
short selling without a prior increase in the stock price.                          Jan       Feb     Mar    Apr      May       Jun
Nevertheless, the bourse gave up most gains after a                                                         2002
series of accounting scandals were reported in the US, as
investors grew concerned over possible ramifications to
Japan’s export-led recovery.

2.2 Regional Financial Markets
   Asian short-term rates were generally lower.

Monetary conditions in Asia have generally continued to                                   Chart 2.4
remain easy amidst a weak economic environment and                                 Changes in North Asian
benign inflationary pressures. In North Asia, the Central                       Interbank Rates over H1 2002
Bank of China cut its key rediscount rate by 25 bps to a                      40
                                                                                                                   Korean Overnight
record low of 1.875% in June 2002, to ease the upward                                       HK 3-month                 Call Rate
pressure on the NT dollar.       Hong Kong’s 3-month                                      Interbank Rate
interbank rate (HIBOR) also weakened by 15 bps at end-
                                                              Basis Points

June from end-2001. In contrast, the Bank of Korea
(BOK) hiked its target overnight call rate by 25 bps in                        0
May 2002 to 4.25% in a move to curb growing
inflationary pressure as Q1 2002 GDP growth came out                          -20
stronger than expected. The core CPI for June reached                                                               Taiwan 3-month
2.9% y-o-y, just 0.1% below the BOK’s annual inflation                                                               Interbank Rate
target. More recently, BOK raised the core CPI forecast                       -40
                                                                                Jan          Feb      Mar    Apr      May       Jun
for the year to 3.2%, citing higher public service fees                                                     2002
and wages. (Chart 2.4)

Similarly, in Southeast Asia, interest rates continued to
decline, as inflationary and exchange rate pressures
subsided. Since January 2002, the Philippine central
bank has cut the overnight lending and borrowing rate
by 75 bps to a decade low of 7.00% and 9.25%

respectively    In Indonesia the SBI (Bank Indonesia
Monetary Authority of Singapore                                                                             Economics Department
Macroeconomic Review, July 2002                                                                                                                                         32

respectively.    In Indonesia, the SBI (Bank Indonesia
Certificates) rate has also fallen from 17.6% to 15.1%                                     Chart 2.5
due to easing inflationary pressure and the strengthening                         Changes in Southeast Asian
of the Rupiah. Similarly, the Bank of Thailand reduced                           Interbank Rates over H1 2002
the 14-day repurchase rate by another 25 bps from                              100
2.25% to 2.00% in January 2002 while the interbank                               0

rates in Malaysia have continued to remain low and                             -100
stable. (Chart 2.5)                                                            -200

                                                                Basis Points
  Asian currencies strengthened against the US                                                               Philippines
     dollar, reflecting the weaker US dollar.
During the first half of the year, Asian currencies                            -800
appreciated against the US dollar. The Korean Won rose                               Jan    Feb       Mar          Apr         May         Jun
by 9% in tandem with the Yen, reflecting a robust                                                              2002
recovery and strong portfolio inflows. Fitch Ratings’
upgrade of South Korea's long-term foreign currency
debt rating to A from BBB+ further strengthened the
Won. (Chart 2.6)
                                                                                               Chart 2.6
The Indonesian Rupiah was the best performing                                          Selected Asian Currencies
currency, appreciating by 19% vis-à-vis the US dollar on                                 Against the US Dollar
the back of a successful US$280 million eurobond issue                         124                                                               110
by Indofood (the largest issued by an Indonesian                                                                     Rupiah
                                                                               120                                                               108
corporate since the Asian financial crisis), IMF’s approval                                                           (LHS)
of the release of $358 million to Indonesia as part of a                       116                                                               106
                                                              1 Jan 2002=100

                                                                                                                                                       1 Jan 2002=100
three-year $4.7 billion loan program, and the Paris Club                       112
US$1.3 billion debt rescheduling agreement.              In                            Baht (RHS)
Thailand, the Baht was also supported by strong equity                         108                                                               102
                                                                                                                               NT$ (RHS)
portfolio related inflows. The Philippine peso, however,                       104                                                               100
was plagued by domestic concerns – a rising fiscal deficit                                                                HK$ (RHS)
                                                                               100                Won (RHS)                                      98
as well as political and security problems.
                                                                               96                                                                96
                                                                                 Jan       Feb     Mar       Apr         May         Jun
 The performance of Asian stock markets were
mixed amidst uncertainties over the US economy
                and equities.

Following the strong performances during the period                                        Chart 2.7
11 Sep-Mar 2002, the Taiwanese and Korean bourses                              North Asian Stock Market Indices
underwent a correction. Meanwhile, the Hong Kong                               140
stock prices continued to trend lower in line with the US                                         Korea (KOSPI)            Taiwan (TWSE)
markets on concerns over the prospects of a weaker-                            130
than-expected recovery.       Nevertheless, the Korean
                                                              1 Jan 2002=100

bourse, KOSPI, managed to end the period 7% higher,
boosted by confidence in the country's reform efforts and                      110
sustained economic strength. (Chart 2.7) The Chinese
bourse, SICOM, which has slumped earlier due to                                100

concerns about high valuations and oversupply of shares,                        90                         Hong Kong (HSI)
managed to recover to end the period higher following                                            China (SICOM)
recent proposals on IPO reforms that effectively limit the                      80
pace of new share issues.                                                        Jan       Feb       Mar       Apr             May         Jun

Meanwhile, the Southeast Asian equity markets have
generally outperformed the US and Northeast Asian

Monetary Authority of Singapore                                                                              Economics Department
Macroeconomic Review, July 2002                                                                                                                33

markets, benefiting from foreign investors’ renewed                       Chart 2.8
interest in emerging equity markets, in addition to more    Southeast Asian Stock Market Indices
favourable growth expectations and a perception that                           150
corporate governance have generally improved over the                                                                  (JCI)
past year. (Chart 2.8)

                                                            1 Jan 2002=100
The Indonesian and Thai bourses, which both recorded                                                                                Thailand
gains of 29%, were the top performing bourses for the                          120                                                   (SET)

period. The former was boosted by the success of the                           110
Paris Club debt rescheduling and the signing of a fresh                                                         Malaysia
pact of reforms with the IMF while Thailand was buoyed                         100                              (KLCI)
by strong foreign fund interest on signs of improved
prospects for corporate earnings, given robust consumer                          Jan          Feb     Mar          Apr       May      Jun
spending.     A slew of positive factors, such as a                                                               2002
turnaround in the domestic economy, buoyant consumer
confidence and progress in corporate debt structuring,
supported Malaysian stocks. In comparison, stocks in
the Philippines were weighed down by negative domestic

2.3 Domestic Financial Markets
 The Singapore dollar weakened against the Euro
   and the Yen but appreciated against the US.                                                    Chart 2.9
                                                                                           Singapore Dollar Against
Against the backdrop of international financial markets                                    US Dollar, Euro and Yen
developments, the Singapore dollar strengthened against                        106

the US dollar, but depreciated against the Euro and Yen                        104

in H1 2002. After weakening initially against the US                           102
                                                            1 Jan 2002 = 100

dollar in February and March, the domestic currency
strengthened in the second quarter of the year, to end                         100

some 4.9% higher at end-June 2002 compared with end-                            98                         Yen
2001. Against the Euro and the Yen, however, the
Singapore dollar fell by 6.1% and 4.5% respectively over                                                                              Euro
the same period. (Chart 2.9)                                                    94

                                                                                     Jan      Feb         Mar       Apr       May       Jun
   The Singapore dollar recorded mixed results
         against the regional currencies.

The performance of the Singapore dollar against the                                              Chart 2.10
Asian currencies was mixed. It appreciated against the                                     Singapore Dollar Against
US dollar-pegged Ringgit and HK dollar, weakened by                                         Won, Rupiah and Baht
12% against the Rupiah and 5.1% against the Won, and                           104

remained largely unchanged against the Baht and the NT
dollar. (Chart 2.10)
                                                            1 Jan 2002 = 100

      Domestic interest rates remained low.                                     92

Domestic interest rates remained low, reflecting the soft                       88
global interest rate environment and easy liquidity
conditions in the domestic money market.          In the                        84
                                                                                     Jan      Feb         Mar       Apr       May       Jun
interbank market, the domestic 3-month interbank rate                                                             2002
eased from 1.25% at the start of the year to 0.88% as at

Monetary Authority of Singapore                                                                                 Economics Department
Macroeconomic Review, July 2002                                                                                                               34

end-June 2002. (Chart 2.11) To some extent, this                            Chart 2.11
decline reflected lacklustre interbank credit demand            3-Month Interbank Rate and 3-Month
amongst resident banks on account of sluggish non-bank                        SIBOR
lending as well as increased inflows of deposits from                         2.2
non-bank customers. This brought the loan-to-deposit                          2.0
ratio down to 0.88 in May 2002 from the high of 0.93 in                                               3-month SIBOR
July 2001. (Chart 2.12)

                                                                Per Cent
In the offshore interbank market, the 3-month US$                             1.4
                                                                                                   3-month Interbank Rate
SIBOR stabilised at around 1.90% in the first half of                         1.2
2002, as the Fed has left the overnight federal funds rate                    1.0
unchanged at 1.75% since December 2001. Reflecting
the relatively larger decline in the domestic 3-month
interbank rate, the differential between the domestic and                     0.6
                                                                                   Jan      Feb      Mar      Apr      May        Jun
foreign interest rates widened initially at the start of the                                                 2002
year, although it has somewhat steadied at around 100
bps points since April 2002.
                                                                                                Chart 2.12
Meanwhile, the retail interest rates on deposits continued                                 Loan-to-Deposit Ratio
to trend lower, with the 3-month and 12-month fixed                           0.94

deposit rates slipping to 1.00% and 1.48% respectively
at end- June 2002. (Chart 2.13) The average prime
lending rate also remained low at 5.40%, compared with                        0.90
the average of 5.66% in 2001. The response of the

prime lending rate to the softening interbank interest                        0.88
rates, however, appeared to be smaller compared with
the deposit rates. (Table 2.3)                                                0.86


 The Singapore stock market rallied but was soon                              0.82
 weighed down by concerns over weakness in US                                       1999            2000            2001           2002 May

    equities and corporate scandals in the US.
                                                                            Chart 2.13
The Singapore stock market started off the year on a             Non-Bank Customers’ Interest Rates
buoyant note with the release of several positive US                          8
macroeconomic indicators. The STI chalked up gains of
nearly 10% from the start of the year to reach a high of                                             Prime Lending
1787 at end-January. (Chart 2.14) Average daily                               6                          Rate

volume of transactions hit a 30-month high, underlining
                                                                % Per Annum

the interest of investors in the stock market. Foreign
institutional investors were also reportedly channelling                                              12-month Fixed
funds into Singapore, which was reflected in the higher                                                Deposit Rate

portfolio investment inflows in the balance of payments                       2
                                                                                    3-month Fixed
                                                                                     Deposit Rate

However, the upward momentum was not sustained into                           0
                                                                                  1997      1998     1999      2000        2001    2002Q2
the second quarter, as investor sentiments were battered
by a host of external negative events, notwithstanding
the gradual improvement in economic prospects. While                           Table 2.3
the STI hit the year’s high of 1808 in March, the gains          Spread between the Highest and the
were eroded away by mid-June. Eventually, it ended             Lowest Rate in the Period 1997-Jun 2002
4.4% lower from the start of the year at 1553. The SES                                                     3-month           12-month
                                                                Average Prime
                                                                                                           Deposit            Deposit
Electronics Index, an indicator of the share prices of           Lending Rate
                                                                                                             Rate              Rate
technology companies listed on the SGX, was more
volatile. It rose by as much as 34% from end-2001 in                               2.44%                    4.22%                 3.90%
March, before losing all the gains over the second

Monetary Authority of Singapore                                                                             Economics Department
Macroeconomic Review, July 2002                                                                                                                            35

    Trading activity was stronger y-o-y but IPO
             activity stayed sluggish.
                                                                                          Chart 2.14
While stock market turnover fell off after the record level                     Singapore Stock Market Indices
reached in January, the average daily value and volume                         140

of turnover over the past six months still exceeded                                                                 SES Electronics
2001’s level by 9.3% and 43% respectively. (Chart 2.15)                        130

The poor market conditions, however, deterred potential

                                                              1 Jan 2002=100
listings, with the number of IPOs dwindling to 11 in the                       120

first half of 2002, compared with 35 for the whole of last
year. The amount of funds raised from these listings                           110

was also some $208 million lower than the $294 million                                                        Straits Times
gathered in H1 2001.                                                           100                                Index

                                                                                 Jan              Feb      Mar        Apr     May           Jun
Yields across all SGS maturities fell on concern of                                                                  2002
         the robustness of the recovery.

The Singapore Government Securities (SGS) market also
reflected diminished expectations of a robust domestic
recovery, with a downward shift of the yields across all
maturities. At the longer end of the curve, yields rose                   Chart 2.15
initially in March on the back of a more optimistic outlook   Stock Market Average Daily Turnover
for the domestic economy, underpinned by improving            1000
macroeconomic indicators in the US.            Inflationary
pressures were also expected to rise with the pickup in                                   ($ Million)
economic activity, which would lead to a tightening of            800

monetary conditions by global central banks. This would
put upward pressure on future interest rates, proxied by          600
the yields of long-term government maturities.

In comparison, yields of SGS with short- and medium-              400
term maturities recorded a modest decline in March,                                                                                      Volume
possibly reflecting some flight to quality in the aftermath                                                                           (Million Units)
of the collapse of Enron in Q1. However, investors’               200
                                                                                2000                        2001                         2002      Jun
confidence did not appear to have been dampened
significantly, as evident in the strong recovery of the STI
in late-February.

The ensuing external events over the second quarter
reversed these initial market expectations. Risk aversion
                                                                                                          Chart 2.16
heightened, prompting a switch of preference from
                                                                                                          SGS Yields
equities to the safe-haven SGS. The lower yields at the
longer-term maturities also underlined the expectations                        5.0
of a delay in monetary tightening in view of subdued                           4.5                                               31 Mar 2002
inflationary pressures. (Chart 2.16)                                           4.0
                                                                                          31 Dec 2001
                                                                Per Cent

Overall credit growth turned sluggish but housing                              2.5
                                                                                                                    28 Jun 2002
                loans were resilient.                                          2.0
Notwithstanding the recent pickup in loans in May, the                         1.0
level of non-bank lending was still $2.46 billion lower                        0.5
than the level in end-2001. (Chart 2.17) On a q-o-q

                                                                                                                              10 YR

                                                                                                                                                   15 YR
                                                                                           1 YR

                                                                                                   2 YR

                                                                                                             5 YR

basis, loan growth has lagged output growth, which
turned around in Q4 last year. Indeed, it was observed
from the past two recessions in 1985 and 1998 that a
sustained q-o-q improvement in loans came about only

Monetary Authority of Singapore                                                                                     Economics Department
Macroeconomic Review, July 2002                                                                                                                               36

four to six quarters after the economy emerged from
recession. Hence, any sustained upturn in non-bank
lending will most likely occur only in Q3 2002 at the                                           Chart 2.17
earliest. (Chart 2.18)                                                                 Loans to Non-bank Customers
                                                                                  5                                                       5
The fall-off in lending was largely linked to weak and                            4                                                       4
uncertain economic conditions. Credit extended to the
                                                                                  3                                                       3
industrial and commercial segments – transport &                                          QOQ Changes
communications, commerce, manufacturing, and building                             2                                                       2

                                                                                                                                               YOY % Growth
                                                                S$ Billion
& construction – contracted in the Jan-May period from                            1                                                       1
end-2001. (Chart 2.19) Notwithstanding the recent                                 0                                                       0
improvement in some of the macroeconomic indicators,                              -1                                                      -1
business prospects remained uncertain and uneven.
                                                                                  -2                                                      -2
According to the Q2 2002 Business Expectations Survey                                               YOY

by the Department of Statistics, relatively more firms in                         -3               (RHS)                                  -3

the services and commerce sectors expected                                        -4                                                      -4
unfavourable business conditions for the period from                                   1999        2000           2001         2002 May

April to September 2002. In EDB’s Survey of Business
Expectations of the Manufacturing Sector, a greater
proportion of firms projected an improvement in business
conditions for the same period, but the number of firms                                             Chart 2.18
planning to increase their capital expenditure was still                                      Loans and GDP growth
less than those which would cut back their spending.                                    1985 Recession           1998 & 2001 Recession
Even for those firms that have predicted better business                          5
conditions ahead, it was plausible that they utilised the                         4
                                                                QOQ SA % Growth

unused capacity first to meet increased demand.                                   3

Inevitably, business borrowings for capital expenditure                           2

will likely be dampened.                                                          1

The decline in business loans could also be partly                                -1

attributed to the growing popularity of bond issuance                             -2

among large corporations as an alternative fund-raising                           -3

tool. This was encouraged by a range of government
                                                                                       1984        1987           1997          2000    2002Q1
initiatives aimed at broadening and deepening the                                                        Loans      GDP
corporate debt market, which include the establishment
of a reliable government yield curve to facilitate efficient
and sound price discovery in bond origination.

Lending to professional and private individuals was also                              Chart 2.19
badly hit during the period. While private consumption                    Change in Loans to Selected Sectors
expenditure picked up in Q1 2002 after three consecutive                                        Industrial*
quarters of contraction, loan growth has remained                                               Professional & Private Individuals
negative. In the quarters ahead, some improvement in                               4            Housing

loan growth is likely, as private consumption picks up on                          2
the back of rising consumer confidence.
                                                                  S$ Billion

Housing loans turned out to be the only resilient
segment, as homebuyers bought a record number of                                  -2
private housing units in Q1 this year on the back of
easing prices and low mortgage rates. At end-Q1 2002,                             -4

house prices were still about 18% below the recent peak
in Q2 2000. Consequently, more prospective house-                                      1999         2000            2001             2002 May
owners and long-term investors borrowed to finance             * Industrial loans consist of loans extended to the
housing investments.        Moreover, banks have also            building & construction, manufacturing, commerce and
significantly lowered interest rates for the first few years     transport & communications sectors.
in home loan packages, given the highly competitive
consumer banking environment and easy monetary

Monetary Authority of Singapore                                                                              Economics Department
Macroeconomic Review, July 2002                                                                                                                                    37

3         Wage-Price Dynamics
The adjustment of the economy in 2001 to negative
external pressures was facilitated by price flexibility in
both factor and product markets. In the labour market,
nominal wages began to trend down in Q1 2001, the first
quarter of economic contraction.             Employment
responded with a lag of 1 - 2 quarters, and has been
declining since Q3 2001. Likewise, consumer prices
adjusted with a similar lag and started to decline in Q2
2001, reflecting the absence of external inflationary
pressures as well as the emergence of excess capacity in
the domestic economy. More recently, however, both
wages and consumer prices have begun to pick up. This
chapter reviews the behaviour of wages and prices
during the current recession and highlights some key
differences with the earlier downturns in 1985 and 1998.

3.1 External Inflation
                                                                                                      Chart 3.1
   External inflation declined more mildly in the                                                 External Inflation
    current recession, as compared with earlier                                 40                                                             8

                                                                                30                                                             6
                                                                                             Industrial-7           ASEAN-3*
External inflation experienced a milder and shorter period
                                                              YOY % Growth

                                                                                                                                                    YOY % Growth
                                                                                                (RHS)                 (LHS)
                                                                                20                                                             4
of adjustment in 2001 compared with the earlier
recessions. In general, global prices had started to trend                      10                                                             2
down even before the recent weakening in activity,
limiting the scope for further declines. Compared with                           0
the periods preceding the other downturns in the early-                                                                      (LHS)
1980s and during the Asian financial crisis, when external                      -10                                                            -2
                                                                                  1984              1989          1994           1999    2002
inflation averaged 5-6% and 4-7% respectively, inflation                                                                                Apr-May

in most of Singapore’s major trading partners remained       *ASEAN-3 refers to Malaysia, Indonesia and Thailand
fairly low in 2000 and in the early part of 2001,
fluctuating between 1-3%. (Chart 3.1)                                                      Chart 3.2
                                                                                  Commodity Price Inflation and
In addition, commodity prices did not adjust by as much                            Singapore’s Business Cycles
this time around, trending down over five quarters in the                        45

current business cycle, compared with nine quarters in
the past two business cycles. The size of the downward                                                         Singapore's
                                                                                                                Real GDP
adjustment was also smaller in the current downturn,
                                                                 YOY % Growth


with a peak-to-trough contraction of about 22%, as
compared to a fall of more than 30% in the previous
recessions. (Chart 3.2) Prices were already on a                                -15                               Commodity
downward trend since the mid-1990s, in part reflecting
the impact of the Asian financial crisis, which reduced
                                                                                      1984      1987    1990      1993   1996        1999     2002

Monetary Authority of Singapore                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                                           38

demand from emerging market countries.17 The smaller
adjustment in commodity prices could also have been
underpinned by the more efficient price discovery
process in world commodity markets, as well as
improvements in supply-side management and
production responses among the major producer

     External price pressures have turned around.
                                                                                          Chart 3.3
In recent months, there have been tentative signs of an                       CPI Inflation in the G3 countries
upturn in external prices. Several of Singapore’s major                       4

trading partners have seen a mild pickup in price
pressures, although inflation rates mostly remained low                       3
at below 2%. Concomitantly, world commodity prices,

                                                               YOY % Growth
which bottomed out at the end of 2001, have continued                                                             Euro-zone
to strengthen as well.                                                        1


     CPI in Singapore’s trading partner countries                                                   Japan
                have started to rise,…
CPI inflation in the US trended down to 1.3% y-o-y in                          1997         1998     1999      2000     2001   2002 May

Jan-May, from 1.9% in Q4 2001. However, overall prices
increased slightly on a sequential basis over the period
Mar-May, driven by higher energy costs, as well as some
strengthening in consumer spending. On a y-o-y basis,
inflation in the Euro-zone picked up more strongly in Jan-
May, largely on account of bad weather conditions and
higher taxes. Meanwhile, prices in Japan continued to
decline, as economic activity remained weak. (Chart 3.3)

Inflation in the NIEs dipped into negative territory in Jan-
May 2002. In Hong Kong, deflation continued to deepen                                         Chart 3.4
due to falling import prices as well as weakening                                     CPI Inflation in the NIEs
domestic demand amidst rising unemployment. The                               10
steeper fall in consumer prices also reflected the
property tax concession and electricity rebate extended                                                Korea

by the government. Falling prices were also recorded in                        5

Taiwan, which has been in a cyclical downturn. In
                                                               YOY % Growth

comparison, buoyant consumer spending, as well as
rising world oil prices boosted prices in Korea, albeit at a                              Taiwan
more moderate pace compared with last year.
(Chart 3.4)                                                                    -5
                                                                                                            Hong Kong
With the exception of Indonesia, inflationary pressures in
the ASEAN countries have remained benign. Despite the                         -10
                                                                                   1997      1998     1999      2000    2001   2002 May
appreciation of the Rupiah, consumer prices in Indonesia
continued to rise at double-digit rates, as domestic fuel
prices and electricity tariffs were hiked again in Q1, in
line with the government’s move to cut costly budget
subsidies. The higher inflation in recent months was also

       Source: IMF, World Economic Outlook, April 2002.

Monetary Authority of Singapore                                                                               Economics Department
Macroeconomic Review, July 2002                                                                                                                                  39

partly due to severe flooding in some parts of the                                                Chart 3.5
country, which had caused disruption to goods                                             CPI Inflation in ASEAN-3
distribution. In Thailand and Malaysia, consumer prices                        12                                                           90
rose from their levels in 2001, although average inflation                               Thailand
was relatively subdued at below 2% in Jan-May.                                 10

(Chart 3.5)                                                                    8

                                                             YOY % Growth

                                                                                                                                                  YOY % Growth
                                                                               6                                                            45

       …while world commodity prices have                                       4                                 Malaysia

                 strengthened.                                                 2                                                            15

                                                                               0                                                            0
World commodity prices recovered somewhat in recent
months, largely due to the effects of the surge in world                       -2                                                           -15
                                                                                1997           1998      1999      2000      2001      2002May
crude oil prices, as well as modest price increases in
some non-oil commodities.

Despite efforts by OPEC to maintain prices within a
target range of US$22-28 per barrel, global oil prices                                         Chart 3.6
retreated sharply in Q4 2001 and in the early part of                                    Commodity Price Inflation
2002 to less than US$20, reflecting sluggish global                             200
demand. However, prices strengthened in Mar-May to
US$21-25, following concerns about disruptions to the oil                       150
                                                                                                                             OPEC Oil
supply in the Middle East, as violence flared up again in
                                                                YOY % Growth

the region. (Chart 3.6)                                                                             World
Meanwhile, the turnaround in global industrial production
in Q1 provided some support to the prices of industrial-                            0
related commodities such as base metals, which had                                                                   Commodities
declined less severely. (Chart 3.7) Similarly, increased
demand was the main factor for improvements in coffee,                         -100
rice and palm oil prices. Demand was partly boosted by                                  1997      1998      1999      2000          2001   2002 May

the build-up of stocks in anticipation of the El Niño
effect, which was expected to hit the Pacific region in
mid-2002. The turnaround in the price of Thai rice was
also supported by rising demand from major rice-
                                                                                       Chart 3.7
consuming countries, particularly China, and supply
                                                                            Non-oil Commodity Price Inflation
shortages in rival exporting countries such as Vietnam.
Palm oil prices picked up as well, in expectation of lower
production. World sugar prices, however, remained                                              Coffee
depressed despite earlier attempts by exporting countries                                                 Rice
to support the market. The continued weakness in sugar
                                                               YOY % Growth

prices reflected oversupply and poor demand conditions                                                           Metals
worldwide. (Box Item B discusses in greater detail the                              0
relationship between world commodity prices and
domestic price pressures.)                                                     -40
                                                                                                                     Palm Oil
                                                                                    1997         1998      1999       2000      2001       2002 May

Monetary Authority of Singapore                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                 40

                                       Box Item B:
      The Importance of Commodity Price Inflation in Explaining Domestic Price Pressures

Changes in world commodity prices have played an important role in assessing the inflation outlook in many
economies. Central banks, particularly among the developed countries, have expended much effort in
constructing their own commodity price indices to reflect their unique indigenous commodity composition, as well
as in assessing the pass-through effects of commodity prices to consumer goods prices.

Given the high import content of domestic goods in Singapore, ED monitors developments in world commodity
prices very closely, including the IMF’s commodity price indices. The overall IMF Primary Commodity Price Index
(PCPI) has served as a useful summary measure of commodity price pressures, but it is recognised that a periodic
review is necessary to ensure that the series remains relevant in its information content for predicting future
domestic CPI inflation. In this study, the relevance of the PCPI is examined and an assessment is made of its
importance in the analysis of domestic inflationary pressures. Econometric tests are carried out to determine if
movements in commodity prices precede movements in domestic consumer prices in a reliable and predictable

Survey of Various World Commodity Price Indices

The considerable interest generated by commodity prices reflects in part the perception that they might possess
predictive properties for subsequent general price developments. Apart from the direct pass-through effects,
swings in commodity prices (particularly in energy) frequently precede turning points in global economic activity.
Movements in commodity prices are also monitored closely by many commodity-dependent exporters with a view
to gathering information on an important source of export income fluctuations.

Table B1 provides a summary of the various major commodity price indices that are monitored by central banks.
To isolate the effects of global developments on individual countries, some central banks construct their own
commodity price indices to reflect the pattern of domestic usage. The various price indices, therefore, differ in
construction, both in terms of weights and commodity coverage. For example, commodities in the ANZ index are
weighted according to New Zealand’s main commodity exports in the world markets whereas the Hamburg
Institute of International Economics (HWWA) index uses weights based on imports of primary commodities to
OECD countries (excluding trade between EU countries).

In the case of Singapore, the IMF PCPI is monitored closely by ED to provide a summary measure of commodity
price pressures. The PCPI covers about 80 commodities subsumed under six broad categories, namely, food,
beverages, agricultural raw materials, metals, fertilisers, and energy. It is constructed by weighting the price of
each of these commodities by its average worldwide export earnings. The movements in the PCPI, which are
reflective of the changes in commodity prices in the world market, have shown a relatively higher correlation with
the domestic CPI compared to other commodity price indices.

The role of commodity prices as a leading indicator of general price developments has been addressed extensively
in the literature. (Table B2) Some studies in the 1980s concluded that commodity prices could be a valuable
indicator as an early warning of inflation, although findings of more recent studies have shown that its signalling
power of general inflationary pressures is now much less reliable. Generally, the results indicate that the
empirical relationship between commodity prices and consumer prices has changed dramatically over time, largely
due to the shift in the extent to which idiosyncratic shocks affect commodity prices, as well as changes in the
relative importance of commodities in final consumer goods. In particular, the studies fail to find a stable,
predictable link to future inflation in the long run. Notwithstanding these findings, developments in world
commodity prices are still monitored closely by central banks amongst a whole range of other indicators, as their
short-run movements can influence headline CPI numbers to a significant extent.

Monetary Authority of Singapore                                                          Economics Department
Macroeconomic Review, July 2002                                                                                               41

                                            Table B1
           A Summary of Major Commodity Price Indices Monitored by Other Central Banks*
                     US                 Reserve                          European
                               Bank of              Bank of    Bank of               Bank of
      Central Bank Federal              Bank of                           Central
                                Japan               Canada    England                 New
                   Reserve              Australia                          Bank
                         IMF Primary
                                         Overseas         RBA            BOC           BOE          HWWA           ANZ
      Commodity          Commodity
                                        Commodity      Commodity      Commodity     Commodity     Commodity     Commodity
      Price Index           Price
                                           Index       Price Index    Price Index   Price Index   Price Index   Price Index
      Apple                                                                                                         !
      Banana                  !                                                           !
      Barley                                               !              !                           !
      Beef & veal             !              !             !              !               +                         !
      Canola                                                              !
      Coal                                                 !              !               !           !
      Cocoa                   !                                                           !           !
      Coffee                  !              !                                            !           !
      Corn                    !              !                            !               +           !
      Cotton                  !              !             !                              !           !
      Crude oil               !              !             !              !               !           !
      Edible oil              !                                                           !           !
      Fish                                                                !                                         !
      Hides                   !                                                                       !             !
      Hogs                    !                                           !               +
      Lamb                    !                                                           +                         !
      Metals                  !              !             !              !               !           !             !
      Natural gas                                          !              !               !
      Natural rubber          !              !                                            !           !
      Pulp                                                                !                           !             !
      Rice                    !                            !                              !           !
      Soybeans                               !                                                        !
      Sugar                   !              !             !                                          !
      Tea                     !                                                           !           !
      Timber                  !              !                            !               !           !             !
      Tobacco                 !                                                           !           !
      Wheat                   !              !             !              !               +           !
      Wool                    !              !             !                              +           !             !

 Source: Respective central banks’ homepages.
      Bank of Australia, Canada, Japan and England construct their own commodity price indices. US Federal Reserve uses the
      International Monetary Fund PCPI, while ECB uses the Hamburg Institute of International Economics (HWWA) Commodity Price
      Index, and Reserve Bank of New Zealand uses the ANZ Bank’s Commodity Price Index.
      The IMF Primary Commodity Price Index is also closely monitored by ED, MAS.
      The weighting of the Bank of England’s Commodity Price Index is also based on the value of the indigenous agricultural
      production, which could comprise these items.

Monetary Authority of Singapore                                                                     Economics Department
Macroeconomic Review, July 2002                                                                                42

                                               Table B2
                         The Empirical Literature on the Relationship Between
                        World Commodity and Overall Consumer Price Inflation
                   Study                                    Summary of Results
   Angell (1987)                        This study finds that over a long historical period, a variety of
                                        commodity price indices tend to have peaks and troughs that
   United States (1960-1987)            preceded peaks and troughs in consumer price inflation.

                                        This study finds no evidence that commodity price indices provide
                                        any information for predicting movements in the general price
   Aguais, DeAngelis and Wyss (1988)    index beyond what is already contained in wages and other
                                        supply-side indicators.

                                        This study finds that most commodity price indices did have
   Bloomberg and Harris (1995)          predictive power in explaining consumer inflation in the 1970s
                                        and early 1980s, although they have not been reliable indicators
   United States (1970-1994)            of CPI inflation since the mid-1980s.

                                        This study finds that changes in commodity prices tend to lead
                                        those in consumer prices, and that the inclusion of commodity
   Boughton and Branson (1988)          prices significantly improves the in-sample fit of regressions of an
                                        aggregate (multi-country) consumer price index. However, a
   United States (1960-1987)            stable long-run relationship between the level of commodity
                                        prices and the level of consumer prices was not found.

                                        This study finds that there is no clear evidence of any equilibrium
   Durand and Boland (1988)             relationship between levels of consumer and commodity prices,
                                        although relations between changes in a sample of commodity
   OECD (1960-1987)                     prices (e.g. metals and agricultural raw materials) and consumer
                                        prices may be established.

                                        This study finds that the overall relationship between CPI inflation
                                        and the commodity price indices has changed significantly over
   Furlong and Ingenito (1996)          time. The non-oil commodity prices were relatively strong and
                                        statistically robust leading indicators of overall inflation in the
   United States (1947-1995)            1970s and early 1980s, but they have performed poorly in more
                                        recent years.

   Garner (1995)                        This study finds evidence of a decline in the statistical
                                        significance of commodity prices in explaining CPI inflation,
   United States (1973-1994)            particularly since the mid-1980s.

   Herrero and Thornton (1997)          This study finds no stable long-run relationship between
                                        commodity prices and UK retail prices, and also no evidence of
   United Kingdom (1980-1996)           causality from commodity prices to retail prices.

   Webb (1989)                          This study finds that commodity price indices improve the
                                        forecasts of CPI inflation, although the improvement was
   United States (1949-1988)            marginal.

                                        This study finds that commodity price indices had substantial
   Whitt (1988)                         predictive value of future aggregate price change in the volatile
                                        post-1975 period.

Monetary Authority of Singapore                                                       Economics Department
Macroeconomic Review, July 2002                                                                                                 43

A number of economic arguments have been put forward in support of the hypothesis that commodity price
developments predate movements in the general price level. A more traditional argument is that commodities are
an important input into production. Hence, other things being equal, higher costs from commodities will
eventually be passed on to consumers, generally with a lag. In addition, commodity prices are largely determined
in auction markets that respond readily to shifts in supply and demand, and thus adjust more quickly to “news”
about future inflation prospects, as compared to the relatively slower adjustment of final goods prices that are
restrained by contractual arrangements. Moreover, any emerging signs of inflationary pressures would be
observed almost immediately since commodity price indices are updated quickly, as compared to consumer price
indices, which are reported with a lag of several weeks.

Nonetheless, there also exist potential weaknesses of using commodity prices as an indicator of general price
developments. Supply conditions in commodity markets can deviate significantly from aggregate demand in an
economy. Not only do fluctuations in commodity prices reflect changes in demand and hence potential
inflationary pressures, they are also affected by temporary interruptions in supply due to weather conditions or
political interventions. In addition, it is apparent that the importance of commodities in the consumer market has
declined over time, given the trend increase in the proportion of services in the CPI basket.

Historical Relationship Between Inflation of World Commodity, Domestic DSPI and CPI

As background for the formal econometric analysis, this section provides a qualitative overview of how commodity
prices and overall consumer prices have been related over the past two and a half decades in Singapore. Chart
B1 reveals some stylised facts about the relationship between y-o-y changes in the PCPI, the Domestic Supply
Price Index (DSPI)1/ and the CPI. While changes in the DSPI clearly exhibited fairly strong co-movements with
the fluctuations in the PCPI over the period shown, the relationship between the changes in the PCPI and the CPI
appears to be much weaker, particularly since the mid-1980s, suggesting a lack of a stable long-run relationship
between the latter two series. It is also observed that the cycles in the PCPI and DSPI inflation, which are
generally more variable and pronounced than that of the CPI inflation, have become less volatile since the mid-

                                                                     Chart B1
                                                    Long-run Relationships Between Inflation
                                                         of Overall PCPI, DSPI and CPI*

                                                                 Overall PCPI
                                   YOY % Growth


                                                                       Overall CPI

                                                        Overall DSPI


                                                    1975       1980    1985      1990   1995   2001
                                    The series were smoothed using the variable span smoother
                                    developed by Friedman (1984).

Prior to the 1980s, fluctuations in the overall commodity price inflation were reflected in domestic consumer price
inflation. It is clear that food commodities and oil prices were the main influences. For example, the first oil price
shock in 1973-74, coupled with a surge in non-oil commodity prices, led to a sharp rise in domestic consumer

      DSPI is a weighted measure of the prices of imported and domestically produced goods faced by producers.
      The standard deviation of the PCPI inflation fell from 20.3% during the period 1975-85 to 13.7% in the period 1986-2001, while
      that of DSPI inflation declined from 8.0% to 6.2% during the respective periods. This compares to the standard deviation of
      the CPI inflation of only 3.4% and 1.4% respectively.

Monetary Authority of Singapore                                                                       Economics Department
Macroeconomic Review, July 2002                                                                                                                    44

price inflation to more than 20% during the period. The spike in world food prices, reflecting the after effects of
the El Niño weather phenomenon, caused the domestic food price index, which has the largest weight in the CPI
basket, to increase significantly by about 30% in 1973-74, contributing to almost 40% of the increase in the
overall CPI. Similarly, there was also a sharp run-up in prices of oil-related consumer items, with domestic costs
of petrol and fuel rising at double-digit rates, reflecting the pass-through effects from the oil price shock.
(Charts B2 and B3)

                        Chart B2                                                              Chart B3
       Long-run Relationships Between Inflation                               Long-run Relationships Between Inflation
          of PCPI Oil, DSPI Oil and CPI Oil                                   of PCPI Food, DSPI Food and CPI Food
                           24                                                                16

                           18                                                                12
                                                       PCPI Oil
            YOY % Growth

                                                                              YOY % Growth
                           12                                                                                 CPI Food
                                    CPI Oil                                                   0
                            0                                                                                            DSPI Food
                                                            DSPI Oil
                                                                                                      PCPI Food
                           -6                                                                -8

                           -12                                                               -12
                             1985        1989   1993       1997        2001                    1975         1982         1989        1996   2001

These trends were repeated over 1979-80 during the next sharp spike in world commodity price inflation, largely
on account of the second oil price shock as well as the rise in prices of other non-oil commodities. The
heightened commodity price pressures led to a double-digit increase in domestic producer price inflation, which in
turn also drove up overall consumer price inflation to about 10% in the first half of 1980. Following another
occurrence of the El Niño weather disturbance in 1982-83, global food commodity prices escalated in the second
half of 1983, by more than 20%. Food price inflation in Singapore, however, rose less significantly, as keen
competition was seen among domestic retailers.

The relationship between PCPI and CPI inflation appeared to have weakened in the mid-1980s. For example, in
the period just preceding Singapore’s first major downturn in 1985, the fall in commodity price inflation, although
reflected in a decline in DSPI inflation, did not seem to affect overall CPI inflation. The latter continued to record
modest increases, supported by domestic sources of inflation such as higher asset prices and wage costs. The
subsequent fall in overall CPI inflation in 1986 was largely due to the collapse of the property market during the
recession, although it was also partly depressed by a subdued external inflationary environment following the
slump in world commodity prices. The double-digit decline in world food inflation due to abundant supplies
helped cap domestic food price inflation, while the easing of global oil prices further dampened prices of consumer
items with significant oil content.

The inflationary outcome in the 1990s was dominated by domestic factors, and it was a period that witnessed a
significant “decoupling” of the relationship between the PCPI inflation and the CPI inflation. (Chart B1) For
example, world commodity price inflation was generally benign in 1990-91, as the surge in oil prices following the
Persian Gulf War was offset by the collapse in non-oil commodity prices. In comparison, domestic CPI inflation
reached an eight-year record high, largely on account of domestic cost-push factors resulting from a tight labour
market.3/ Similarly, during the 1997-98 Asian crisis, the fall in domestic consumer price inflation was largely due
to the economic downturn, although the impact of the plunge in the world commodity prices also dampened CPI
inflation to some extent.

      Of the total increase in CPI inflation in 1990-91, only 0.4% point was attributed to external factors resulting from the oil price
      surge following the Gulf crisis, while the remaining 3% points were due to domestic cost-push factors resulting from a tight
      labour market.

Monetary Authority of Singapore                                                                                                 Economics Department
Macroeconomic Review, July 2002                                                                                            45

Notwithstanding the observations that were made earlier, a closer examination of the inflation of the sub-
components indicated that there were indeed some co-movements between changes in prices of crude oil and
domestic fuel-related consumer items during the 1990s, although the pass-through effects from world food
inflation on domestic food inflation were generally more muted. (Charts B2 and B3) For example, in 1990-91, the
steep hike in crude oil prices was passed on to consumers, resulting in double-digit increases in the costs of fuel-
related consumer items. Inflation of petrol and electricity tariffs in the CPI basket also rose sharply in the recent
oil price shock in 2000, contributing to more than 60% of the increase in overall CPI inflation during the year.
However, despite fluctuations in the world food inflation in the 1990s, domestic food inflation was low and stable,
such as during the mid-1990s, when world food inflation escalated by more than four times but domestic food
price increases remained at around 2%. The standard deviation of the domestic food inflation fell significantly
from about 5.0% during 1975-85 to only 1.3% during 1986-2000, while that of world food inflation remained high
at 13.1% in the latter period.

Information Content Test

Based on the stylised facts presented in the previous section, a series of Granger-causality tests were conducted
to determine the possible causality and feedback effects between rates of inflation in CPI, DSPI and PCPI. Then,
to examine the overall strength of the causality, a two-equation model was estimated using two-stage least
squares, to investigate the nature and consistency of the relationship between the inflation of PCPI, DSPI and CPI,
as well as the two sub-components of oil and food. To control for exchange rate effects, all the PCPI price series
were converted into domestic currency terms.4/ The analysis was based on quarterly data for the period Q1 1975
to Q4 2001, except for prices of oil-related items, which are only available from 1985 onwards.

Table B3 summarises the results of Granger-causality tests on inflation of overall PCPI, DSPI and CPI, as well as
the respective food and oil inflation. The results for the direction of causality are statistically consistent using a
10% level of significance for all the three cases and a lag length of 10 quarters. Changes in world commodity
prices precede (or Granger-cause) movements of the DSPI as well as CPI inflation. In addition, DSPI inflation was
found to precede CPI inflation. The same conclusions hold if the overall PCPI is replaced with either the IMF sub-
index for food or oil.

                                                 Table B3
                   Results of Granger-causality Tests on Inflation of PCPI, DSPI and CPI
                                                                   Q1 1975 - Q4 2001
                                               Overall PCPI           Overall DSPI             Overall CPI
                   Overall PCPI                      --                     !                       !
                   Overall DSPI                      X                      --                      !
                   Overall CPI                       X                       X                      --
                                                                   Q1 1975 - Q4 2001
                                                PCPI Food              DSPI Food                CPI Food
                   PCPI Food                         --                     !                       !
                   DSPI Food                         X                      --                      !
                   CPI Food                          X                      X                       --
                                                                   Q1 1985 - Q4 2001
                                                  PCPI Oil              DSPI Oil                 CPI Oil
                   PCPI Oil                          --                     !                       !
                   DSPI Oil                          X                      --                      !
                   CPI Oil                           X                      X                       --
                 ! indicates significant Granger-causality between the variables at the 10% level of significance
                 X indicates no significant Granger-causality between the variables at the 10% level of significance

      Singapore is assumed to be a price-taker in world markets.

Monetary Authority of Singapore                                                                          Economics Department
Macroeconomic Review, July 2002                                                                                                    46

Modelling Commodity Price Pass-through

This pattern of causality motivates the specifications of a two-equation simultaneous model linking firstly the pass-
through from PCPI to DSPI, and secondly the “mark-up” relationship between DSPI and CPI. Using a set of
independent instrument lists, it was found that the fit and diagnostics of the equations are robust and acceptable,
suggesting that the two-stage pass-through and cost mark-up specification are relevant in explaining the
relationship between PCPI and CPI in Singapore. (Table B4 summarises the estimation results of the model.)

                                                    Table B4
                          Estimation Results of the Two-equation Simultaneous Model
                                 Overall PCPI, DSPI and CPI (Q1 1975 - Q4 2001)
    Variable                                                           Coeff.        Std. Err.           t-stat.    p-value
    Dependent Variable: DSPI
    Instrument Lists: Lags of DSPI and PCPI
    Constant                                                           0.0174          0.3281            0.0530      0.9578
    DSPI(-1)                                                           0.5728          0.0579            9.8959      0.0000
    PCPI                                                               0.1799          0.0248            7.2666      0.0000
    Specification/Fit of the Model
           R-squared                                                                            0.9162
           Adjusted R-squared                                                                   0.9137
           Durbin-Watson                                                                        1.9514
           Std. Err.                                                                            2.1653
    Variable                                                           Coeff.        Std. Err.           t-stat.    p-value
    Dependent Variable: CPI
    Instrument Lists: Lags of CPI, DSPI, PCPI and Output Gap*
    Constant                                                           0.4588          0.1945            2.3593      0.0202
    CPI(-1)                                                            0.7675          0.0605            12.6835     0.0000
    DSPI(-1)                                                           0.0562          0.0213            2.6368      0.0097
    Specification/Fit of the Model
           R-squared                                                                            0.8880
           Adjusted R-squared                                                                   0.8847
           Durbin-Watson                                                                        2.0626
           Std. Err.                                                                            0.8815

                            PCPI Food, DSPI Food and CPI Food (Q1 1975 - Q4 2001)
    Variable                                                           Coeff.        Std. Err.           t-stat.    p-value
    Dependent Variable: DSPI Food
    Instrument Lists: Lags of DSPI Food and PCPI Food
    Constant                                                           0.2589          0.2654            0.9755      0.3317
    DSPI Food(-1)                                                      0.7152          0.0739            9.6796      0.0000
    PCPI Food                                                          0.0612          0.0221            2.7713      0.0067
    Specification/Fit of the Model
           R-squared                                                                            0.7294
           Adjusted R-squared                                                                   0.7213
           Durbin-Watson                                                                        1.9488
           Std. Err.                                                                            2.0872
    Variable                                                           Coeff.        Std. Err.           t-stat.    p-value
    Dependent Variable: CPI Food
    Instrument List: Lags of CPI Food, DSPI Food and PCPI Food
    Constant                                                           0.1943          0.3395            0.5724      0.5683
    CPI Food(-1)                                                       0.7250          0.1008            7.1917      0.0000
    DSPI Food                                                          0.3414          0.1223            2.7925      0.0062
    Specification/Fit of the Model
           R-squared                                                                            0.7294
           Adjusted R-squared                                                                   0.8480
           Durbin-Watson                                                                        1.9438
           Std. Err.                                                                            1.3387

  * The output gap is the difference between actual real GDP and potential GDP, expressed in percentage terms. This difference
    was estimated using an ideal band pass filter, assuming that business cycles (recessions/booms) in Singapore range from 3-20
    quarters in length.

Monetary Authority of Singapore                                                                           Economics Department
Macroeconomic Review, July 2002                                                                                                                      47

                                 PCPI Oil, DSPI Oil and CPI Oil (Q1 1985 - Q4 2001)
     Variables                                                                                Coeff.          Std. Err.          t-stat.   p-value
     Dependent Variable: DSPI Oil
     Instrument Lists: Lags of PCPI Oil
     Constant                                                                                 -0.0717          1.0729            -0.0668    0.9470
     DSPI Oil(-1)                                                                             0.1017           0.0578             1.7586    0.0838
     PCPI Oil                                                                                 0.7492           0.0436            17.1850    0.0000
     Specification/Fit of the Model
            R-squared                                                                                                   0.9564
            Adjusted R-squared                                                                                          0.9535
            Durbin-Watson                                                                                               1.9506
            Std. Err.                                                                                                   6.3975
     Variables                                                                                Coeff.          Std. Err.          t-stat.   p-value
     Dependent Variable: CPI Oil
     Instrument Lists: Lags of CPI Oil, DSPI Oil and PCPI Oil
     Constant                                                                                 -0.3910          0.8501            -0.4599    0.6472
     CPI Oil(-1)                                                                              0.5990           0.1046             5.7261    0.0000
     DSPI Oil                                                                                 0.1274           0.0291             4.3785    0.0000
     Specification/Fit of the Model
            R-squared                                                                                                   0.8427
            Adjusted R-squared                                                                                          0.8350
            Durbin-Watson                                                                                               1.7517
            Std. Err.                                                                                                   3.7132

To illustrate the dynamics of the model, Chart B4 shows the responses of the overall inflation of DSPI and CPI to
a one-time 20% shock to the PCPI inflation.5/ The results show that the pass-through effects of commodity price
inflation to DSPI inflation dominate that of CPI inflation. Specifically, the results suggest that a 20% shock in the
PCPI inflation will increase DSPI inflation by about 9% in the same quarter, and subsequently increase CPI
inflation by about 2.2% after two quarters.6/

                                                                            Chart B4
                                                            Responses of Overall DSPI and CPI Inflation
                                                           to a One-time Shock in Overall PCPI Inflation
                                  % Change from baseline


                                                                                  Overall DSPI


                                                                                       Overall CPI

                                                                -1     0           1           2          3        4
                                                                           Quarters after initial shock

Charts B5 and B6 show the respective responses of domestic oil and food inflation to a one-time 20% shock to
the world price inflation of oil and food. The results indicate that that a one-time 20% shock in the world crude
oil inflation will increase DSPI oil inflation by about 19% in the same quarter, and subsequently by about 16% in
the domestic petrol inflation. However, the impact of the pass-through on domestic food component is relatively
smaller. A 20% shock in the PCPI food inflation will only increase DSPI food inflation by about 5% in the same
quarter, and subsequently by about 4% in the CPI food inflation.

       The timing of the shock was selected at a point where the baseline predictions were very close to the actual value of the
       dependent variable.
       There is a one quarter lag in the impact of the PCPI inflation on the CPI inflation because of the specification of the equations,
       which incorporates a one period lag between the DSPI and CPI.

Monetary Authority of Singapore                                                                                                   Economics Department
Macroeconomic Review, July 2002                                                                                                                                      48

                     Chart B5                                       Chart B6
      Responses of DSPI and CPI Oil Inflation to Responses of DSPI and CPI Food Inflation to
        a One-time Shock in PCPI Oil Inflation    a One-time Shock in PCPI Food Inflation
                                     20                                                                             5
                                                                                                                                     DSPI Food
                                                   DSPI Oil
            % Change from baseline

                                                                                           % Change from baseline

                                                         CPI Oil                                                    2
                                                                                                                                                       CPI Food


                                     -5                                                                             -1
                                          -1   0     2     3       4   5   6   7   8   9                                 -1      0        1        2         3
                                                    Quarters after initial shock                                              Quarters after initial shock

Consistent with the findings presented in the stylised facts earlier, the pass-through of world crude oil prices was
indeed relatively higher compared to that of food. The weaker relationship between food commodities and final
consumer items could be attributed to a number of factors. There have been major technological advancements
in the food distribution system, which have reduced costs. There have been increased competitive pressures
among domestic food wholesalers and retailers, with a growing number of large supermarket or hypermarket
chains emerging in the local retail food industry. Direct sourcing of cheaper consumer food items from non-
traditional producers has allowed many of these supermarket chains to cut down on middlemen costs. Besides,
these large retailers can enjoy economies of scale as they can purchase in large quantities, passing on further cost
savings to consumers.

Concluding Remarks

In this study, the relationship between inflation of world commodity, domestic producer as well as consumer price
inflation over the past two and a half decades was assessed. Consistent with most of the past empirical findings
in other countries, the results indicate that the pass-through of overall commodity prices to domestic inflation is
relatively muted, particularly in the period after the mid-1980s. This is not surprising given that the weights of
commodity-related goods accounted for only about 24% of the 1997-98 CPI basket, as compared to almost 33%
of the CPI basket two decades ago. In addition, the exchange rate policy that was adopted in the early 1980s
was also instrumental in dampening imported inflation from the 1980s onwards. The significant reduction in the
volatility of the world commodity prices in recent years could be attributed to the increased efficiency of the
commodity exchanges. Other factors such as improved supply-side management, and technological advancement
have lowered production costs to some extent. Nevertheless, while the link between commodity prices and
inflation has weakened in the last decade or so, ED continues to monitor developments in world commodity prices
closely, especially that of hard commodities such as oil.


Angell, W.D. (1987) “A commodity price guide to monetary aggregate targeting,” Speech before the Lehrman
Institute, December 10, 1987.

Aguais, S.D., DeAngelis, R.A. and Wyss, D.A. (1988) “Commodity prices and inflation,” Data Resources U.S.
Review, June, pp. 11-18.

Bloomberg, S.B. and Harris, E.S. (1995) “The commodity-consumer price connection: fact or fable?” Federal
Reserve Bank of New York, Economic Policy Review, October, pp. 21-38.

Boughton, J. and Brannson, W.H. (1988) “Commodity prices as a leading indicator of inflation,” NBER Working
Paper Series No. 2750.

Monetary Authority of Singapore                                                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                                                                                     49

Durand, M. and Boland, S. (1998) “Are commodity prices leading indicators of OECD prices?” OECD, Department
of Economics and Statistics Working Paper No. 49.

Friedman, J.H. (1984) “A variable span smoother,” Department of Statistics, Stanford University, Technical Report,

Furlong, F. and Ingenito, R. (1996) “Commodity prices and inflation,” Federal Reserve Bank of San Francisco
Economic Review, 2, pp. 27-47.

Garner, C.A. (1995) “How useful are leading indicators of inflation?” Federal Reserve Bank of Kansas City
Economic Review, 80(2), pp. 5-22.

Herrero, A.G. and Thornton, J. (1997) “World commodity prices as a forecasting tool for retail prices: evidence
from the United Kingdom,” IMF Working Paper WP/97/70.

Webb, R.H. (1989) “Commodity prices as predictors of aggregate price change,” Federal Reserve of Richmond
Economic Review, July/August, pp. 3-11.

Whitt, J.A. (1988) “Commodity prices and monetary policy,” Working Paper 88/8, Federal Reserve Bank of Altanta,

3.2 Domestic Price Pressures
Signs of bottoming out have recently emerged in
               the labour market.                                          Chart 3.8
                                                                Unemployment Rate & Retrenchments
The most recent data show that Singapore’s labour                                                   Retrenchments (LHS)
market remained weak in Q1 2002. This is to be
                                                                                            Manufacturing     Services

                                                                                                                                                    Per Cent, Seasonally Adjusted
                                                                                10                                                             5
expected, as a recovery in labour demand typically lags a                                                           Unemployment
pickup in output by 1-2 quarters. Nevertheless, some                            8
                                                                                                                     Rate (RHS)
signs of levelling off have emerged. The seasonally

adjusted unemployment rate edged up to 4.5% in                                  6                                                              3
March, from a revised 4.4% in December 2001.
(Chart 3.8) At the same time, retrenchments have fallen                          4                                                             2

to 4,900, about half its peak in Q4 2001, but still higher
than pre-recession levels of less than 2,000. This                              2                                                              1

reflects a substantial drop in retrenchments in both the
                                                                                0                                                               0
manufacturing and services sectors.                                                  1997       1998        1999     2000       2001       2002Q1

Employment, however, fell sharply in Q1 2002, by
                                                                                                     Chart 3.9
13,800, following declines averaging 13,200 in the past
                                                                                                Employment Changes
two quarters. (Chart 3.9) The sharp contraction in
                                                                                                  Manufacturing           Services
overall employment mainly reflected a steep drop in                                               Construction            Overall
construction employment, as activity in the sector slowed                        40

further. Amongst the services sectors, employment                                30
continued to trend down, except in the community,                                20
social and personal services sector. The financial and

business services (F&B) sector was the worst hit,                                10

reflecting the restructuring efforts of newly merged local                           0
banks, as well as moves by foreign financial institutions                       -10
to lay off staff as IPO and M&A activities remained weak.
In the manufacturing sector, however, the contraction in                        -20

employment has moderated considerably, in line with the                         -30
gradual pickup in the global electronics industry.                                       1998       1999           2000         2001        2002Q1

Monetary Authority of Singapore                                                                                     Economics Department
Macroeconomic Review, July 2002                                                                                                       50

      Wages have responded fairly flexibly,…

Nominal wages excluding employers’ CPF contribution                                           Chart 3.10
responded relatively quickly in this recession, contracting                             Average Nominal Wages*
on a q-o-q SA basis in Q1 2001, the first quarter of                             3300
economic contraction. In Q2 and Q3, wages rose                                   3200
slightly, before falling sharply in Q4 to record a peak-to-
trough decline of more than 5%. Subsequently, wages                              3100

                                                                SA Levels (S$)
bottomed out and rose in Q1 2002. (Chart 3.10) The
adjustment in wages this time round has been much
quicker and sharper compared with the previous                                   2900
business cycles in 1985-86 and 1998-99, when wages
began falling only into the third quarter of economic
contraction, and ultimately saw peak-to-trough declines                          2700
of less than 2%. (Table 3.1) ED has recently completed
an econometric study to assess wage flexibility in the                                  1998   1999   2000      2001       2002Q1
Singapore economy over time and we will now highlight         * ED, MAS internal estimates
some of its key findings.

  …and have been found to be among the most
responsive in a cross-country comparative study.

The study validates the relevance of the so-called
“Phillips Curve” equation for explaining wage movements                      Table 3.1
in the Singapore economy. The Phillips curve is a              Peak-to-Trough Comparisons of Labour
hypothesis about the negative relationship between              Market Indicators Across Downturns
wage growth and unemployment over the business                                                        1985      1998      2001
cycle. In particular, when the economy is expanding,                                                    -1.7     -1.8      -5.26/
                                                                (excl employers’ CPF)1/
firms bid up wages at a faster rate for a given level of        Real Wages
unemployment; when the economy is contracting, wages                                                    -0.8     -1.1      -5.16/
                                                                (excl employers’ CPF)2/
rise more slowly. The predictive abilities of the equation      Employment Changes3/                  -135.9    - 4 2.1   - 4 0.36/
are illustrated in Chart 3.11, which shows an extremely         Unemployment Rate4/                      3.6       2.7       2.16/
                                                                Output                                  -5.3      -3.1      -7.7
good fit on the historical data, verifying that headline
                                                                Productivity Growth5/                    N.A.     -3.2      -5.3
wages have responded fairly flexibly to changes in              Memo:
underlying business and economic conditions. Note that          Wages
the equation can explain market determined wage                 (incl employers’ CPF)1/               -13.6      -8.9      -6.06/
movements in 2001.                                              Real Wages
                                                                (incl employers’ CPF)2/               -12.2      -8.5      -5.66/
                                                              1/ ED, MAS internal estimates.
Using a methodology built around a common Phillips            2/ ED, MAS internal estimates. The figures are deflated
Curve specification, wage flexibility in Singapore is            by consumer prices.
compared against that in other countries. (Table 3.2)         3/ The figures are in thousands.
Of the countries examined, wages in Singapore were            4/ The figures are percentage point change from the
among the most flexible. The equation suggests that           5/ Average YOY growth in productivity during the period
wages will fall by 2.7% points for every 1% point                of YOY decline in GDP.
increase in the unemployment rate. In Korea and               6/ The figures for these series show the decline ‘to date’.
Taiwan, wages are predicted to decline by a smaller           Note: All these series have been seasonally adjusted,
                                                                     except for the series on employment changes and
1.8% and 2.5% points on average, respectively, for a
                                                                     productivity growth.
1% point increase in the unemployment rate. The
sensitivity of wages to movements in unemployment is
even smaller for the major OECD countries – less than
1% point. Econometric estimates of wage flexibility in
the economy as a whole, which take into account the
impact of wage growth on inflation and the subsequent
wage-price dynamics in the economy, yielded similar

Monetary Authority of Singapore                                                                       Economics Department
Macroeconomic Review, July 2002                                                                                                                   51

 Real wages have also responded faster this time

Real wages excluding employers’ CPF contribution have
also adjusted more sharply during the current downturn.
On a SA basis, real wages posted a peak-to-trough
decline of 5.1% in the 2001 downturn, compared with                                                     Chart 3.11
declines of about 1% in the earlier recessions. In fact,                                     The Phillips Curve Equation for
the market-determined component of nominal wages,                                                       Singapore
i.e. wages excluding employers’ CPF contribution,                                          15
adjusted fairly quickly this time round, in the absence of                                                                             Actual
additional cuts to the CPF rate. In particular, ED                                         10
estimates show that about two-fifths of the fall in real

                                                                            YOY % Growth
wages took place in Q1 2001 itself. In comparison, real                                     5
wages in 1998 and 1985 came down largely on account
of the sharp (non-market) cuts made to the CPF                                              0
employers’ contribution rate, as part of the package of                                                                           Fitted
off-Budget measures introduced at that time. Further,                                       -5
these changes only occurred three to four quarters after
the onset of these earlier recessions.
                                                                                             1984   1987   1990     1993   1996     1999 2001Q4

                                                                         Note: (i) ‘Actual’ refers to observed data on y-o-y growth
 …which means that the initial impact of labour                                      of overall wages.
 market adjustments was absorbed in changes in                                 (ii) ‘Fitted’ are their predicted values from a
                                                                                     standard Phillips Curve equation (of the form:
                 productivity.                                                       ∆W = constant + A*unemployment rate
                                                                                             + other control variables fitted on
With the rapid adjustment of real wages from Q1 2001,                                           Singapore data over the period
businesses could afford to hold on to their employees                                           Q1 1984 to Q4 2001)
during the initial stages of the current downturn.
Employment started to decline only in the middle of
2001, lagging the fall in output by about two quarters,
and productivity consequently fell sharply, by around 3%
in H1 2001. Thus, the greater flexibility in real wages
                                                                                         Table 3.2
and its subsequent impact on businesses’ labour demand
                                                                           Peak-to-Trough Comparisons of Labour
decisions can explain the differences in responses of the
                                                                            Market Indicators Across Downturns
labour market quantity variables, including employment                                                                      Normalised
(smaller contraction to date), the unemployment rate                                                         Labour          Economic
(smaller increase) and productivity (sharper decline)                                                        Market           System
across the cycles.18                                                                                          Wage           Flexibility
                                                                                                           Flexibility*        Index
                                                                                                                            (US = 1.00)
 Singapore’s labour market is relatively flexible,                          Singapore                             2.72           2.99
though there remains more scope for variation in                            Germany                               0.83           0.85
         the number of hours worked.                                        France                                0.50           0.53
                                                                            United Kingdom                        0.81           0.81
                                                                            Italy                                 0.94           0.83
Table 3.3 summarises the empirical evidence for the                         Japan                                 0.83           1.30
different dimensions of labour market flexibility in                        United States                         0.87           1.00
Singapore. While it appears that the labour market is                       Korea                                 1.81           1.93
fairly flexible when it comes to pricing workers, there                     Taiwan                                2.49           2.71
could possibly be more scope for variation in the number                   * Calculated as the negative of the unemployment
of hours worked during the cycle, as unit labour costs                       coefficient in the short-run Phillips Curve equation
                                                                           Note: Larger absolute values of both indices imply
will then adjust faster and further.
                                                                                 greater flexibility

      These stylised comparisons are unlikely to change significantly, on the basis of the baseline projections for the various labour
      market indicators into 2002.

Monetary Authority of Singapore                                                                                     Economics Department
                                                             Table 3.3: Empirical Evidence on Labour Market Flexibility in Singapore


                                                         •   Singapore has the highest flexibility in the labour market, as well as in the economy as a whole when compared with the OECD
                                                             countries and Taiwan.
                                                         •   Singapore has avoided introducing wage rigidity by eschewing legislation and institutions that distort labour markets, such as
                                                             laws that make it costly or difficult to retrench workers, minimum wages or income security programs. Recommendations by
                                                             the National Wage Council (NWC) have also been shown to be generally in line with economic forces.

                                                         •   The AVC, which includes the annual variable bonus and the annual wage supplement (AWS), was introduced after the 1986/87
                                                             recession in an attempt to increase nominal wage flexibility.
                                                         •   By 2000, 83.6% of all firms have set aside some portion of wages as the AVC.

Monetary Authority of Singapore
                                    Annual Variable
                                                                                                                                                                                                Macroeconomic Review, July 2002

                                                         •   Despite the large proportion of firms participating in the AVC program, its impact on the size of the total variable component
                                  Component of Wages
                                        (AVC)                has been fairly small. The share of the AVC in total wages rose from 11% in 1987 to peak at 16% in 1996, lower than the
                                                             targeted 20%.
                                                         •   Our computations show that AVC did improve wage flexibility as it accounted for almost half of the decline in wage growth
                                                             between 1997 and 1998.

                                                         •   The MVC was implemented in 1999.
                                    Monthly Variable     •   Evidence of the contribution of the MVC to the flexibility of Singapore's labour market is inconclusive as the implementation of
                                  Component of Wages         MVC is fairly recent and data are available only after 1998.
                                        (MVC)            •   Using anecdotal evidence, we estimate that economy-wide wages set aside under this program was no more than 1% as of
                                                             2000. Thus, the MVC is unlikely to have contributed much to wage flexibility in the current recession.

                                                         •   There appears to be mixed signals on the true contribution or role of the flexible component of wages.
                                                         •   The simple Phillips Curve specification, which does not include an explicit role for the AVC or the MVC, has explained the data
                                  Flexible Wage System       very well. Moreover, it has not shown any indication of a change in the underlying wage determination process over the years.
                                                         •   An alternative interpretation could be that the reduction in the AVC is largely substituting for wage reductions that would have
                                                             occurred in the absence of the flexible wage system.

                                  Length of Work-Week    •   While the number of hours worked adjusted quickly, it was not a major shock absorber of output fluctuations.

                                                         •   The impact of output declines is initially absorbed by falls in productivity declines and then by declines in employment.
                                     Employment &        •   The pace of employment adjustment in the last two cycles was more rapid compared with that seen during the 1985 recession.
                                      Productivity       •   The variability of employment has increased, for a given pattern of output fluctuations. The phenomenon is not unique to
                                                             Singapore, having been observed in industrial countries such as the US.

                                                         •   Retrenchment rates are very low relative to resignation and recruitment rates.
                                                         •   While the data are extremely cyclical, it is evident that there has been a steady increase in retrenchment rates between the
                                     Retrenchments           cycles, particularly in the manufacturing sector, possibly reflecting increased job turnover arising from shorter product cycles
                                                             and the impact of globalisation.

Economics Department
Macroeconomic Review, July 2002                                                                                                                                                                                 53

3.3 Inflation in Singapore
Consumer prices have adjusted to a lesser degree                                                      Chart 3.12
           in the current recession.                                                       Real GDP Growth and CPI Inflation
                                                                                                5                                                                  15

Overall consumer prices in the Singapore economy                                                4                                                                  12
declined more sharply by 0.9% y-o-y in Q1 2002, after                                           3                                                                  9
contracting by 0.2% in Q4 2001. Nonetheless, some

                                                               YOY % Growth

                                                                                                                                                                                               YOY % Growth
                                                                                                2                                                                  6
incipient signs of bottoming out in the price declines of                                                              Real GDP
various key consumer items have emerged, with the CPI
                                                                                                1                                                                  3
rising steadily on a m-o-m SA basis in recent months.                                           0                                                                  0

                                                                                                -1             CPI                                                 -3
With overall prices expected to turn around on a                                                -2
sequential basis in Q2 2002, prices have trended                                                -3                                                                 -9
downwards for about three quarters in the latest                                                 1984       1987     1990     1993      1996      1999      2002
downturn, as compared to four quarters in the earlier
recessions in 1985 and 1998. (Chart 3.12) The peak-to-
trough decline was about 0.9% this time round, as
compared to larger contractions of 2% and 1.6%
respectively in the previous downturns. The smaller                                                                   Chart 3.13
adjustment in consumer prices reflects the differences in                                                               DSPI
the external inflationary environment (as discussed                                             130                                                                20

earlier in Section 3.1) and in the domestic conditions
                                                              Index, Seasonally Adjusted

influencing costs.                                                                              120
                                                                                                                               DSPI YOY %

                                                                                                                               Growth (RHS)

                                                                                                                                                                                                 YOY % Growth
                                                                                                110                                                                0

   The DSPI has declined fairly mildly, and most
                                                                                                100                                                                -10
           recently has levelled off,...
                                                                                                                              DSPI (LHS)*
                                                                                                 90                                                                -20
The cost of intermediate inputs, as measured by the
Domestic Supply Price Index (DSPI), experienced a                                                80                                                                -30
shorter and more muted response during the current                                                   1984    1987    1990      1993     1996      1999     2002
recession.    The mild pickup in external inflationary
                                                            * ED, MAS internal estimates.
pressures led to a levelling off in the DSPI in recent
months, falling less severely by 3.2% y-o-y in Jan-May,
compared with a larger contraction of 6.6% in Q4 2001.
                                                                                                                Chart 3.14
(Chart 3.13)
                                                                                                            Components of DSPI*
                                                                                                105                                                          250
In particular, there was a strong rebound in global oil                                                             Chemicals &
prices that saw the mineral fuel component in the DSPI                                                                Chemical
                                                                                                                   Products (LHS)
                                                                   Index, Seasonally Adjusted

                                                                                                                                                                        Index, Seasonally Adjusted

                                                                                                100                                                          200
rising by about 26% since the beginning of the year. In
addition, prices of other raw materials and intermediate
                                                                                                 95                                                          150
goods also recorded a slight pickup recently, supported                                                                          Mineral Fuel
by the improvement in industrial production activity.                                                                               (RHS)

(Chart 3.14) Prices of the consumer-related items, which                                         90                                                          100

are aggregated under “miscellaneous manufactures” in
the DSPI, have remained largely unchanged since the                                              85
                                                                                                                                      Crude Materials

beginning of the year.                                                                                                                    (LHS)
                                                                                                 80                                                          0
                                                                                                     1997    1998      1999     2000       2001     2002 May

                                                            * ED, MAS internal estimates.

Monetary Authority of Singapore                                                                                                  Economics Department
Macroeconomic Review, July 2002                                                                                                                                                       54

     …reflecting adjustments that had already taken
           place in domestic cost components.

The downward adjustment in other domestic cost
components faced by producers, including unit labour
costs (ULC) of the manufacturing sector, only started in
                                                                                                       Chart 3.15
Q4 2001, lagging the fall in output by about three
                                                                                          Unit Labour Costs and Unit Business
quarters. In comparison, ULC of the manufacturing
                                                                                           Costs in the Manufacturing Sector
sector adjusted more quickly in the mid-1980s and 1998,
beginning to turn down within two quarters of the                                                                 110
                                                                                                                                               Unit Business Costs,
decline in economic activity. This difference reflects the                                                                                        Manufacturing

                                                                                     Index, Seasonally Adjusted
sharper cyclical decline in productivity in 2001 noted
earlier. In 2001, manufacturing productivity fell by 14%,
compared with flat growth on average in the past two
recession years, even as manufacturing activity suffered                                                           90

a much more severe contraction of 12% compared with                                                                                     Unit Labour Costs,
an average decline of 4.0% in the earlier recession years.                                                         80
The cuts in CPF rates in 1985 and 1998 would also have
contributed to further reductions in business costs in the
earlier downturns. However, projections indicate that                                                              70
                                                                                                                       1984   1987   1990   1993    1996     1999 2002Q1
ULC would decline into 2002, as wages remain fairly flat
while productivity picks up moderately.

Business services costs came down fairly early in 1985
and 1998, ahead of the introduction of the off-Budget
measures.19 Consequently, overall unit business costs
(UBC)20 recorded peak-to-trough contraction of some
15% on average during previous downturns. In the
current business cycle, UBC has only fallen by 5.5% since                                                                            Chart 3.16
Q4 2001. (Chart 3.15) Here again, the scope for                                                                                         CPI
reducing variable business costs was somewhat limited,                                                            103                                               4.5
as many of the measures introduced in the 1998 crisis                                                                                        CPI (LHS)
remained in place into 200121. In fact, the UBC index
                                                                               Index, Seasonally Adjusted

                                                                                                                  102                                               3.0
was at a lower level at the beginning of 2001 than it was                                                                        CPI YOY %
just prior to the Asian crisis.                                                                                                 Growth (RHS)
                                                                                                                  101                                               1.5
                                                                                                                                                                           Per Cent

                                                                                                                  100                                               0.0
 Inflationary pressures remain subdued, although                                                                                               3M-SAAR
     the CPI has risen mildly since early 2002.                                                                    99

With various external and domestic costs showing signs                                                            98                                                -3.0
of a turnaround, the CPI in Singapore has also risen                                                                1997      1998   1999   2000    2001     2002 May

mildly. While the headline CPI inflation rate continued to
record an average decline of 0.8% y-o-y in Jan-May, the
SA index rose by 0.4% over the same period, after
hitting a trough in January. The main support for the

         These included utility and distribution costs. In addition, property-related taxes had come down as property prices had fallen
         early in the cycle.
         UBC comprises ULC, government fees and services costs.
         Examples of measures that remain in force include the concession on foreign worker levies, the permanent removal of electricity
         taxes, the reduction of JTC rentals by 20-30% and corporate and property tax cuts. Stamp duty on most transactions, except
         on property, was also permanently removed.

Monetary Authority of Singapore                                                                                                             Economics Department
Macroeconomic Review, July 2002                                                                                                                                                                55

price increase came from private road transport costs,
which contributed to more than half of the increase in                                                                      Chart 3.17
overall consumer prices, with consumer services and                                                                   MAS Underlying Measure*
cyclical-sensitive items accounting for the remaining 40%                                                     106                                                         3

and 10% respectively. The rate of price increases, as                                                                                MAS Underlying
measured by the 3M-SAAR (annualised, seasonally

                                                                           Index, Seasonally Adjusted
                                                                                                                                     Inflation (RHS)
                                                                                                              104                                                         2
adjusted, 3-month moving span rate) also picked up for

                                                                                                                                                                                YOY % Growth
the first time in April, and rose further in May, after
falling for nine consecutive months. (Chart 3.16)                                                             102                                                         1
Meanwhile, the MAS underlying CPI has trended up since                                                                                             MAS
January. (Chart 3.17)                                                                                                                            CPI (LHS)
                                                                                                              100                                                         0

Higher private road transport costs were due to an
increase in car and petrol prices, as well as car insurance                                                   98                                                          -1
premiums. Car prices rose, reversing the price declines                                                         1997         1998    1999    2000      2001       2002 May

recorded over most of last year. This was mainly                        * ED, MAS internal estimates.
underpinned by a pickup in demand for cars, as
reflected by higher COE premiums. (Chart 3.18) In
addition, there were two consecutive hikes to petrol                                                                             Chart 3.18
pump prices in Mar-Apr, as well as a significant upward                                                                    Private Road Transport
adjustments in car insurance premiums, which further                                                          130                                                       75
boosted overall private road transport costs.22                                Index, Seasonally Adjusted

                                                                                                              120                                                       60
                                                                                                                              Other Private Road              Petrol
Costs of some services items have likewise risen. In                                                                           Transport (LHS)                (LHS)

                                                                                                                                                                               S$ Thousands
particular, various healthcare services such as specialist                                                    110                                                       45
medical treatment and dental treatment saw relatively
large increases in March and April respectively. In                                                           100                                                       30
addition, cooked food prices rose, mostly on account of
more expensive meals at hawker stalls.                                                                         90                                COE                    15
In recent months, the prices of several cyclical-sensitive                                                     80
retail items have shown signs of a turnaround. These                                                                1997     1998    1999    2000      2001     2002May

include various mass-market retail items such as
clothing, personal care, personal effects and recreation.
(Chart 3.19)
                                                                                                                                  Chart 3.19
Nonetheless, various government-initiated and other                                                                        Cyclical-sensitive Items
related measures have helped cap consumer price
increases. Specifically, electricity tariffs were reduced by                                                  105
8.7% in Jan 2002, facilitated by the decline in global oil
                                                                                 Index, Seasonally Adjusted

                                                                                                                                Clothing        Care
prices in H2 2001. In addition, NTUC FairPrice’s price-                                                       102
cutting package implemented since Aug 2001 continued                                                                                           Recreation and
to hold down prices of several essential consumer items,                                                       99
namely that of non-cooked food and non-durable
household goods.
                                                                                                                   1997       1998    1999      2000      2001         2002 May

      Premium rates in the general insurance industry have been increasing steadily as rising payouts and costs exceeded premiums.

Monetary Authority of Singapore                                                                                                               Economics Department
Macroeconomic Review, July 2002                                                                                                                56

4 Outlook
4.1 External Outlook23
     The external outlook has improved markedly.

The outlook for the OECD economies has improved
significantly since September 11, and there is cautious
optimism of a sustained recovery in the industrial
countries this year. As inventories have been largely
depleted, there is considerable scope for a new output-
investment cycle to commence.         The key question
remains one of timing and strength of the recovery.
Businesses, pressured by weak profits, appear to be
waiting for signs of sustained consumer spending before
they raise output, hire more workers and order new
capital equipment. In the meantime, consumer spending
may have been restrained somewhat by the high level of
indebtedness (especially among US households), reduced
wage increases and rise in unemployment. Current
concerns about accounting irregularities found in some
large US companies (the latest cases being WorldCom
and Xerox) have affected the stock market, and could
slow down the recovery, but are not likely to derail it                                   Chart 4.1
altogether. Accordingly, the OECD economies are likely                        US ISM Purchasing Managers' Index
to continue to recover, but at a slower pace than that of                            80

previous upturns.

Global growth leadership will continue to rest with the
US. The Euro-zone is expected to recover at a gradual                                60

pace, with not much scope for policy measures as
monetary policy may be turning restrictive while fiscal                              50

deficits for some countries are nearing limits imposed by
the EU’s Stability and Growth Pact. The Japanese                                     40

economy remains mired in severe structural difficulties,
with very limited policy options compounding the                                     30
                                                                                      1981   1984   1987   1990    1993   1996   1999   2002
problem of a lack of consensus on policy actions. The                                                                                   Jun

recent strengthening of the Japanese Yen may also crimp
GDP and corporate earnings growth post-Q1 2002.

     The US economic recovery remains on track,
      although there are some short-term risks.

While the US economy may have hit a speed bump in Q2
following a slowdown in consumer spending, a double
dip recession remains a low probability event at this
point. A range of recent indicators has tended to
support the case for sustained growth ahead: the
Institute for Supply Management's (ISM) Manufacturing
PMI rose to 56.2 in June, up from 55.7 in May
(Chart 4.1), unemployment claims fell in June, and

       This section is contributed by the External Economies Division, ED, MAS.

Monetary Authority of Singapore                                                                                   Economics Department
Macroeconomic Review, July 2002                                                                                                                                     57

the Leading Indicator rose by 0.4% in May, after a 0.3%
drop in April. Coupled with a robust housing sector, the
continued easy monetary and fiscal policies should help
ensure that the US economy would be able to grow at a
moderate pace over the next few quarters.

Consumer confidence eased a little in June, but remained
at a relatively high level. The Michigan Consumer
Confidence Index (final reading) fell by a smaller 4.5                        Chart 4.2
points to 92.4 in June than earlier estimated, while the         Conference Board Index of Consumer
Conference Board Index was off 3.9 points to 106.4.                          Confidence
(Chart 4.2) Even at these reduced levels, the consumer                                160
confidence indices have stayed well above the lows
during the recessions of the early 1980s and 1990s.                                   140

Accordingly, the dip in personal consumption spending in

                                                                   Index (1985=100)
recent months is likely to be temporary.
While the macroeconomic indicators have so far been
generally supportive of continued economic expansion,                                  80

short-term risk to US GDP growth lies in the recent                                    60
plunge in the equity markets. Investors have reacted
negatively to a string of corporate profit warnings as well                            40
as disclosures of significant accounting irregularities that                             1981    1984   1987   1990   1993    1996   1999        2002
had inflated past profits. If sustained, a downward
movement of stock prices could undermine consumer
and business confidence and lead to cutbacks in
expenditure due to negative wealth effects.

Longer-term concerns in the US centre on the household.
Years of robust spending and conducive interest rate
conditions have led to low household savings rates and
record debt-to-income levels. At the national level, these
excesses were reflected in the current account deficit of
                                                                                                      Chart 4.3
3.9% of GDP in 2001, close to a record 4.2% of GDP in
                                                                                              US Current Account Deficit
2000. (Chart 4.3) As these excesses have not been
                                                                                      100                                                   1
sufficiently corrected by the relatively shallow recession,                                      US Current Account
it is unclear how much further consumers can continue                                   0
                                                                                                    Deficit (LHS)
to spend without severely impairing their balance sheet,
and also how much longer the rest of the world will
                                                                                                                                                 % of Nominal GDP

                                                                                      -100                                                  -1
                                                                US$ Billion

continue to satisfy the US’ strong appetite for foreign
funding. Concerns about financial imbalances, the slow                                -200                                                  -2
                                                                                                               % of Nominal
rise in corporate profitability and accounting irregularities                                                   GDP (RHS)
                                                                                      -300                                                  -3
are some of the factors that have kept foreign investors
away from the US market this year.                                                    -400                                                  -4

                                                                                      -500                                          -5
        A slower recovery is expected for the                                                1980 1983 1986 1989 1992 1995 1998 2001

              Euro-zone economies,…

Domestic demand remained weak in the Euro-zone even
as exports helped to lift GDP growth in the first quarter.
Recent signs of a rebound in output and improved capital
goods orders, however, offer hopes for an eventual
recovery in corporate investment. Production rose in Q1
2002, the first time in five quarters, while inventories
continued to be drawn down. (Chart 4.4) Going
forward, European exporters will continue to benefit from

Monetary Authority of Singapore                                                                                   Economics Department
Macroeconomic Review, July 2002                                                                                                                                                 58

the global economic upturn this year, but economic
activity may be dragged down by the modest recovery in                                            Chart 4.4
domestic demand. Overall GDP growth this year is                                       Euro-zone Industrial Production
expected to be broadly similar to last year’s 1.5%.                                               and PMI
Employment growth is expected to rise in the second half                               8                                                          64
of this year, which will help to support consumer                                                     Industrial
                                                                                                   Production Excl
spending.                                                                              6            Construction                                  60

                                                                YOY % Growth (3MMA)

                                                                                                                                                       Index (50=Zero Growth)
                                                                                       4                                                          56
Given the hawkish tone of the ECB, the market has been
preparing for a rate hike, perhaps even before the US                                  2                                                          52
Fed moves to raise interest rates. However, recent
inflationary developments have surprised on the                                        0                                                          48
downside; the preliminary estimate for inflation stood at                                     Manufacturing
1.7% in June, dipping below the 2% target for the first                               -2         (RHS)                                            44

time in two years. Recent gains in the Euro have also                                 -4                                                          40
helped to allay inflationary fears. Furthermore, oil prices                                 1997 1998      1999       2000     2001     2002Jun
have stabilised at around the US$25 level. Fears of an
imminent rate hike have therefore subsided, and rate
hikes, if any this year, are likely to be limited to 25-50

       …while Japan is on a cyclical rebound.                                                     Chart 4.5
                                                                                       Bank of Japan's Tankan Surveys
Driven by a rise in exports, and perhaps a weaker Yen in                               20
Apr-May, the June BOJ Tankan survey of business
                                                                                                    All Industry
sentiment showed a record 20-point rise in the key
diffusion index for large manufacturers, and the first                                  0
                                                                Index (0=Neutral)

increase since September 2000.        (Chart 4.5)    Big                                                 Non-Manufacturing
companies also expect to see higher sales and profits                                                    (Principal Industry)

later this year though they do not foresee increases in

fixed investment spending as yet.        Labour market
conditions are anticipated to remain weak.                                            -40
                                                                                                                         (Principal Industry)
While the results of the June Tankan survey are
encouraging, the recent sharp appreciation of the Yen                                 -60

and decline in the stock market could dampen the
                                                                                            1997        1998      1999       2000      2001     2002 Q2

optimistic outlook. Furthermore, a slowdown in the US
economy after a brisk first quarter would also affect
growth prospects throughout Asia. Still, after a severe
downturn last year, and despite ongoing debt-deflation
concerns, the Japanese economy appears to be on a
cyclical rebound in 2002.
                                                                                                      Chart 4.6
                                                                                            Korea’s GDP and Consumption
 Sustained regional recovery largely depends on                                       15

        the strength of the US rebound.
China continues to stand out as the fastest growing                                    5
                                                              YOY % Growth

economy in Asia. GDP growth this year is widely
expected to be above last year’s 7.3% due to a                                         0

combination of firm domestic spending, rising FDI inflows
and strong export growth. While there are risks to this                                -5
favourable outlook (for example, rising unemployment                                  -10
due to the restructuring of state-owned enterprises, high
levels of NPLs and some uncertainties concerning the                                  -15
                                                                                           1990    1992        1994   1996      1998    2000    2002Q1

Monetary Authority of Singapore                                                                                           Economics Department
Macroeconomic Review, July 2002                                                                                                                     59

political leadership transition), China is expected to be
able to eventually grow its way out of these constraints.                                             Chart 4.7
                                                                                                 Taiwan Export Orders
Driven by similar factors, namely, strong household                                  30
spending, a boom in housing and construction and rising
exports, the South Korean economy is expected to grow                                20

                                                               YOY % Growth (3MMA)
by 6-7% this year, the highest in Asia after China.
(Chart 4.6) Indeed, the recent surge in house prices has
raised concerns about overheating, and was in part a                                     0
factor behind the decision by the BOK to hike interest
rates by 25 bps in May.                                                              -10

Taiwan is also experiencing an export-led recovery but                               -20

its domestic economy is not as robust as Korea’s – both
unemployment and NPLs are at near record high levels.                                    1990          1993          1996        1999     2002May
(Charts 4.7 and 4.8) Finally, among the Asian NIEs, the
prospects for the Hong Kong economy continue to be
hampered by sluggish domestic demand as a result of
falling asset values, a deterioration in public finances and
                                                                                                      Chart 4.8
rising unemployment.
                                                                                                  Unemployment Rate
The ASEAN-4 economies are expected to grow faster in
2002 compared to last year, supported by rising exports.                             8
Private consumption, which has helped to sustain growth                              7

of the larger ASEAN countries last year, is likely to                                                     Korea
continue to underpin growth in 2002-03. As exports and

incomes rise, business confidence will improve. Although                             5

private investment is expected to remain soft for the rest                           4
of the year, reflecting both excess capacity in the
property and manufacturing sectors as well as reduced                                                                       Taiwan
FDIs into the region, business spending will likely begin                            2

to pick up more strongly in 2003.                                                    1
                                                                                      1995      1996   1997   1998    1999   2000    2001 2002May

Monetary Authority of Singapore                                                                                      Economics Department
Macroeconomic Review, July 2002                                                                                          60

4.2 Domestic Output
     Recent indicators suggest a continued                             A systematic approach towards interpreting
     recovery in the domestic economy,…                                       global electronics indicators…

 The latest Advance GDP Estimates suggest a                          The pattern of recovery in the domestic economy
 continued strong growth momentum in the                             hinges on the external environment, and in
 Singapore economy. Real GDP expanded by 10%                         particular on the pace and strength of the upturn in
 (on a q-o-q SAAR basis) in Q2 2002, on the heels                    the global electronics industry.     ED has been
 of an 8.4% expansion in the preceding quarter.                      tracking a series of indicators pertaining to the
 Against the backdrop of a more favourable external                  state of the global electronics industry.       The
 environment, the support provided by domestic                       information content in these indicators is
 macroeconomic policies, as well as the strong                       summarised in this Review, to provide a better
 recovery momentum in both Q1 and Q2 this year,                      picture of the strength and sustainability of the
 GDP growth for 2002 is likely to come in at the                     current upturn.
 upper half of the 2-4% range.

                                                                      …suggests that the initial rebound has been
  …even as the dynamics contributing to the                                   stronger this time round.
 strong growth momentum may have changed
                 somewhat.                                           Table 4.1 compares the values of 19 electronics-
                                                                     related indicators at the same stage of the recovery
 Most recently, the factors contributing to the                      cycle across the three global electronics downturns
 growth momentum have appeared to change                             in 1996, 1998 and 2001. The troughs24 of the
 somewhat. As mentioned in Chapter 1, growth in                      three periods were identified to be in Q3 1996, Q2
 Q4 2001 and Q1 2002 was partly due to strong                        1998 and Q3 2001 respectively. To capture the
 expansions in the global electronics industry, which                strength of the initial rebound, the level of the
 benefited our domestic manufacturing and trade-                     indicator two quarters after the trough (in Q1 1997,
 related services cluster. In comparison, the strong                 Q4 1998 and Q1 2002) was compared to its level at
 growth in Q2 2002 was largely due to a surge in                     the trough for each downturn. This was achieved
 pharmaceutical output, which is typically volatile                  by normalising the index for each series to take a
 and has limited spillovers to the rest of the                       value of 100 at the trough. The indicators were
 economy.                                                            then grouped according to the extent of recovery
                                                                     they suggested. As shown in Table 4.1, in the
 Meanwhile, the electronics segment in the                           current downturn, only 16% of the indicators had
 manufacturing sector, which was a key driver of                     index values below 100 two quarters from the
 growth in the past, has shown some signs of                         trough, as compared to 21% in 1998 and 1996.
 moderation. The slower activity in the global                       Also, more than half the indicators hit an index
 electronics supply chain has also dampened activity                 above 110 this time round, which was substantially
 in the trade-related services cluster.                              more than in the two previous recessions, thereby
                                                                     signalling a stronger initial rebound.

     IT final demand is key to a broad-based                         The sharp recovery profile that is reflected in the
       recovery in the domestic economy.                             initial strong momentum in Singapore’s domestic
                                                                     manufacturing output is not unexpected. The
 Hence, for a more broad-based and sustained                         worldwide outsourcing trend has resulted in
 recovery in the second half of this year, the                       electronics production chains that are vertically
 domestic electronics sector needs to be supported                   integrated across countries.      It follows that
 by continued strengthening of global final IT                       inventory adjustments in the US immediately
 demand. In the next section, we will take a closer                  translate into slowing or rising demand in
 look at the current state of play in the global                     Singapore. The domestic electronics industry has
 electronics industry, including an assessment of the                thus become more responsive, exhibiting both a
 prospects for final demand in the IT markets.                       sharper decline and a steeper rise compared with
 Implications on the various domestic sectors will be                the previous downturns.
 discussed in subsequent sections.

       Trough is defined as the quarter with the steepest y-o-y decline in global chip sales growth.

Monetary Authority of Singapore                                                                        Economics Department
 Macroeconomic Review, July 2002                                                                                  61

                                                   Table 4.1
                          Extent of Recovery in the Index Values of the IT Indicators
                                 vis-à-vis the Trough across Three Downturns
                                                     < 100  100-     110-    120-       130-    140-     ≥ 150
                                                             109     119      129       139      149
                                                        2001 downturn [Q1 2002 vis-à-vis Q3 2001 (trough)]
Percentage of Total Indicators                        16%     32%      32%     16%        0%        5%      0%
Singapore’s Electronics Domestic Exports
Singapore’s Index of Industrial Production (IIP)
Singapore’s IIP (electronics)
Singapore’s IIP (non-electronics)
Global Chip Sales - Worldwide
Global Chip Sales - Americas
Global Chip Sales - Europe
Global Chip Sales - Japan
Global Chip Sales - Asia Pacific
Book-to-Bill Ratio of Semiconductor Equipment
US New Orders for Electronics
US New Orders for Computers
US New Orders for Communications Equipment
US New Orders to Inventory Ratio
US Shipment to Inventory Ratio
US Shipment for Electronics
US Pte Fixed Investment in Info Processing
US Pte Fixed Investment in Computers & Peripherals
                                                        1998 downturn [Q4 1998 vis-à-vis Q2 1998 (trough)]
Percentage of Total Indicators                        21%     74%      5%       0%        0%        0%       0%
Singapore’s Electronics Domestic Exports
Singapore’s Index of Industrial Production (IIP)
Singapore’s IIP (electronics)
Singapore’s IIP (non-electronics)
Global Chip Sales - Worldwide
Global Chip Sales - Americas
Global Chip Sales - Europe
Global Chip Sales - Japan
Global Chip Sales - Asia Pacific
Book-to-Bill Ratio of Semiconductor Equipment
US New Orders for Electronics
US New Orders for Computers
US New Orders for Communications Equipment
US New Orders to Inventory Ratio
US Shipment to Inventory Ratio
US Shipment for Electronics
US Pte Fixed Investment in Info Processing
US Pte Fixed Investment in Computers & Peripherals
                                                        1996 downturn [Q1 1997 vis-à-vis Q3 1996 (trough)]
Percentage of Total Indicators                        21%     47%      21%      5%        0%        0%       5%
Singapore’s Electronics Domestic Exports
Singapore’s Index of Industrial Production (IIP)
Singapore’s IIP (electronics)
Singapore’s IIP (non-electronics)
Global Chip Sales - Worldwide
Global Chip Sales - Americas
Global Chip Sales - Europe
Global Chip Sales - Japan
Global Chip Sales - Asia Pacific
Book-to-Bill Ratio of Semiconductor Equipment
US New Orders for Electronics
US New Orders for Computers
US New Orders for Communications Equipment
US New Orders to Inventory Ratio
US Shipment to Inventory Ratio
US Shipment for Electronics
US Pte Fixed Investment in Info Processing
US Pte Fixed Investment in Computers & Peripherals

 Monetary Authority of Singapore                                                            Economics Department
Macroeconomic Review, July 2002                                                                                          62

 However, there is still some way to go before                          Some mild signs of retraction have emerged
     reaching the pre-recession levels.                                      in the global electronics scene.

 To better assess how sustained the recovery in the                   Indeed, the outlook for a sustained recovery in
 global electronics industry might be, the earlier                    global electronics demand has become more
 comparisons were repeated using the peak25 of the                    uncertain in the light of recent developments.
 cycle as a reference point. The levels of the                        There has been evidence that suggests some
 indicators five quarters after the peak (in Q1 2002,                 moderation in global electronics demand, although
 Q1 1999 and Q2 1997) are now measured against                        most of the electronics indicators still point to
 their values at the peak, where the index of each                    continued growth in Apr-May 2002.
 series takes a value of 100. If an indicator takes a
 value greater than 100, it has risen beyond its level                Global chip sales, a key barometer for global
 at the peak five quarters ago. As before, the                        electronics demand, grew by an average of 3% (on
 indicators are classified according to the extent of                 a m-o-m SA basis) in Apr-May 2002, significantly
 recovery they display. The peaks of the three                        slower than the 12% expansion (q-o-q SA) in Q1
 periods are identified to be Q4 2000, Q4 1997 and                    2002. Some of the major electronics firms have
 Q1 1996.                                                             also indicated that their Q2 revenues are likely to
                                                                      be below expectations. For instance, Intel, the
 Table 4.2 clearly shows that comparing the initial                   world’s largest microprocessor maker, announced
 stage of the downturn with the peak yields                           lower revenue targets for Q2 2002, citing weaker-
 somewhat less optimistic results. In the previous                    than-expected demand and slower sales of
 downturns, a substantial number of indicators                        microprocessors.       Similarly, rival company
 (79% for 1998 and 68% for 1996) returned to, or                      Advanced Micro Devices said that its Q2 results
 surpassed, their pre-recession levels five quarters                  would be weaker than its forecast. Both companies
 after the peak.     In comparison, none of the                       have also slashed the prices of their
 indicators exceeded their peaks in the current                       microprocessors.
 recovery cycle.     In fact, in the two earlier
 downturns, almost all the indicators regained at                     DRAM (128MB) prices, which reached a peak of
 least 90% of their pre-recession levels, compared                    US$4.2 in March 2002, have since corrected by
 with only a quarter of the indicators this time                      33% to US$2.8 in July 2002. (Chart 4.9) Industry
 round.                                                               analysts have attributed a fair proportion of the
                                                                      recent decline in DRAM prices to weak demand.
 The exceptional technology boom in 2000 can                          Although DRAM prices seemed to have stabilised, it
 explain these results. Having fallen from such                       is uncertain how the recent antitrust probe by the
 inflated levels, the global electronics industry is still            US Department of Justice into alleged anti-
 some      way     off   the    pre-recession     levels              competitive practices among DRAM chipmakers will
 (notwithstanding the strong initial rebound). The                    impact on DRAM prices going forward. Recent
 volatile swings in the IT sector in the past focus                   events in the global DRAM industry, such as the
 attention on the sustainability of the current strong                collapse of merger talks between major players
 momentum, i.e., whether the recovery will level off                  Hynix and Micron, have tended to exert downward
 prematurely before reaching pre-recession levels.                    pressure on DRAM prices, which would in turn hurt
                                                                      the profitability of DRAM manufacturers.

       Peak is defined as the quarter preceding the first y-o-y decline in global chip sales growth.

Monetary Authority of Singapore                                                                        Economics Department
 Macroeconomic Review, July 2002                                                                                   63

                                                   Table 4.2
                          Extent of Recovery in the Index Values of the IT Indicators
                                  vis-à-vis the Peak across Three Downturns
                                                     < 50   50-59   60-69    70-79     80-89    90-99     ≥ 100
                                                         2001 downturn [Q1 2002 vis-à-vis Q4 2000 (peak)]
Percentage of Total Indicators                        11%      5%     16%      26%        16%     26%        0%
Singapore’s Electronics Domestic Exports
Singapore’s Index of Industrial Production (IIP)
Singapore’s IIP (electronics)
Singapore’s IIP (non-electronics)
Global Chip Sales - Worldwide
Global Chip Sales - Americas
Global Chip Sales - Europe
Global Chip Sales - Japan
Global Chip Sales - Asia Pacific
Book-to-Bill Ratio of Semiconductor Equipment
US New Orders for Electronics
US New Orders for Computers
US New Orders for Communications Equipment
US New Orders to Inventory Ratio
US Shipment to Inventory Ratio
US Shipment for Electronics
US Pte Fixed Investment in Info Processing
US Pte Fixed Investment in Computers & Peripherals
                                                         1998 downturn [Q1 1999 vis-à-vis Q4 1997 (peak)]
Percentage of Total Indicators                         0%      0%       5%      0%         0%     16%        79%
Singapore’s Electronics Domestic Exports
Singapore’s Index of Industrial Production (IIP)
Singapore’s IIP (electronics)
Singapore’s IIP (non-electronics)
Global Chip Sales - Worldwide
Global Chip Sales - Americas
Global Chip Sales - Europe
Global Chip Sales - Japan
Global Chip Sales - Asia Pacific
Book-to-Bill Ratio of Semiconductor Equipment
US New Orders for Electronics
US New Orders for Computers
US New Orders for Communications Equipment
US New Orders to Inventory Ratio
US Shipment to Inventory Ratio
US Shipment for Electronics
US Pte Fixed Investment in Info Processing
US Pte Fixed Investment in Computers & Peripherals
                                                            1996 downturn [Q2 1997 vis-à-vis Q1 1996 (peak)]
Percentage of Total Indicators                       5%         0%      0%       0%        11%      16%      68%
Singapore’s Electronics Domestic Exports
Singapore’s Index of Industrial Production (IIP)
Singapore’s IIP (electronics)
Singapore’s IIP (non-electronics)
Global Chip Sales - Worldwide
Global Chip Sales - Americas
Global Chip Sales - Europe
Global Chip Sales - Japan
Global Chip Sales - Asia Pacific
Book-to-Bill Ratio of Semiconductor Equipment
US New Orders for Electronics
US New Orders for Computers
US New Orders for Communications Equipment
US New Orders to Inventory Ratio
US Shipment to Inventory Ratio
US Shipment for Electronics
US Pte Fixed Investment in Info Processing
US Pte Fixed Investment in Computers & Peripherals

 Monetary Authority of Singapore                                                              Economics Department
Macroeconomic Review, July 2002                                                                                                                 64

  End-user demand is crucial in determining the
     momentum of recovery going forward.                                                        Chart 4.9
                                                                                            128MB DRAM Prices
The initial support to the turnaround in the electronics                          20

industry was more a result of inventory depletion than a
pickup in final demand. Chart 4.10 shows that the                                 16
depletion in inventory of electronics products in the US

                                                              US$ Per Chip
was steeper this time round. In response to the low                               12
level of inventory, manufacturers in general have been
ramping up production throughout the electronics supply                           8
chain since Q4 last year, instead of further depleting
stocks.    Based on data from the past two global                                  4

electronics downturns in 1996 and 1998, manufacturers
typically began to increase production after the level of                         0
inventory fell by about 2-4% from the peak.                                       2000Jun    2001Jan       Jun          2002Jan          Jul*
Subsequently, the rate of decline in inventory levelled off   * Average of 1-12 July 2002
within the next two quarters. However, in this current
downturn, global chip sales (a proxy for electronics
manufacturing activity) only started to register sequential
increase in Q4 2001, when inventory of electronics in the
US had fallen by about 13%. This was due to the huge                       Chart 4.10
excess supply that was built up during the IT euphoria in     Index of US Inventory for Electronics
2000. Nonetheless, the rate of decline in inventory levels        (Excluding Semiconductors)
has moderated somewhat in Q1 2002, suggesting that                                100
inventory levels are unlikely to decline much further, and                                                                  1996
production is likely to increase on a sustained basis if                          95
demand conditions hold up.                                                                                                        1998
                                                              Index (Peak =100)

Moving ahead, a sustained recovery will be heavily
predicated on an upturn in end-user demand. As it is the                          85
demand for final goods that will set off activities in the                                                       2001
entire supply chain from the production of basic chip                             80
materials to the assembling and packaging of final end
products, the following detailed study on end-user                                75
                                                                                        1     2        3     4      5        6       7
demand would provide more insight into the near-term                                               Quarters After Peak
outlook for the global electronics industry.

        What comprises end-user demand?

“End-user demand” essentially refers to consumption and
investment spending on final electronics products (“end
products”), which can be broadly classified into three
main     categories:   computers,     telecommunications
equipment, and consumer electronics. End products are
distinguished from electronics components which are
intermediate parts, such as disk drives, semiconductors
and printed circuit boards, used in the final assembly of
end products.

  The telecommunications segment has become
              more important…

The three main categories of end products identified
earlier accounted for 84% of the global market for
semiconductor usage in 1999. Chart 4.11 shows that

Monetary Authority of Singapore                                                                            Economics Department
Macroeconomic Review, July 2002                                                                                                                 65

while computers are currently the largest use for
semiconductor applications, the communications market
is growing in importance. This is partly due to the                                      Chart 4.11
burgeoning     cellphone     market   and     increasing                     Share of Semiconductor Applications
semiconductor content in these phones to accommodate                                      Markets
the implementation of 2.5G and 3G networks worldwide.                                                     Worldwide
Cahners In-Stat predicts that the communications market
will increase by 4% points between 1999 and 2003, as
its growth outpaces the other semiconductor applications
                                                                                               1999                           2003
                                                                                                      18.0%                            22.0%
                                                                                                          6.0%   45.0%
                                                                          49.0%                                                          6.0%

     …and the US is the largest consumer of IT                                                           9.0%
              products and services.                                                                  17.0%                  19.0%

Due to the difficulty of obtaining the relevant data,                                    Communications   Industrial & Instrument    Consumer
information and communications technology (ICT)                                          Auto             Government                 Computer
expenditure26 is used as a proxy for electronics end-user               Source: Cahners In-Stat (extracted from “Electronics
demand. ICT expenditure may in fact be more reflective                          Journal”, Mar/Apr 2001)
of end-user demand (than say, investment in PCs), as it
encompasses a wider scope of technology products,
including services and software. As shown in Chart 4.12,                               Chart 4.12
the US is the world leader in ICT spending, followed by                  ICT Spending: Top 10 Countries in 2000
Japan and Germany. The dominance of developed                                           1000

economies in the top ten consumers is not unexpected.                                   800
More notably, findings from the recent 2002 issue of
                                                                          US$ Billion

“Digital Planet”27 reveal that while the US remains the                                 600

largest ICT spending nation, its share of global ICT                                    400
spending has continued to decline as other countries join
the ICT bandwagon. China, in particular, has emerged                                    200
as the world’s fastest growing ICT spending country with                                  0
a compound annual growth rate of 27%. Developing

                                                                                                us il
                                                                                                er n

                                                                                                  C e



                                                                                                C ly

                                                                                               A raz

                                                                                               G pa

countries in Eastern Europe and other parts of the world






also recorded significant ICT spending increases,
suggesting that the current “hot markets” for ICT                                                             1995        2000

demand can be found in the emerging countries, more                     Source: “Digital Planet 2000: The Global Information
so than the mature, developed nations.28                                         Economy” (Executive Summary), and World
                                                                                 Bank data.

      ICT expenditures include external spending on information technology (“tangible” spending on information technology products
      purchased by businesses, households, governments, and educational institutions from vendors or organisations outside the
      purchasing entity), internal spending on information technology (“intangible” spending on internally customised software,
      capital depreciation, and the like), and spending on telecommunications and other office equipment. Data on countries’ ICT
      expenditure are provided by the World Information Technology and Services Alliance (WITSA) and the International Data
      Corporation (IDC).
      “Digital Planet 2000: The Global Information Economy”, published by the World Information Technology and Services Alliance
      (WITSA), based on research conducted by the International Data Corporation (IDC).
      Nevertheless, the US still remains an important market. For example, Alan Greenspan observed in relation to the US that
      “Reports from businesses around the country suggest that the exploitation of available networking and other information
      technologies was only partially completed when the cyclical retrenchment of the past year began. Many business managers
      still hold the view…that less than half of currently available new and, presumably profitable, supply-chain technologies have
      been put into use”. Testimony before the Joint Economic Committee, US Congress, 17 Apr 2002.

Monetary Authority of Singapore                                                                                   Economics Department
Macroeconomic Review, July 2002                                                                                                                      66

                                              Table 4.3
              Extent of Recovery in the Index Values of the Final Demand IT Indicators
                             vis-à-vis the Peak across Three Downturns
                                  50-      60-     70-    80-   90-    100- 110- 120- 130-                                    140-      150-
                                  59       69      79     89    99     109     119     129    139                             149       159
                                                   2001 downturn [Q1 2002 vis-à-vis Q4 2000 (peak)]
US New Orders for
US New Orders for
Communications Equipment
US Pte Fixed Investment in Info
US Pte Fixed Investment in
Computers & Peripherals
                                                   1998 downturn [Q1 1999 vis-à-vis Q4 1997 (peak)]
US New Orders for
US New Orders for
Communications Equipment
US Pte Fixed Investment in Info
US Pte Fixed Investment in
Computers & Peripherals
                                                   1996 downturn [Q2 1997 vis-à-vis Q1 1996 (peak)]
US New Orders for
US New Orders for
Communications Equipment
US Pte Fixed Investment in Info
US Pte Fixed Investment in
Computers & Peripherals

Notwithstanding the emergence of China and other
economies as consumers of IT products, the US still
remains an important market for Asia’s electronics
exports. Morgan Stanley estimates that as much as 40%
of Asia’s total GDP growth in 2000 came from IT exports
to the US.29 Although intra-Asia exports have been
increasing over the years, much of these exports in fact                            Chart 4.13
go into supply chains that ultimately feed demand in the               Investment in Information Processing
US.                                                                      (IP) and Computer & Peripherals
                                                                                                                                   US Investment
                                                                                                                                   in Computers
     The nascent recovery in end-user demand…                                             10
                                                                                                                                   & Peripherals
                                                                        QOQ SA % Growth

In the array of IT indicators used in the earlier analysis,                                5
four of them – namely, US new orders for PCs, new
orders for communications equipment, US private fixed                                      0
                                                                                                                     US Investment
investment in information processing and in computers                                                                in Information
and peripherals – are most reflective of final demand                                      -5
trends. As of Q1 2002, these indicators have all picked
up from the levels seen at the trough. When compared                                      -10
to the peak levels, Table 4.3 shows that five quarters                                          1996   1997   1998   1999   2000     2001   2002Q1
after the peak, the two US IT investment and two US
new orders indicators have recovered 60-80% and 80-
100% of their pre-recession levels respectively. In
comparison, in the two earlier downturns, all four
indicators have recovered fully and overshot their peak
levels, some by as much as 50%.

       Quoted in The Economist, “Falling (again)”, 5 July 2001.

Monetary Authority of Singapore                                                                                       Economics Department
Macroeconomic Review, July 2002                                                                                                                       67

The apparent pickup in electronics end-user demand is
reflected in a turnaround in the growth of these
indicators in Q1 2002. For instance, US IT investment in
information processing grew by 4.4% on a q-o-q SAAR
basis in Q1 2002, after four quarters of contraction.
(Chart 4.13) US new orders for communications
equipment also turned in sequential growth during the
quarter. (Chart 4.14) These point towards a nascent
recovery in electronics end-user demand.

 …needs to be boosted by a rebound in corporate                                                             Chart 4.14
                   profits…                                                                          US New Orders for PCs and
                                                                                                     Communications Equipment
Looking ahead, the continued recovery of end-user                                             30

demand in the US is likely to be underpinned by two
factors. First, a recovery in US corporate profits will be                                                                            US New Orders
instrumental in encouraging companies to increase IT

                                                                            QOQ SA % Growth
                                                                                                                                         for PCs
spending. Currently, business spending accounts for
80% of total IT demand in the US. Chart 4.15 shows                                             0
that profits tend to lead the recovery of US investment
spending by one to two quarters. Analysts generally                                           -10
                                                                                                                  US New Orders for
expect a mild recovery in this year’s corporate profits,                                                           Communications
which could provide some impetus for IT spending later                                        -20                    Equipment
in the year. Nevertheless, in light of the Enron and                                          -30
WorldCom debacles, the recent spate of accounting                                                   1996      1998            2000           2002Q1
frauds in American companies has cast doubt on the
reliability of profits data, and may jeopardise the actual
pace of recovery in business profits going forward.

 …as well as the introduction of new applications.                                      Chart 4.15
                                                                          US Corporate Profits and IT Investment
Second, new technological innovations will help to                                            30
spearhead the recovery in end-user demand, and this
                                                                                                                            US IT
will ultimately translate into stronger demand down the                                       20
supply chain. Of the three main categories of end
                                                                            YOY % Growth

products, only consumer electronics shows promise in                                          10

this regard.                                                                                    0

While the PC segment is expected to be supported by                                           -10                                US
replacement demand due this year, fewer software                                                                               Profits
upgrades, and near-saturation points of the consumer                                          -20
and corporate markets will limit growth to some extent.30
Some analysts noted that the traditional three-year                                           -30
                                                                                                    1994   1996        1998       2000       2002Q1
upgrade cycle has extended to 40 months or more, with
the bulk of upgrades expected to take place only in
2003. In addition, the explosive demand for PCs driven
by the desire to access the Internet in the 1990s is
unlikely to be repeated.      Windows XP, which was

      A rebound in PC sales might not occur until next year because corporations already have their budgets in place and are unlikely
      to spend more on PCs this year. As Michael Dell, CEO of Dell Computer said: “Until they see their own profits resuming in
      growth, there's not a great appetite on the part of CFOs and CEOs to upgrade.”

Monetary Authority of Singapore                                                                                         Economics Department
Macroeconomic Review, July 2002                                                                                                68

launched by Microsoft late last year, has yet to                 entertainment gadgets, such as high-definition TV,
create a significant impact on PC demand                         DVD recorders, and Super Audio CD (an emerging
compared to the launch of Windows 95.              At            next-generation audio format), this year and
present, there are still no signs of an upturn in the            beyond. Nevertheless, as consumer electronics is a
sluggish PC market, with global shipments                        relatively small segment, accounting for less than
remaining flat in Q1 2002.         Industry analysts             20% of semiconductor end-use, the spin-offs
generally expect the PC segment to turn in modest                generated down the supply chain remain limited in
growth this year. For instance, International Data               the short term.
Corp (IDC) expects the IT market to rebound by
mid-2002, with PC sales growing by 4.7% (or 139.7
million units) in 2002, supported by strong demand                Recovery in end-user demand is likely to be
from the Asia-Pacific region. In a separate forecast                          modest this year,…
by Gartner, PC shipments are expected to rise by
4% in 2002, with most of the increase coming in                  Thus, for the year as a whole, end-user demand is
the fourth quarter.                                              expected to turn in fairly modest growth as the
                                                                 relatively subdued expectations for corporate profits
In the telecommunications segment, cellphone                     are likely to cap the recovery in IT investment,
sales should improve because of the launch of new                while the lack of “killer applications” in the PC and
technologies such as the rollout of 2.5-3G                       telecommunications segments will imply only a slow
networks. However, major telecom manufacturers                   recovery in consumer demand. According to IDC,
in the world are still in the red. Nokia, the world’s            global IT spending is projected to increase by less
top cellphone maker, has cut its sales growth                    than 5% in 2002. Two industrial surveys released
forecast for H2 2002 from more than 15% to less                  in end-May31 – one by Goldman Sachs and Gartner,
than 10%, citing a longer-than-expected market                   and another by Merrill Lynch – provided further
recovery. Ericsson has also reported profit losses,              evidence of shrinking corporate IT budgets which
and has expressed pessimism about its business                   would limit the growth of final demand.
outlook for the year.         According to Gartner,
worldwide mobile phone unit sales experienced its
first dip in history last year, after a compound                      …translating to a moderate growth of
annual growth rate of close to 60% between 1996                           domestic electronics exports.
and 2000. As the telecom industry consolidates
further, it is likely to grow at a moderate pace in
                                                                 The performance of Singapore’s domestic
the near term.
                                                                 manufacturing sector is tied very closely to end-
                                                                 user demand in the US, since it remains the top
The consumer electronics segment appears to be
                                                                 export market for electronics products, accounting
the only bright spot. DVD players and digital
                                                                 for 27% of domestic electronics exports to the
cameras sold well in Q1 2002. As noted by the
                                                                 world.    Even though Singapore has gradually
President    of    the   Semiconductor      Industry
                                                                 shifted towards the production of intermediate
Association (SIA) in March 2002, “strong consumer
                                                                 high-end products to the regional countries, the
spending for mobile phones, DVDs, and digital
                                                                 demand for these products ultimately depends on a
cameras continued to move chip sales slightly
                                                                 turnaround in the demand for final goods in the US.
upward”. In April’s consumer electronics industry
                                                                 Besides directly exporting intermediate products to
report, Prudential Financial highlighted the current
                                                                 the US, part of Singapore’s domestic exports to the
“exciting stage of product development”, with the
                                                                 East Asian economies is also meant for final
merging of storage and file access technologies in
                                                                 consumption in the US. Some rough estimation
the computer industry with the micro technologies
                                                                 using the International Input-Output Table32
of the consumer electronics industry – also known
                                                                 suggests that about 25% of Singapore’s exports to
as “digital convergence”.           Indeed, “digital
                                                                 East Asia will eventually be exported to the US for
convergence” is expected to spur the introduction
                                                                 final consumption.
of new consumer electronics devices and digital

      “Gartner and Goldman Sachs US IT Spending Confidence Survey Indicates Weak Sentiment and Flat Spending Through 2002”,
      Gartner Press Release, 22 May 2002; and “Evidence of falling technology budgets grows”, Financial Times, 30 May 2002.
      “Asian International Input-Output Table 1995”, Institute of Developing Economies, Japan External Trade Organisation, 2001.

Monetary Authority of Singapore                                                                      Economics Department
Macroeconomic Review, July 2002                                                                                                                          69

 Chart 4.16 depicts the close relationship between
 Singapore’s electronics exports and the US IT investment
 cycle, while Chart 4.17 shows the same close relation
 using US new orders for PCs and communications
 equipment – which are also indicative of US final
 demand for electronics.

                                                                                 Chart 4.16
  Growth of the manufacturing sector in 2002 will                    Singapore’s Electronics Exports and
  be supported by the non-electronics segment,…                              US IT Investment
                                                                             40                                                     60
                                                                                                               US Investment in
 Hence, the expected mild recovery in end-user demand                                                          PCs & Peripherals
 will translate into modest growth in the domestic                           20
 electronics segment this year. In comparison, the non-

                                                              YOY % Growth

                                                                                                                                          YOY % Growth
 electronics segment is expected to remain robust, with
 increased production and export volumes in the chemical                      0                                                     0

 industry, supported by capacity expansions.                                              US Investment
                                                                                          in Information
                                                                             -20                            Singapore's             -30
                                                                                               (LHS)        Electronics
   …which has limited spillovers to the rest of the                                                        Exports (LHS)

             manufacturing sector…                                           -40
                                                                                   1996          1998         2000           2002


 However, the spin-offs from a chemical-led recovery are
 somewhat more limited compared to an electronics-led
 one. First, the pharmaceutical industry does not rely on
 supporting industries in Singapore as it requires very
 little domestic inputs. In comparison, the electronics
 industry draws a substantial amount of its inputs from
 supporting industries, which account for around 20% of
 Singapore’s manufacturing value-added. Second, a hefty
 99% of pharmaceutical sales is exported directly to
 markets in the US and UK, and does not contribute to                                   Chart 4.17
 further downstream activities in Singapore.             In                   Singapore’s Electronics Exports
 comparison, only 78% of the electronics industry’s sales                       and US New Orders for PCs
 are generated overseas. The remaining 22% are sold to                        and Communications Equipment
 downstream plants, as well as for final consumption in                      40                                                     60
 Singapore. In addition, given its highly capital-intensive
 nature, the pharmaceutical segment does not generate
 much employment, accounting for only 0.6% of total
                                                                             20                                                     30
                                                                                                                      US New
                                                              YOY % Growth

                                                                                                                                          YOY % Growth

 manufacturing employment. This compares with 30%                                                                    Orders for
                                                                                                                     PCs (RHS)
 and 37% from the electronics and electronics supporting                      0                                                     0
 industries respectively. Hence, we expect the overall                                    Singapore's Electronics
 manufacturing sector to post moderate growth this year.                                      Exports (LHS)
                                                                             -20                                                    -30
                                                                                                     US New Orders for
                                                                                                     Equipment (RHS)
           …as well as the services sector.                                  -40                                                    -60
                                                                                   1996          1998         2000           2002

 Likewise, the services sector is unlikely to benefit much
 from the surge in pharmaceutical output. This is in
 contrast to an electronics-led recovery, which will
 generate spin-offs to both the domestic manufacturing-
 related and hub-related segments of the trade-related
 services cluster. Along with a chemical-led recovery in
 manufacturing, growth in the services sector is expected

Monetary Authority of Singapore                                                                            Economics Department
Macroeconomic Review, July 2002                                                                                                   70

to be modest this year. In particular, the continued              registered last year. The recent announcement of
weakness in financial services will somewhat                      a 10% rebate on all bills at the PSA cargo
dampen the overall services growth.                               terminals, as well as the halving of handling fees
                                                                  for empty containers for the period July 2002 to
                                                                  June 2003 are also expected to raise traffic over
 Trade-related activities in H2 2002 are likely                   the next 12 months, with the latter yielding
   to benefit from the improvement in the                         significant cost savings for shipping lines using PSA
            external environment.                                 for their empty box transhipment.33

Whilst the moderation in global electronics activity              Over the medium term, PSA will also benefit from
has recently led to a general slowdown in growth                  greater port business as its policy shifts towards
momentum of the trade-related cluster, a modest                   allowing shipping lines to run their own dedicated
uptick in global electronics demand going forward                 berths, and new operators to compete alongside
is still expected to translate into a mild recovery in            PSA and Jurong Port, which will encourage major
the cluster in the latter part of the year. Both air              shipping lines to hub at PSA.
and sea transport activities will grow in tandem
with the pickup in the domestic manufacturing
sector. At the same time, hub-related activities will               Likewise, the tourism-related cluster could
be boosted by the continued growth in                                also see some moderate improvement,…
manufacturing activity and trade in the region.
                                                                  Similarly, the tourism-related cluster is likely to
                                                                  continue expanding moderately this year, in line
   Port competition is unlikely to derail the                     with the gradual strengthening of the region’s
recovery in the trade-related services cluster.                   economic growth.34 Business visitor arrivals will
                                                                  also provide support due to the larger number of
Apart from cyclical factors, hub-related transport                conferences and events35 that are to be held in
services may be affected by regional port                         Singapore this year.
competition which has intensified since 2000 when
Maersk Sealand announced the shift of its
operations to Port Tanjung Pelepas (PTP). In                       …though domestic-oriented activities may be
addition, Taiwan’s largest shipping line, Evergreen                 constrained by the weak labour market…
will shift one million TEUs to PTP from August
2002. Nevertheless, this is unlikely to have a                    The domestic-oriented services cluster is likely to
significant impact on the recovery in trade-related               turn in marginal growth this year, capped by weak
services this year, as the shift is expected to affect            employment conditions and wage restraints. With
transhipment cargo only. Domestic and re-exports                  employment conditions only expected to pick up
cargo are unlikely to be significantly affected, as               gradually in H2, business in the retail sector could
manufacturers and trading companies based in                      remain slack for most part of this year.
Singapore could switch to using the services of
other shipping lines.                                             Indeed, the Q2 Business Expectations Survey
                                                                  indicated poor business sentiments in the domestic
Further, the Port Authority of Singapore has                      wholesale and retail industries over the next six
expressed confidence that the gradual recovery in                 months. (Chart 4.18) Some segments of the retail
local exports, as well as the support from the                    industry may however benefit from a small increase
strong China transhipment through Singapore in                    in retail spending in the months prior to the raising
recent months, will contribute towards reversing                  of the GST from 3% to 5% in January 2003.
the 8.9% decline in container cargo volumes

      According to a Business Times article dated 5 July 2002, empty containers account for about 15% of PSA’s Singapore
      The importance of economic growth and exchange rate fluctuations in determining tourist arrivals into Singapore was
      highlighted in the June 2001 MAS Quarterly Bulletin.
      Some of the mega events expected this year include CommunicAsia 2002, GlobalTRONICS 2002, and Global Franchising, which
      could attract up to 73,000 visitors. In fact, around 41% of the hoteliers expect these mega events to contribute to higher hotel
      occupancy rates and revenues in the next six months, according to the latest Business Expectations Survey compiled by DOS.

Monetary Authority of Singapore                                                                         Economics Department
Macroeconomic Review, July 2002                                                                                                                                           71

 Meanwhile, growth of the real estate industry is expected
 to slow down further in 2002, dragged down by a
 lacklustre property market.         Although the private
 residential property market has seen a significant pickup
 in buyer demand since Q4 last year, the high transaction
 volumes witnessed over the past two quarters may not
 be sustainable, particularly if the various price and non-
 price incentives offered recently by developers are
 withdrawn.      Activity in the market for commercial
 properties is expected to lag the economic recovery, as
 companies are likely to take up additional space only
 after firmer signs of recovery emerge.                                                                                       Chart 4.18
                                                                                                                     Business Expectations Survey
     …and the financial services industry is likely to                                                                      Retail                      Real

                                                                             Net Balance of Firms (Per Cent)
                remain weak this year.                                                                         20

 Notwithstanding the recovery in the external                                                                   0
 environment, the financial services sector is expected to
 be weak this year, largely because of sluggishness in the                                                     -20
 insurance and commercial banking segments. Having                                                                                          Wholesale
 expanded by 14.2% in 2001 on the back of the                                                                  -40
 liberalisation of CPFIS, the insurance industry is expected
 to see a sharp correction in growth this year, with a
 significant portion of the slowdown attributed to the                                                               1997    1998    1999     2000      2001     2002Q1
 tapering off effect of the liberalisation. In addition,
 projected returns of traditional life insurance products
 (including endowment policies) have been revised
 downwards recently, thus reducing the attractiveness of
 insurance products relative to alternative investment
 products. However, additional premiums garnered from
 the implementation of ElderShield in Q3 2002 will
 somewhat offset the expected drop in activity.36
 Meanwhile, the impending introduction of the Financial
 Advisory Act could also have a mixed impact on the life
 insurance industry.       On the one hand, insurance
 companies will be able to distribute unit trusts, leading to
 new sources of commissions for the insurance
 companies’ financial planners.        On the other, the
 popularity of investment-linked single premium products
 may taper off, as investors choose to disentangle their
 investments and insurance needs.

 The lagged response of non-bank loans to the economic
 cycle would also reduce the growth in commercial
 banking activity this year. While the economy saw fairly
 strong recovery in Q1 this year, the expected slowdown
 in growth momentum in the quarters ahead may
 constrain credit demand. This is compounded by the
 tight interest margin ascribed to stiff competition
 amongst the banks amidst a low interest rate
 environment. While growth of non-interest income is
 expected to stay healthy, underpinned by bancassurance

        ElderShield is an affordable severe disability insurance scheme that provides insurance coverage to elderly Singaporeans who
        require long-term care.

Monetary Authority of Singapore                                                                                                             Economics Department
Macroeconomic Review, July 2002                                                                                                     72

activities and underwriting of debt issuances,37 its                Despite emergent signs of recovery in the external
relatively small size will cap its contribution to                  and domestic environment, positive spillovers to the
overall growth in the commercial banking industry.                  construction sector are not likely to manifest in the
                                                                    near term, given the considerable lags associated
The recent slump in activity in the stock broking                   with construction activity.
segment has also cast doubt on the strength of
support it can provide to the overall financial                     The cessation of new HDB building works will be a
sector. Nevertheless, with the prospects for the                    drag on the performance of the construction sector
recovery in the real economy still intact, investors                this year. Meanwhile, the public non-residential
could channel their funds back into the stock                       segment is also expected to remain weak, as the
market in expectation of a rally once the recent                    fiscal stimulus measures introduced in the off-
accounting scandals are discounted in stock prices.                 Budget packages in July and October last year will
In addition, the investment advisory business will                  take some time to flow through. The private
also benefit from the fees and commissions                          residential and non-residential segments are likely
generated as investors reallocate their portfolios to               to remain in negative territory this year, although
suit their configuration of risk and return, which                  their declines are projected to be more moderate
depends on their different risk appetites over the                  when compared with 2001. (Please refer to Box
recovery.                                                           Item C for a more detailed analysis of the private
                                                                    residential property market.)
The boost from the stock broking and investment
advisory business segments will, however, be
bounded by their size, which together comprise
less than 10% of total financial services GDP.

     Meanwhile, the construction sector is
     expected to contract further this year.

After declining by 2.1% in 2001, the construction
industry contracted severely by a further 9.0%
(y-o-y) in Q1 this year, and is expected to continue
weakening over the remainder of 2002. Growth
momentum, as measured on a q-o-q SAAR basis,
was similarly weak, with the sector posting sharp
declines of just over 10% in Q4 2001 and Q1 2002.

       According to the Life Insurance Association, banks are expected to garner a larger share of new life insurance sales this year,
       which will help bolster their fees, and distribute other banking products. Bond issuance and syndication activities are likely to
       stay healthy, driven by power industry deregulation, roll-out of 3G networks and funding needs for expansion of government-
       linked companies (GLC). The current backlog of IPOs has already exceeded the total number launched last year.

Monetary Authority of Singapore                                                                          Economics Department
Macroeconomic Review, July 2002                                                                                                 73

                                                  Box Item C
                              The Singapore Private Residential Property Market:
                                 Cyclical Behaviour and Recent Developments

Cycles in the Residential Property Market

Over the past two and a half decades, the residential property market in Singapore has been characterised by
relatively pronounced swings. The residential property cycle has experienced three distinct phases since 1975 –
the first spanning the period 1975 to 1985, the second from 1986 to 1995, and the latest from 1996 to the
present. (Chart C1)

The first phase peaked in 1983, driven in part by increased foreign buying interest in the domestic market, the
rising affluence of the local population and a booming stock market. After a relatively mild moderation, the
private housing market grew modestly in the late 1980s, before enjoying a five-year long bull run between 1991
and 1996 that was powered by the strong performance of the domestic economy. In the most current phase,
residential property prices and other related indicators such as rentals and occupancy rates have been buffeted by
several externally originated shocks such as the Asian financial crisis of 1997 and the global electronics downturn
in 2001.

                                                    Chart C1
                             Phases in the Private Residential Property Price Cycle
                                       240                                                100
                                                    Phase 1       Phase 2       Phase 3
                                       200                                                75

                                                                                                YOY % Growth
                                       160                                                50

                                       120                                                25

                                        80                                                0

                                        40                                                -25

                                         0                                               -50
                                             1975         1984        1993          2002Q1

Chart C2 plots, over the period 1976 to 2001, the y-o-y growth rates of private residential construction investment
and the private residential property price index, and compares these with the real GDP cycle (and its deflator).1/
The series is divided into two periods – the first from 1976 to 1987 in Chart C2i, and the second from 1985 to
2001 in Chart C2ii.

      In assessing long-term trends and implications, it is more appropriate to consider housing prices in real terms (i.e. nominal
      prices deflated by the GDP deflator). The standard deviation of the growth of real housing prices is 20.6%, and the mean is
      8.8%, compared with 24.2% and 11.7% respectively in nominal terms. During the run-up in the late 1970s, real housing
      prices grew by an average of 43%, compared with 53% in nominal terms, reflecting the strong pace of overall inflation.
      Similarly, in 1989-96, the rapid appreciation in nominal housing prices spilled over into the overall inflation data, while
      concomitantly, prices in real terms grew by 174% compared with the 244% gain in nominal terms.

Monetary Authority of Singapore                                                                                Economics Department
Macroeconomic Review, July 2002                                                                                                                                     74

                                                                  Chart C2
                                                  Cycles in the Residential Property Market
                                         (i) 1976-1987                                (ii) 1985-2001
                            75                                                                           60
                                                            Private Residential                                       Private Residential      Private
                                                              Property Index                                            Property Index       Residential
                                     Private                                                             40
                            50                                                                                                              Construction
             YOY % Growth

                                                                                          YOY % Growth
                                   Investment                                                            20
                            25                                                                                                                 GDP
                                                                                                          0                       GDP
                                                 Real GDP                                                                        Deflator

                            -25                                                                          -40
                                  1976   1978     1980      1982    1984    1986                               1985     1989       1993     1997      2001

Several observations can be drawn from the residential property cycles. First, the cycles in the residential
property and construction markets have exhibited more pronounced swings, as compared to the GDP cycle for the
Singapore economy since 1985. In both real and nominal terms, the residential property and construction series
have exhibited significantly greater volatility than the overall GDP cycle. This is reflected in the calculated
standard deviations of the relevant series (in growth rates) as reported in the summary statistics in Table C1. The
standard deviation measure for the private residential construction investment cycle is some 4.5 times greater
than that of real GDP, while the standard deviation of private housing prices exceeds that of the GDP deflator by
more than six times.

                                                                     Table C12/
                                                    Summary Statistical Table (1985 – Q3 2001)
                                                    (Applied to Quarterly y-o-y Growth of Series)
                                                                                                                          Private                     Private
                                                      Real GDP                    GDP Deflator***                        Residential                Residential
                                                                                                                        Construction               Property Price
                                                                                                                        Investment                     Index

          Mean (%)                                          7.06                        1.71                                    4.65                        7.51

     Standard Deviation
                                                            4.75                        2.81                                   21.38                       18.65

          Skewness*                                      -0.96                         -0.66                                    0.21                        0.06
           Kurtosis                                         3.34                        3.62                                    2.65                        2.54

     Unit Root (Yes/No)                                      No                         No                                      No                          No
     *   Compared to 0 for a normal distribution.
     ** Compared to 3 for a normal distribution.
     *** Data for GDP deflator starts from 1986.

The expansion and contraction phases of the property cycle since 1976 are also relatively more extended than
those of the GDP cycle. Table C2 summarises the key results of a series of non-linear tests (using the Markov-
Switching model) which were conducted on each of the above series. The results indicate that expansion phases
for the private residential property market typically extend over a period of 41 quarters, compared to 20 quarters
for the real GDP series. Similarly, contraction phases in the private housing market may be expected to persist for
around six quarters, compared with three for the overall GDP cycle. For all three series, the durations of the
expansion phases are found to exceed the contractions.

       The statistical and econometric estimates reported in Tables C1-C3 cover the sample period 1985 up to Q3 2001 as they were
       based on a study completed earlier this year. Preliminary estimates based on the latest available data suggest that the
       inferences do not change with inclusion of the most recent observation points.

Monetary Authority of Singapore                                                                                                             Economics Department
Macroeconomic Review, July 2002                                                                                                75

                                                    Table C2
                                Asymmetric Properties of Selected Construction and
                                   Property Market Series (Q2 1977 to Q3 2001)
                                                                          Construction Sector            Private Residential
                                              Real GDP
                                                                                 GDP                    Property Price Index

    Average growth rate
                                                -0.93%                           -1.97%                             0.22%
    (Contraction regime)

    Annualised growth
    rate (Contraction                           -3.72%                           -7.88%                             0.8%

    Average growth rate
                                                 2.27%                            2.38%                             2.94%
    (Expansion regime)

    Annualised growth
    rate (Expansion                              9.08%                            9.52%                            11.76%

    More persistent
                                              Expansion                        Expansion                          Expansion

    Expected duration of
    contractions                                   3                                9                                6

    Expected duration of
                                                  20                               35                                41
    expansions (quarters)

The results reported in Table C2 provide useful insights into the historical characteristics of the GDP and property
cycles, which could be instructive in comparing the current downward phase of the private residential property
price cycle with those in the earlier periods.

Second, the real business cycle, as measured by the GDP growth series, appears to precede the residential
property cycle. A test of Granger-causality, which establishes the temporal precedence of one series over
another, indicates that overall economic activity leads construction activity in the residential property market (as
proxied by private residential construction investment) by some three quarters. (Table C3) This suggests the
strong influence of income growth in stimulating activity in the property market in Singapore.

                                                          Table C3
                                             Results of Granger-causality Tests
                                                                               Q1 1985 – Q3 2001

        Hypothesised Causal                                                                     Private Residential
        Variable                                            Real GDP (YOY)                    Construction Investment

        Real GDP (YOY)                                               --                                      !

        Private Residential Construction
                                                                     X                                       --
        Investment (YOY)
    !       Indicates significant Granger-causality between the variables at the 10% level of significance.
    X       Indicates no significant Granger-causality between the variables at the 10% level of significance.

Third, the more pronounced nature of cycles in the property market reflects the particular supply-side response
of housing construction investment to the real rate of return. (The latter may be proxied by private housing
prices.) Construction activity responds sharply to changes in property prices, albeit with a substantial lag of
around four quarters, reflecting the time between the decision to develop a new residential project and the
launch of the units for sale. Such lags contribute to the boom-bust behaviour of the construction cycle by
exacerbating conditions of over/undersupply in the private residential property market.

Monetary Authority of Singapore                                                                            Economics Department
Macroeconomic Review, July 2002                                                                                                 76

During a period of market undersupply, for instance, developers respond by initiating new construction projects
to meet the excess demand. However, due to the lengthy delays inherent in construction activity, such new
developments may only come on stream when the excess demand has already been satiated or the economy is
experiencing an economic downturn, resulting in an oversupply situation in the market.

A consequence of the more pronounced swings in the supply-side response is also manifested in the significantly
larger adjustments in residential property prices as compared with price movements in the overall economy. The
GDP deflator, used as a proxy for economy-wide prices, yields a standard deviation of 2.81%, much less than
that for private housing prices at 18.65%. Thus, more significant price movements have been needed to clear
the imbalances in the property market.

Recent Developments in the Residential Property Market

The most recent phase of the residential property cycle has seen a marked slowdown in private housing demand,
as the market adjusted to a series of shocks which have buffeted the housing sector and the economy since
1996. While some of these shocks have been external in nature, such as the Asian financial crisis and the recent
electronics-led downturn, others have been domestic and administrative in origin.

The fall-off in housing prices after the sustained housing market boom of 1991-96 was triggered off initially by
the introduction of a series of anti-speculation measures in May 1996, that were aimed at cooling the market
which was clearly overheating, with average quarterly price increases of around 5.5% over the preceding 22
quarters. The correction was subsequently exacerbated by the onset of the Asian financial crisis, and the
introduction of revised measures in the HDB resale segment in mid-1997.3/ As a result, private housing prices
declined at an average rate of 8% per quarter between Q3 1997 and Q4 1998, compared with the milder 2.3%
quarterly fall registered over the Q3 1996 to Q2 1997 pre-crisis period. Prices rebounded swiftly between Q4
1998 and Q2 2000, as market sentiment improved in line with the economic recovery. However, the respite was
brief as the sharp correction in the global electronics sector pushed the domestic economy into recession in early

Latest data for Q1 2002 show that private residential property prices have declined for the seventh consecutive
quarter, shedding a further 1.1% to stand at 17% below the Q2 2000 peak, and 16% above the Q4 1998 trough.
The weakness in private housing prices to date has largely been the result of anaemic market demand on the one
hand, and the persistent overhang of unsold units on the other. The total number of uncompleted units sold
directly by developers in the first three quarters of last year amounted to just 3,556 units, compared with the
7,742 and 7,181 units recorded over the same period in 1996 and 1999 respectively. However, the oversupply
situation is not as serious as in previous periods. As at Q1 2002, the stock of unsold residential units under
construction totalled 14,558 units, significantly less than the average of about 18,100 in 2001, and more
comparable with the 14,800 figure seen in 2000.

In part, the drawdown of unsold housing stock has reflected the dramatic turnaround in private housing demand
since Q4 2001, as developers, favouring cashflow over profits, slashed prices at a number of projects. Buyers
were also enticed by innovative pricing schemes and non-price sweeteners such as free furniture packages and
home computer systems. As a result, the number of uncompleted units sold in the primary market more than
doubled in Q4 last year to 2,821 units, compared with just 1,329 units in the previous quarter. The surge in
buying momentum intensified in Q1 2002, with developers selling a total of 3,827 new units. (Chart C3) The
robust demand over these two quarters has thus helped to trim the supply overhang considerably.

      Amongst the measures implemented were a tightening of the criteria for granting HDB concessionary loans, an extension of the
      minimum period (from five to 10 years) before an existing HDB flat owner could purchase a second flat from HDB at subsidised
      prices, and a non-refundable registration deposit of $5,000 for applicants under the fiancé/fiancée scheme. At the same time,
      a higher resale levy, ranging from 15% to 25% depending upon the type of flat, was imposed on those intending to sell their
      existing flats to upgrade to a new HDB flat. Such tighter regulations in the HDB resale market led to a reduction in demand by
      dampening buyers’ expectations of large capital gains. Consequently, the number of new applications received for new HDB
      flats under the Registration for Flats Scheme nearly halved in Q3 1997, with many dropping out from the queue.

Monetary Authority of Singapore                                                                       Economics Department
Macroeconomic Review, July 2002                                                                                              77

                                              Chart C3
                        Uncompleted Private Residential Units Launched and Sold
                                                             Uncompleted Units Sold
                                                             Uncompleted Units Launched for Sale


                             Units('000)   2


                                               1996   1997   1998      1999     2000     2001      2002Q1

Nevertheless, most analysts are of the opinion that the high transaction volumes witnessed in Q4 2001 and Q1
2002 may not be sustainable, particularly if the various price and non-price incentives are withdrawn. The
rebound in transaction volumes has also yet to translate into a corresponding recovery in prices.

The continued weakness in the domestic labour market and the stock market will continue to restrain demand
over the near term, while much of the existing pent-up demand may have already been satiated, as evidenced by
the recent high take-up rates. The strong response by developers to the pickup in buying activity – developers
launched 6,926 units in Q4 2001 to Q1 2002 alone, after just 4,797 units in the first three quarters of 2001 – has
also fuelled fears that the stock of mass-market projects that can be priced attractively has diminished. However,
initial concerns over the impact of the proposed changes to CPF rulings pertaining to the purchase of residential
property appear to have been overdone. In the wake of repeated assurances by the government that any
changes will be carefully calibrated in order not to de-stabilise the property market, most property consultants are
now of the opinion that the changes will not significantly dampen residential transaction activity.

The majority of analysts place the recovery of private housing prices at between 0% and 5% for 2002, with the
potential for growth of up to 10% over the next two years.

Monetary Authority of Singapore                                                                             Economics Department
Macroeconomic Review, July 2002                                                                                78

4.3 Aggregate Demand
   The turnaround in the economy was led by a
         recovery in external demand,…

From an expenditure perspective, the pickup in economic
activity was led by external demand, which turned
around in Q4 last year and continued to improve into Q1
this year. Domestic expenditure, however, remained
weak. Private consumption, which has fallen by about
5% during the current recession compared to an average
of 6.6% in the earlier recessions, started to pick up
mildly in Q1 as consumer sentiments began to improve.
Fixed investment continued to decline in Q1 2002,
registering a contraction of around 17% compared to its
pre-recession peak. In comparison, in the past two
recessions, fixed investment fell by a steeper 20-30%
from pre-recession highs, and bottomed out 1-2 quarters
after the pickup in output.

  …which is expected to rise further, albeit at a
                 slower pace.

In the quarters ahead, external demand is expected to
continue to grow, although at a slower pace, as the
initial boost coming from the reduced rate of liquidation
of global inventories tapers off. The continued pickup in
external demand will also underpin a gradual recovery in                    Chart 4.19
domestic demand, particularly in private consumption.           Straits Times Consumer Confidence

    Private consumption is expected to recover                       350

Private consumption is projected to pick up further in the           250

coming quarters to register growth of 1-3% for 2002 as               200
a whole, up slightly from the 0.5% recorded in 2001.
Consumer confidence, which plunged sharply last year,                150

improved markedly in Q1 2002, with the Straits Times                 100
Consumer Confidence Index rising significantly to 234
points. (Chart 4.19) The Index has since moderated to
                                                                           1998Q4   2000Q1   2001Q1   2002Q2
187 points in Q2, mainly reflecting continued weakness
in the labour market.

Monetary Authority of Singapore                                                          Economics Department
Macroeconomic Review, July 2002                                                                                                               79

     …with a slight boost in Q4 as consumers bring
      forward purchases in view of the GST hike.

However, there could be a small one-off boost to private
consumption in Q4 as consumers bring forward their
purchases in anticipation of higher prices after the
implementation of the hike in Goods and Services Tax
(GST) with effect from 1 Jan 2003. Such a pickup in
retail expenditure prior to the introduction of a value-
added tax was witnessed earlier in 1994 when GST was
first implemented in Singapore. Retail sales rose by 14%
in Q1 1994, the quarter before the introduction of GST,
compared with an average growth rate of 5.4% in 1990-
93.38    Some other countries such as Australia and New
Zealand also saw varying degrees of increases in retail
spending prior to the implementation of similar
consumption taxes.

     Business fixed investment is likely to decline
               further in the near term.

Business fixed investment is expected to contract further
in the quarters ahead, before recovering mildly towards
the end of the year. For the year 2002 as a whole,
business fixed investment is expected to decline more
steeply than last year, by about 8-10%. While business
fixed investment turned up 1-2 quarters after the
                                                                                         Chart 4.20
recovery in output in the past two business cycles, the
                                                                          Business Expectations of Manufacturers
turnaround is expected to take longer this time round.
                                                                                  for the Next 12 Months
This reflects greater slack in the economy as estimated
by the output gap measure. (Please refer to Chart 4.29
                                                                                              Forecasted Expenditure
on page 85.) In addition, firms have been hesitant to                                  70
                                                                                               on Plant & Machinery
commit to increasing production capacity, given that the                               60
current output recovery has, until fairly recently, been                               50
mainly underpinned by a reduced rate of inventory
                                                                            Per Cent

liquidation rather than a sustained pickup in end-user                                                             Expenditure on
demand. According to EDB’s latest Survey of Business                                   30

Expectations of the Manufacturing Sector in Q2, the net                                20
balance of firms planning to raise capital expenditures                                10
over the next twelve months has remained low, although
this figure has risen moderately compared to the                                       0
                                                                                            1997   1998     1999       2000   2001   2002Q1
previous quarter.39 (Chart 4.20)

        The overall impact of this retail boost on private consumption growth in Q1 1994 was somewhat muted, as the ongoing
        consumption boom in 1993 prior to the implementation of the GST, could have obscured the slight uptick due to the front-
        loading effect. Buoyant GDP growth, as well as a strong stock market rally had generated a large wealth effect, resulting in
        robust consumption growth of 12% in 1993, about twice the historical average of 6.5%.
        The net balance refers to the difference between the percentage of firms raising capital expenditures and the percentage of
        firms cutting capital expenditures.

Monetary Authority of Singapore                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                                                                     80

4.4 Labour Market
Conditions in the labour market will remain weak
   in the near term before picking up towards
                                                                                                                         Chart 4.21
Labour market conditions are expected to remain weak                                                                   Vacancy Rate*
in the near term, before picking up towards the end of                                               5

the year. The improvement in labour demand is likely to

                                                                  Per Cent, Seasonally Adjusted
be gradual, reflecting the uncertainty surrounding the                                               4

robustness of the recovery, as well as ongoing
restructuring, particularly in the financial services sector.                                        3

Nevertheless, there are indications that some pickup in                                                                                               Overall
the labour market is likely in 1-2 quarters’ time. The                                               2

vacancy rate – which has typically turned up about one                                                                               Manufacturing

quarter before a recovery in employment – has bottomed                                               1
out and risen slightly over the past two quarters.                                                                              Construction

(Chart 4.21) The number of paid overtime hours worked                                                0
has also increased slightly. (Chart 4.22)                                                                1997      1998       1999       2000    2001      2002Q1

                                                                * ED, MAS internal estimates

                                                                                                                   Chart 4.22
Some early signs of a levelling off have emerged,
                                                                                                          Paid Overtime Hours Worked*
  with support from the manufacturing sector.

Signs of a levelling off were most evident in the
                                                                        Hours, Seasonally Adjusted

manufacturing sector, which saw a strong rebound in                                                  4.5
electronics output in Q4 2001 and in the early part of this
year. The decline in manufacturing employment began
to taper off in Q1, while retrenchments in the sector                                                4.0

more than halved from Q4 last year. Vacancy and
recruitment rates in the manufacturing sector have both                                              3.5
risen off their lows in Q3 2001, but are still significantly
lower than their pre-recession peaks. (Charts 4.21 and
4.23) There are also some indications that the decline in                                            3.0
labour demand in the services sector has moderated.                                                        1997      1998      1999      2000    2001      2002Q1

Nevertheless, labour market adjustments are slower in           * ED, MAS internal estimates
the services sector given the relatively muted pickup in
activity as well as ongoing restructuring, especially in the                                                            Chart 4.23
financial & business services sector.                                                                               Recruitment Rate*

The latest surveys conducted by DOS and EDB at end-Q1                                                                                                 Overall
                                                                  Per Cent, Seasonally Adjusted

showed that the majority of firms in the manufacturing
sector expect to hire more workers in Q2 2002, after                                                 3
reducing headcount for more than five consecutive
quarters. Within the services sectors, job prospects
remain poor, with firms in all the sectors except for
commerce expecting to trim employment further.                                                       2

(Chart 4.24)                                                                                                      Manufacturing

                                                                                                         1997      1998       1999       2000    2001      2002Q1

                                                                * ED, MAS internal estimates

Monetary Authority of Singapore                                                                                                       Economics Department
Macroeconomic Review, July 2002                                                                                                              81

 Employment is expected to see a moderate pace
                 of recovery.                                                                       Chart 4.24
                                                                                            Employment Expectations for
The seasonally adjusted unemployment rate is expected                                            the Next Quarter
to peak around 5.5% in Q3, and decline mildly                                         60

thereafter, in line with a continued but gradual recovery                                                           Transport &
of the economy. Employment is likely to start expanding                               40

                                                             Net Balance (Per Cent)
only towards the end of the year, registering a slight                                         Business
increase of 0-1% in 2002. The fairly moderate pace of                                 20

recovery in employment reflects the lag between the
pickup in GDP and its impact on the labour market.                                     0

Employment growth in the manufacturing sector will be
led by non-electronics, which is generally highly capital-                            -20

intensive, while employment creation in the more labour-
intensive services sector will be constrained by its                                  -40
relatively moderate rebound in activity this year.                                          1997    1998    1999     2000    2001   2002Q1

 Wages are likely to rise marginally, and together
 with a rebound in productivity, would result in a
              decline in ULC in 2002.

With the labour market unlikely to tighten significantly,
and consumer prices expected to remain low, wages are
projected to increase only slightly this year. Nominal
earnings, which exclude employers’ CPF contributions,
should rise by a modest 1-3% for 2002 as a whole,
compared with an average growth rate of 4.5% in the
past five years. A cyclical rebound in productivity is
expected in H2, as businesses make more intensive use
of existing resources, even as demand conditions
continue to recover.      On balance, the rebound in
productivity is expected to more than offset the increase
in costs, resulting in a 1-2% decline in ULC in 2002,
compared with the 7.3% increase recorded last year. In
addition, the upside potential for manufacturing sector
growth is unlikely, at the margin, to generate cost-price
pressures, as growth in the sector is likely to be led by
the chemical industry, which is highly capital- and
technology-intensive in nature.

Monetary Authority of Singapore                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                                       82

4.5 Inflation
    Benign external inflationary environment is
               expected for 2002.

The external inflationary environment is likely to stay
benign in 2002, with price pressures in most of our
trading partners remaining subdued, in line with the
gradual pace of recovery in the global economy.
Commodity prices are expected to strengthen towards
the end of the year, although there could be some short-
term weakness due to supply-side and weather-related

Oil prices are likely to remain within OPEC’s target band
of US$22-28 per barrel, given the determination of OPEC
to keep production cuts in place for some time.
However, further upside risks to oil prices are possible if
violence in the Middle East increases unexpectedly.

Prices of industrial-related commodities such as base
metals are likely to strengthen further, following modest
increases in recent months, as demand picks up in
tandem with industrial production. Palm oil prices are
expected to rise, as bad weather conditions in Malaysia
are likely to affect production and yields. Prices of Thai
rice should remain firm as well, supported by the
government’s        price     stabilisation   programme.
Nonetheless, there could be some weakness in coffee
and sugar prices as large supplies from key producers                                        Chart 4.25
such as Brazil are expected in the coming months.                                    CPI Inflation Forecast for
                                                                                    the G3 Economies in 2002*
Inflation is likely to remain subdued for many of                             6
Singapore’s trading partners. US inflation is expected to
stay low despite a mild uptick in prices recently. While

goods prices in the US may trend up in line with the                          4
                                                                                                 Euro-zone              US
global recovery, services inflation could remain muted,
                                                               YOY % Growth

reflecting the sharp fall in wage growth. In the Euro-
zone, the recent appreciation of the Euro has helped to
curb upside risks to inflation, although some upward                          1

pressures still remain, largely due to second-round                           0
effects from wage increases and high oil prices.                                                    Japan
(Chart 4.25)
                                                                                   1990   1992   1994   1996    1998   2000   2002F
Meanwhile, inflation in East Asia is likely to be low. High
                                                              * June 2002 Consensus Forecasts
unemployment and falling property prices are expected
to restrain consumer spending in both Hong Kong and
Taiwan. In addition, Hong Kong’s deflationary trend is
expected to deepen in 2002, given the sluggish recovery
in the economy. In Korea, however, prices will be
supported by robust domestic demand, buoyed by strong
income growth, rising property prices and easy access to
bank credit. Excess capacity in Malaysia and Thailand
will dampen inflationary pressures, even as their
economies gradually recover. In Indonesia, however,
inflation is expected to stay high as the government
gradually removes costly subsidies on domestic fuel
prices and electricity tariffs. (Chart 4.26)

Monetary Authority of Singapore                                                                              Economics Department
Macroeconomic Review, July 2002                                                                                                            83

   Domestic CPI inflation is expected to remain
              subdued this year,…
                                                                               Chart 4.26
Domestic headline CPI inflation is expected to remain low       CPI Inflation Forecast for the East Asian
in 2002. On a y-o-y basis, declines in the CPI are likely                 Economies in 2002**
to level off around mid-2002 and turn positive towards                          25

the end of the year. Likewise, the projection for the MAS
measure of underlying inflation, which excludes costs of
accommodation and private road transport, anticipates

                                                                 YOY % Growth
an uptrend in prices. For the rest of the year, price
dynamics will continue to be dominated by downward                              10            NIE-3
pressures from various government-initiated measures
implemented last year. Nevertheless, prices of several                          5

cyclical-sensitive items and consumer services have
started to record mild increases, and are likely to trend                       0

up going forward.                                                               -5
                                                                                     1990   1992   1994     1996     1998   2000   2002F
The price adjustments arising from the off-Budget               * ASEAN-3 refers to Malaysia, Indonesia and Thailand
package as well as NTUC’s price cuts will keep prices low       ** June 2002 Asia Pacific Consensus Forecasts
in 2002. In addition, the recently announced FY2002
Budget will also impact the prices of several key
consumer items this year. In particular, the reduction in
various car-related taxes, coupled with the increased
number of COEs to be released for bidding, is expected
to have a dampening effect on private road transport
costs. However, these downward price pressures will be
partly offset by higher alcoholic drinks and tobacco
duties, car parking fees and ERP charges. Taking all
these factors into consideration, the impact of the
government measures is estimated to lower the CPI by
about 0.5% point this year.

There have been some incipient signs of a pickup in
services inflation, as service providers endeavour to
recoup rising labour and operating costs by raising
prices. Consequently, the cost of healthcare services is
expected to trend up further. The upward revision in
bus and train fares, as well as electricity tariffs effective
from July 2002, will also contribute to higher CPI
inflation.    Moreover, “other miscellaneous” costs
(comprising largely holiday and tour packages), are likely
to see further increases in the coming months as air
travel continues to recover from the twin shocks of the
economic downturn and the September 11 attacks. In
addition, there is an ongoing review of fixed line
telephone charges, with any upward revision possibly
raising communications costs.

Prices of some cyclical-sensitive retail items are expected
to increase moderately for the rest of the year, in
tandem with further improvement in domestic demand
conditions. The pre-GST surge in retail expenditure
before its implementation in 2003 may also fuel price
increases of these retail items in the later part of the
year. This is especially so for big-ticket items such as
cars and household durables.

Monetary Authority of Singapore                                                                              Economics Department
Macroeconomic Review, July 2002                                                                                                                  84

     …coming in between -0.5% and 0.5%,…

Looking ahead, imported inflationary pressures are
expected to remain low, reflecting the excess capacity                                            Chart 4.27
that remains even as the global economy gradually                                           CPI Inflation Forecasts
recovers. Given the slack in the labour market and                                                 for 2002
rebound in productivity growth, a strong uptick in                             3

domestic price pressures is unlikely at this stage of the
business cycle. Even taking into account further price                         2                                                        Upper
increases in several cyclical-sensitive items and consumer

                                                                YOY % Growth
services, including the recent hikes in public road                            1
transport fares and electricity charges, CPI inflation for
2002 as a whole is expected to come in near the mid-                           0
point of our forecast range of -0.5% to 0.5%. This is a
slight revision to the previous forecast range of -1% to                       -1
0%. The upward revision partly reflected unanticipated
upward adjustments in several services categories,                             -2
including medical and dental treatment costs, public bus                            1998        1999        2000       2001     2002F
and train fares, refuse removal fees, as well as electricity
tariffs. Our earlier forecast was also predicated on
consumer prices adjusting more sharply to the current
downturn, by about the same magnitude as in the earlier
recessions of 1985 and 1998. However, consumer prices
have turned out to be relatively more resilient this time
round, adjusting by a somewhat smaller magnitude in
response to the economic decline.

…with the range mainly reflecting the uncertainty
       surrounding the economic outlook.

Chart 4.27 shows our quarterly forecast for Q2-Q4 2002.                       Chart 4.28
Generally, the upper and lower bounds reflect the              Contributions to CPI Inflation Forecasts
uncertainty surrounding the economic outlook for the                           for 2002
year.    Chart 4.28 exhibits the corresponding main                                                    Upper bound forecasts
                                                                                                       Lower bound forecasts
components of the CPI basket and shows the percentage
contribution of each item to the overall CPI inflation                                                             0.4

forecast. If the contributions were equal in magnitude                                     Clothing
across the main items in the CPI basket, then the upper                                                            0
(red) and lower (green) boundaries would form circles,                                                             -0.4
and perfectly coincide with the concentric (blue) radar                                                            -0.6
circles. The unevenness of the boundaries marking the                                  Misc                                             Health
forecast reflects the different contributions of the various
items to overall inflationary pressures.

At this stage, there are more upside risks to the inflation                                     Education                     T&C

forecast for 2002 than there are downside possibilities.
A stronger rebound in the economy would push CPI
inflation to the upper bound of our forecast range. While
global oil prices have retreated somewhat recently, the
instability in the Middle East continues to threaten oil
supply. If oil prices surge, it could result in another
round of hikes in oil-related consumer items in
Singapore, including petrol prices and electricity tariffs.
Prices of non-oil commodities, which have seen a modest
recovery in recent months, may increase further if the
anticipated El Niño effect is worse than expected.

Monetary Authority of Singapore                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                                                                                         85

Meanwhile, further increases could be possible in public
road transport costs, arising from higher taxi fares and
school bus fares. In addition, more upward revisions to
consumer service charges could occur if the economic
recovery turns out stronger than expected.

On the flip side, if the global economic recovery turns
out to be sluggish, CPI inflation is likely to come in at the
lower bound of our forecast range. World oil prices
could ease and the expected pickup in prices of several
other non-oil commodities will also be delayed. A slower
recovery worldwide will also have spillovers on
Singapore, eventually dampening consumer sentiment
and spending. In addition, wage increases will be more
restrained, thus holding down price increases, especially
in various wage-cost dominated components of the CPI.

     The GST hike will raise CPI inflation by about
         0.8-1.0% point for 2003 as a whole.

In 2003, there will be a one-off increase in the CPI due
to the hike in the GST from 3% to 5%, which will come                                     Chart 4.29
into effect on 1 Jan 2003. The GST hike is unlikely to                       Output Gap and CPI Inflation Forecasts
contribute to further increases in the general price level                                    3                                                         6
beyond its one-off impact, which is estimated to boost
overall CPI inflation by around 0.8-1.0% point for 2003                                       2
as a whole.40 Abstracting from the impact of the GST,                                                                   (LHS)
our preliminary CPI inflation forecast for next year is                                       1                                                         2
                                                                               YOY % Growth

slightly above 1%. The increase arises mainly from a

                                                                                                                                                             Per Cent
stronger pickup in prices of cyclical-sensitive components                                    0                                                         0

such as clothing, and various miscellaneous items like
                                                                                              -1                                                        -2
personal care, as economic activity strengthens and the                                                                 Output Gap
output gap narrows and turns positive. (Chart 4.29)                                           -2
Consumer services will also contribute to price pressures
via the pass-through of wage increases. Oil-related and                                       -3                                                        -6
administrative cost increases comprise the rest of the                                             1997   1998   1999     2000   2001   2002F   2003F

impact on inflation.

Similar to 1994 when GST was first implemented, the
effect of the tax hike in 2003 is not expected to be fully
passed through to consumer prices. Not all of the items
in the CPI basket are subject to GST. Accommodation
costs, for example, are GST-exempt, and have a
relatively large weight of about 15% in the CPI basket.
Businesses with an annual turnover of below $1 million
are also not subject to GST.41          In addition, the
government will absorb GST-related costs in public
healthcare and education services,42 bringing our
estimate of the proportion of the CPI basket that will not
be affected by the GST increase to about 25%.

        Assuming a complete pass through of the GST increase, CPI inflation will be boosted by 1.5% points.
        In Retail Trade 2000, DOS estimates that retailers with operating receipts of less than $1 million account for 17% of retail sales
        in Singapore.
        The government will continue to provide direct grants to hospitals and polyclinics to completely offset the GST. Likewise, for
        education costs, the government will increase its subsidy to the state education system to absorb the GST hike.

Monetary Authority of Singapore                                                                                                  Economics Department
Macroeconomic Review, July 2002                                                                                       86

With regard to the remaining portion of the CPI                   consumer sentiment will somewhat limit the scope
that is subject to GST, the impact of the tax hike on             for retailers to pass on the GST costs. A greater
consumer prices is likely to be fairly muted. This is             number of retailers are expected to either absorb
partly due to the smaller increase in the tax hike                part of the tax increase or delay passing on the full
this time round. The GST, which has already been                  increase at least in the short term. For example,
in place for nine years, will be increased by 2%                  NTUC FairPrice, the largest supermarket chain in
points next year, compared with the 3% tax                        Singapore, has announced that it would absorb part
introduced in 1994.           Singapore was also                  of the proposed increase in the GST hike for up to a
experiencing a consumption boom in 1993-94,                       year.43 These factors are complemented by the
providing more leeway for retailers to pass on the                relatively flexible wage system in Singapore, which
higher costs to consumers.                                        will help ensure that the possibility of second round
                                                                  pass-through effects from the GST hike – emerging
In comparison, the current economic environment                   from nominal wage increases that exceed price
is less robust. With Singapore emerging from one                  movements – are low.
of its deepest recessions, the relatively weak

4.6 Assessing the Macroeconomic Policy Mix
This section examines the recent developments in                  markets increased following the events of
monetary and fiscal policy, and assesses their                    September 11. At the beginning of 2002, MAS
effect on economic activity. In the months ahead,                 announced that it would restore a narrower policy
the incipient recovery in the Singapore economy                   band, while maintaining a zero per cent
should be supported by the macroeconomic policy                   appreciation path for the policy band, centred on
mix, given the generally conducive monetary                       the level of S$NEER prevailing at that time. In view
conditions as well as the government's                            of the benign inflationary environment, and to
expansionary fiscal policy stance. In particular, this            facilitate continued economic recovery, MAS
section assesses the short-term impact of the                     announced on 11 July 2002 that it would maintain
FY2002 Budget measures.44 The Budget’s longer-                    the current policy stance of a zero per cent
term implications for the Singapore economy will be               appreciation in the S$NEER for the second half of
discussed in Chapter 5.                                           2002.

                                                                  The S$NEER has largely fluctuated within the upper
     Exchange rate policy stance remains                          half of the policy band in H1 2002. It initially
                 neutral…                                         strengthened over the first two months of the year,
                                                                  as the improved economic outlook led to portfolio
Turning first to monetary policy, the MAS has                     inflows into the local and regional equity markets.
adopted a neutral stance for exchange rate policy                 The S$NEER subsequently eased and fluctuated
since July last year, with the policy band centred on             within a narrow range.
a zero per cent appreciation of the trade-weighted
Singapore dollar nominal effective exchange rate                  On a bilateral basis, the domestic currency
(S$NEER). This took place against the backdrop of                 strengthened by some 4.9% against the US dollar
a weak external environment and a sharper-than-                   in H1 2002, but depreciated against the Euro and
expected downturn in the global electronics                       Yen, by 6.1% and 4.5% respectively. Among the
industry. The policy band was widened in October,                 Asian currencies, the Singapore dollar also
to allow for greater flexibility in exchange rate                 weakened against the Rupiah and the Won, but
management, as volatility in international financial              remained largely unchanged against the Baht and
                                                                  the NT dollar.

      In 1994, NTUC FairPrice partially absorbed the GST for a period of only two months.
      The data in this section are taken from the FY2002 Budget announced in May 2002.

Monetary Authority of Singapore                                                                 Economics Department
Macroeconomic Review, July 2002                                                                                                                                                  87

     …while domestic interest rates continued to
                  trend lower,…
                                                                                                         Chart 4.30
Domestic interest rates remained low in the first half                                        Domestic Liquidity Indicator (DLI)
of 2002, reflecting the soft global interest rate                                                              0.5

environment and slack liquidity conditions in the

                                                                              Change in Liquidity Conditions
domestic money market.          Singapore's 3-month

                                                                                 from Previous Quarter
interbank rate continued on its downward trend,
declining from 1.25% at end-2001 to 1.06% in Q1
2002, and then to 0.88% in Q2. Retail interest rates                                                           -0.5

also edged lower, with banks’ 3-month and 12-month
fixed deposit rates easing from 1.10% and 1.63%                                                                -1.0
respectively at end-December to 1.00% and 1.48% at
end-June, while the prime lending rate has remained
stable at 5.40% since February.                                                                                -1.5
                                                                                                                      Jan    Apr      Jul      Oct    Jan      Apr Jun
                                                                                                                      2001                           2002

         …resulting in easier overall monetary

These developments were reflected in movements of
the Domestic Liquidity Indicator (DLI), which is a                                                                     Chart 4.31
weighted average of the changes in the S$NEER and                                                               Government's Fiscal Position
the 3-month domestic interbank interest rate.45 The                                             22                                                                6
DLI hovered close to zero during the first half of the                                                            Total
                                                                                                                                                 Revenue (LHS)
year, implying that overall monetary conditions were                                             21               (LHS)                                           5

largely unchanged compared with the previous                                                                                            Fiscal Balance (RHS)
                                                                                                20                                                                4
quarter. It turned slightly positive in February and
                                                                              % of GDP

                                                                                                                                                                      % of GDP
March 2002, largely due to the slight strengthening of                                          19                                                                3
the domestic currency.      For most of Q2 2002,
however, the DLI was in negative territory, as the                                              18                                                                2
exchange rate weakened and interest rates remained
soft.    (Chart 4.30)     Such conducive monetary                                               17                                                                1

conditions should help to sustain the economic
                                                                                                16                                                                0
recovery going forward.                                                                                          FY1997      FY1998   FY1999    FY2000   FY2001

                                                                              Note: Interest on loans to statutory boards has been
                                                                                    reclassified under NII from FY2000.
     The government recorded a smaller surplus in

Turning to the fiscal front, the government's budget
position remained healthy last year, with a surplus46 of
$3.8 billion (2.5% of GDP) recorded in FY2001.
Nevertheless, this was substantially lower compared
with the $5.8 billion surplus (3.6% of GDP) recorded
in FY2000, and largely reflected the decline in
operating revenue due to the deterioration in
economic activity over 2001. (Chart 4.31)

         The DLI was introduced in the June 2001 MAS ED Quarterly Bulletin.
         The “surplus/deficit” is defined as total operating revenue less development and operating expenditure. To be consistent with
         definition in the FY2001 and FY2002 Budgets, operating revenue from FY2000 has been re-defined to include the net
         investment income (NII) contribution.

Monetary Authority of Singapore                                                                                                             Economics Department
Macroeconomic Review, July 2002                                                                                           88

      …largely reflecting a decline in operating                     The off-Budget packages announced in July
     revenue due to the slowdown in economic                                  and October last year,…
                                                                    In addition, two off-Budget packages amounting to
The slowdown in the economy has had an adverse                      $13.5 billion (or 8.4% of GDP) were announced in
impact on both tax and non-tax revenue collections.                 July and October 2001, as economic conditions
Total operating revenue for FY2001 fell by 6.5% to                  deteriorated over the year. Aimed at helping
$31.5 billion, as compared to $33.7 billion in the                  Singaporean households and businesses tide over
preceding year. While direct tax collection remained                the downturn, these off-Budget packages featured
steady at the beginning of the fiscal year, it saw a                a series of tax reductions and fee rebates for
sharp drop in subsequent months, as economic                        individuals and businesses as well as transfers to
conditions worsened and the tax rebates introduced                  the public via the New Singapore Shares, the Skills
by the off-Budget packages took effect. Indirect tax                Development Fund, the Eldercare Fund, and the
collection also fell in FY2001, as private consumption              Community Assistance Fund. As a result, Special
spending weakened in line with poor consumer                        Transfers totalled $5.3 billion last year, the bulk of
sentiment. In particular, revenue from motor vehicle                which was due to the payment of the New
taxes dropped by over 20%. Non-tax revenue was                      Singapore Shares. After taking these transfers into
adversely affected by the drop in revenues from                     account, the government recorded a budget
COEs, due to declines in both the number of COEs                    deficit48 of $1.4 billion in FY2001.
issued and the value of COE premiums.

                                                                      …coupled with tax changes announced in
       …while government expenditure was                                      the FY2002 Budget,…
        sustained by investments in major
             infrastructure projects.                               The FY2002 Budget, which was released on 3 May
                                                                    2002, represented a careful balance between the
Government spending was focused on enhancing                        need for bold measures to improve Singapore’s
Singapore's economic infrastructure and capacity,                   international competitiveness and attract global
with a number of key development projects being                     talent, and fiscal prudence in view of uncertainties
brought forward during the course of the year. Total                in the external environment. Key initiatives include
government expenditure declined slightly by 0.8% to                 reductions in corporate and personal income tax
$27.7 billion in FY2001, from $27.9 billion the year                rates, enhanced tax incentives for the financial
before. One factor behind the higher expenditure                    sector, and the introduction of employee stock
recorded in FY2000 was the one-time $1.9 billion                    option incentive schemes.        For example, the
compensation paid to SingTel and StarHub for the                    government reduced both corporate and the top
early termination of their duopoly.       In addition,              marginal personal income tax rates to 22% for
FY2000 figures included land-related expenditure,                   Year of Assessment (YA) 2003, with the target of
which has been removed from development                             reducing them further to 20% by the FY2004
expenditure with effect from FY2001.47          After               Budget.
adjusting for the compensation to telecommunications
companies and the inclusion of land-related                         To offset the loss of revenue from the reductions
expenditure, government expenditure would actually                  in income tax rates, the GST will be raised from
have recorded an increase of 11% in FY2001,                         3% to 5% with effect from 1 Jan 2003. This is in
compared with the previous year. This rise would                    line with the government’s overall strategy to shift
have reflected increased employment in the public                   the tax revenue base more towards indirect
sector as well as the acceleration of major                         taxation. The increase in the consumption tax will
development projects, such as building of business                  be complemented by an offset package of
parks and various road and rail projects.                           assistance measures valued at $1.23 billion in

       Land-related expenditure has been reclassified under Other Development Fund Outlays starting from FY2001.
       The “budget surplus/deficit” is defined as total operating revenue less development, operating expenditure and special

Monetary Authority of Singapore                                                                      Economics Department
Macroeconomic Review, July 2002                                                                                                                       89

2003, which comprise Economic Restructuring Shares
(ERS) for all adult Singaporeans, rebates on rentals and
service & conservancy charges, and subsidies in
healthcare and public education. The offset package will
help Singaporean households adjust to the increase in
prices of consumer goods and services, even at a time
when uncertainties remain over the prospects of growth
for the economy.                                                                                    Table 4.4
                                                                                           Government Budget for FY2002
                                                                                                                        FY2002 Budget
     …should lead to a small deficit in FY2002.                                                                            $    % of
                                                                                                                        Billion GDP
These tax measures, together with the offset packages,                     Operating Revenue                             29.2   18.2
rebates and ERS, will result in a small budget deficit of                   Tax Revenue                                  22.9   14.3
$190 million49 in FY2002. (Table 4.4) However the size                      Non-Tax Revenue                               3.9    2.4
of the surplus is not a good indicator of the fiscal policy                 Contribution from NII                         2.4    1.5
stance because it is the change in surplus level and not                   Expenditure                                   28.3   17.7
the absolute level that determines the shift in the policy                  Operating Expenditure                        19.5   12.2
stance. Nevertheless, simply observing the change in                        Development
                                                                                                                            8.8            5.5
fiscal balance could be misleading, as it is unclear if the
                                                                           Special Transfers                                1.2            0.7
change in the surplus number is the cause or result of
changes in economic activity. A better indicator of the                    Budget Deficit                                   0.3            0.2
stance and thrust of fiscal policy is the fiscal impulse (FI)
measure, which is able to capture changes in both
discretionary fiscal policy as well as effects of the
automatic stabilisers. A positive (negative) FI measure
will imply a more expansionary (contractionary) fiscal
stance, compared to the previous year.50

                                                                                                      Chart 4.32
      The fiscal policy stance in 2002 is more                                               Fiscal Impulse Measure (FI)
          expansionary than last year,…                                               6

Chart 4.32 shows the estimates of the FI measure,                                     2
expressed as a percentage of nominal GDP, from 1985 to
                                                                           % of GDP

2002. Since 2001, the FI measure has been positive,
implying that the fiscal stance has been more
expansionary than the year before. This reflects the                                  -4

more accommodating stance adopted by the                                              -6
government in view of the sharp economic slowdown.                                    -8
                                                                                           1985   1988      1991     1994     1997       2000 2002F

Similarly, our estimated FI measure for 2002 is relatively                                                    Calendar Year

strong, at 3.7% of GDP, which in turn implies that fiscal                                                Including Off-Budget Measures

policy will be more expansionary compared to 2001. Of
this, more than half of the FI measure can be attributed

      This amount was quoted in the FY2002 Budget Speech and differs from the number stated in Table 4.4 as it takes into account
      the entire package of offsets, rebates, ERS, and other tax changes.
      The FI measure was introduced in the Macroeconomic Review, Vol 1, Issue 1, Jan 2002, where further details can be found.
      Essentially, the FI measure is calculated as follows:

       FI t = − ∆Bt − g t −1 ∆Yt P + t t −1 ∆Yt
       where: ∆B = The actual budget balance (first difference)
              g = Ratio of government expenditures to output
              t = Ratio of government revenues to output
              ∆YP= Potential output in nominal prices (first difference)
              ∆Y = Actual output in nominal prices (first difference)

Monetary Authority of Singapore                                                                                    Economics Department
Macroeconomic Review, July 2002                                                                      90

to the measures introduced through the off-Budget
packages last year, as highlighted by the yellow bar.
This largely reflected the acceleration of major
infrastructure projects as well as the impact of the tax
and fee rebates announced last year.

It is important to remember that the FI measure is
designed to determine the direction of the change in
budgetary stance, rather than to assess its effect on the
economy. For a clearer picture of the impact of fiscal
policy on the economy, it is necessary to complement the
above analysis with a study of the fiscal multiplier effect
using a macroeconomic model, such as the MMS.

…providing a moderate boost to economic activity
                  this year…

As indicated by the DLI and FI measures, both monetary
and fiscal policies have been supportive of economic
activity. The neutral monetary policy stance since last
July, coupled with continued slack liquidity conditions,
has facilitated economic recovery. At the same time, the
FY2002 Budget, together with the off-Budget measures
already introduced last year, should deliver a moderate
boost to real GDP in 2002.

In the previous issue of the Review, the impact of the                     Table 4.5
off-Budget packages and the shift to the neutral               Impact of Fiscal Measures on GDP
monetary policy stance were estimated to boost real GDP                     Growth
by 1.0% point and 0.3% points in 2002 respectively.                             % Point Boost to
The impact of these policies has been incorporated into                          Growth in 2002
the baseline forecast for 2002. This section focuses on                         From    Additional
estimating the additional boost to real GDP this year                            Oct      Impact
from the recently announced Budget measures. The                                2001     from May
impact of these measures on economic activity in 2002                            Off-      2002
will mainly stem from the reduction in motor vehicle                           Budget     Budget
taxes as well as a slight increase in government                              Package
infrastructure investment. (The bulk of the tax changes       Real GDP           1.0       0.2
announced in the Budget, such as the reduction in
personal and corporate tax rates, etc, will only take                            0.6       0.0
effect from 2003.)
                                                                                 1.7       0.7
Several simulations were performed using MAS                  Investment
econometric models, and the results suggest that the          Manufacturing
FY2002 Budget will increase real GDP growth by 0.2%                              1.2       0.5
points this year. (Table 4.5) A large part of the boost
will be from the construction sector, reflecting                                 1.5       0.5
the rise in spending on infrastructure projects
undertaken by the government. For example, total non-         Financial &
                                                                                 0.7       0.1
residential investment growth could increase by 0.7%          Business Sector
points compared to the baseline scenario.

With most of the tax changes announced in the latest
Budget only kicking in from 2003 onwards, it is clear that
the impact of the tax reductions on the economy in 2002
will be somewhat limited. Instead, most of the fiscal

Monetary Authority of Singapore                                                 Economics Department
Macroeconomic Review, July 2002                                                91

boost this year can be attributed to measures already in
the pipeline, which were announced in last year's off-
Budget packages. In sum, the short-term impact of
fiscal policy provides a stimulus to aggregate demand
(GDP growth) of the order of 1.2% points in 2002.

 …and setting in place a medium-term tax policy
 mix which will enhance Singapore's competitive

Over the medium term, the FY2002 Budget envisages a
series of tax adjustments, specifically involving
reductions to the personal and corporate tax rates, that
should    help    enhance     Singapore’s    international
competitive position and lay the foundations of continued
sustained economic growth in an increasingly competitive
economic environment.       Chapter 5 provides further
details on the medium- to long-term impact of the
Budget, by tracing through the longer-term effects of the
key tax changes on the economy, namely the reductions
in personal and corporate income taxes and the increase
in GST.

Monetary Authority of Singapore                              Economics Department
Macroeconomic Review, July 2002                                                                                                     92

5            Special Feature on
             Macroeconomic Impact of the
             FY2002 Budget
5.1 Introduction
 The FY2002 Budget has a medium- to long-term                       will ensure that most households (of all income
 focus which envisages a series of tax adjustments                  groups) are adequately compensated for the rise in
 that will help improve Singapore’s international                   consumption prices over the next five years.
 competitiveness and enhance the country’s growth
 prospects going forward. The key initiatives include               This chapter first examines the short- to medium-
 a reduction in corporate and the top marginal                      term macroeconomic impact of the tax changes
 personal income tax rates to 22% in YA2003, with                   introduced in the FY2002 Budget, before turning to
 the target of reducing them further to 20% by the                  the longer-term impact of these tax changes. The
 FY2004 Budget. In order to offset the loss of                      Monetary Model of Singapore (MMS) is used to
 revenue from these tax cuts, GST will be raised                    simulate the impact of the budget measures.51
 from 3% to 5% on 1 Jan 2003. The decision to
 introduce the GST hike only in January next year                   In the simulation exercise, the baseline scenario
 was to allow for the economic recovery to gain                     keeps the key Budget parameters unchanged, while
 momentum so as to lessen the impact on                             the alternative solution incorporates the tax mix
 households. The increase in consumption tax will                   changes introduced in the Budget. Note that the
 be complemented by an offset package of                            impact of the Budget on key macroeconomic
 assistance measures to take effect in 2003. The                    variables are typically cited as percentage
 package, valued at $1.23 billion, comprises                        deviations from baseline, calculated as the
 Economic Restructuring Shares (ERS) for all adult                  percentage difference in level terms between the
 Singaporeans, rebates on rent and services &                       baseline and alternative solutions.       The fiscal
 conservancy charges, and subsidies in healthcare                   variables, however, will be cited as deviations from
 and education. This comprehensive offset package                   baseline as a percentage of GDP.

5.2 Short- to Medium-Term Impact of the Budget
     Expansionary impact on the economy will be                     small negative impact of the GST hike on private
         largely due to increase in business                        consumption.
                                                                    In the MMS, the rate of investment depends on the
 The MMS estimates indicate that the tax changes                    after-tax return on capital. The cut in the corporate
 introduced in the FY2002 Budget will have an                       tax rate from 24.5% to 22% in YA200352 not only
 overall expansionary impact on the economy over                    raises the after-tax return on capital, but also
 the next two years, with the levels of real GDP                    lowers      business     costs     and      enhances
 boosted by some 0.2% and 0.8% higher than                          competitiveness, thus inducing existing firms to
 baseline in 2003 and 2004 respectively. In the                     step up their long-term spending plans.
 medium term, real GDP will be about 1.2% above
 baseline over the period 2004 to 2007. This                        Also, as anticipated profitability increases,
 increase in GDP is largely due to the stimulatory                  Singapore should attract more FDI. The model
 effect of the corporate income tax reduction on                    estimates that private non-residential investment
 business investment, which more than offsets the                   will rise by about 2.6% from the baseline in 2003

         More details on the MMS are in “An Introduction to the Monetary Model of Singapore (MMS)”, available on the MAS website.
         The corporate tax and personal income tax rates are assumed to be further reduced to 20% in YA2005.

Monetary Authority of Singapore                                                                       Economics Department
Macroeconomic Review, July 2002                                                                                                                        93

 and 10% over the period 2004 to 2007, and after that,                              Chart 5.1
 investments will be sustained at a 12% higher level.                Real Private Non-Residential Investment
 (Chart 5.1)                                                                                       14


                                                                       % Deviation from Baseline
 Consumption levels will be slightly below baseline
                    initially…                                                                     8

 In comparison, private consumption levels should fall                                              4
 slightly because of the tax changes in 2003, given the
 rise in GST from 3% to 5%.53 This arises largely                                                  2

 because of the negative impact of the higher prices,                                              0
 which induces substitution from current consumption to                                            -2
 savings.    As a result, real private consumption is                                                   2001   2003   2005    2007      2009    2011
 predicted to fall by 0.9% from baseline in 2003.

 Nevertheless, the reduction in personal income tax rates
 and the various GST offset packages should ensure that
 households are better off via the support to private
 disposable income. MMS estimates suggest that on
 average, real disposable income will be 1.3% higher in
 2003, and 0.9% higher in 2004-05, as a result of the
 offset measures. The small drop in private consumption
 is likely to be confined to the more price-elastic, non-
 essential consumer items.

     …but consumption is still expected to record
     positive growth in the short to medium term.

 However, these offset measures will not necessarily lead
 households to restore their consumption levels
 immediately. First, there is a delayed impact between                                        Chart 5.2
 the rise in income and the subsequent effect on                                 Real Private Disposable Income and
 consumption, as individuals assess the implications of                                     Consumption
 the tax changes on their long-term income and wealth                                              4
 positions. Second, some proportion of the increase in
 disposable income may not be consumed, but rather be
                                                                       % Deviation from Baseline

                                                                                                   3                    Real Private
 put aside as savings. Thus, MMS predicts that even with                                                                Disposable
 the offset package, private consumption levels will                                               2

 remain slightly below baseline by about 0.4% over the
 period 2004 to 2007, and only return to baseline levels
 from 2007 onwards. (Chart 5.2) Despite a lower level
                                                                                                                                       Real Private
 of consumption in the initial years compared with the                                                                                 Consumption
 baseline, private consumption is still expected to register
 healthy growth of around 2.5-3.5% and 4-6% in 2003
 and 2004-07 respectively. In the absence of the offset                                            -1
                                                                                                        2001   2003   2005    2007      2009    2011
 package, our estimates suggest that consumption levels
 will on average fall by a further 0.2-0.3% over the
 period 2003 to 2005.

       There is likely to be a slight boost to private consumption in Q4 2002 as consumers bring forward their purchases in
       anticipation of higher prices after the implementation of the GST hike in Jan 2003.

Monetary Authority of Singapore                                                                                           Economics Department
Macroeconomic Review, July 2002                                                                                                                                                        94

     Expansionary effect on GDP will be broad-based.
                                                                                                                                       Table 5.1
 From a sectoral perspective, GDP in most sectors                                                                                 Real GDP by Sectors
 increases and remains above baseline throughout the                                                                           (% Deviation from Baseline)
 simulation period, largely due to the increase in                                                                                                              2004-      2008-
                                                                                                                                                                2007       2012
 investment. GDP in the construction sector shows the
                                                                               Overall GDP                                                              0.2       1.2           2.9
 strongest boost, rising 1.3% above baseline in 2003 and
 4.9% in 2004-07, reflecting the strength in non-                                                           Manufacturing                               0.6       2.4            4.3
 residential investment goods, which account for                                                            Construction                                1.3       4.9            5.9
 approximately half of total domestic output in the                                                         Financial & Business                        0.0       0.6            2.3
 construction sector.54 The simulations suggest that the
                                                                                                            Housing                                     0.0       0.0            0.1
 export-oriented manufacturing sector will also benefit
 from the tax changes, rising by 0.6% and 2.4% above                                                        Other Services                             -0.1       0.4            2.2
 baseline in 2003 and 2004-07 respectively, as the                                                          Private Consumption                        -0.9       -0.4           1.7
 reduced corporate tax rate results in lower business                                                       Private Investment                          2.6      10.0           12.1
 costs and enhances competitiveness.      In comparison,
 GDP in the other services sector is expected to fall
 slightly below baseline in 2003. (Table 5.1)
                                                                                                                                           Chart 5.3
                                                                                                                                          CPI Inflation
 Price increase is likely to be smaller than the hike
                        in GST.                                                                                          2.0

 The simulations show that the level of consumer prices
                                                                              YOY % Growth


 will be boosted by around 1% above baseline in 2003
 because of the hike in the GST rate. The magnitude of

 the price increase is less than the 2% point rise in the                                                                0.5
 GST rate.
 Reflecting the effects of the increase in the GST rate and
 the pickup in the economic recovery, the inflation rate                                                         -0.5

 rises slightly above 2% p.a. in 2003. However, CPI
                                                                                                                               2001    2003    2005     2007    2009     2011

 inflation is capped below 2% p.a. for 2004-07.
 (Chart 5.3)     (See also Section 4.5 for a further
 discussion of CPI inflation in 2003.)
                                                                                                     Chart 5.4
                                                                                          Government Operating Revenue and
     Tax revenue and budget positions will be lower                                               Budget Surplus
             than in the baseline scenario.                                                                               0.0
                                                                                    Deviation from Baseline (% of GDP)

 On balance, the combined effect of the tax mix – namely                                                                 -0.5
 the increase in GST rate, corporate and personal income                                                                                                  Budget Surplus
 tax cuts, and GST offset package – will cause total tax
 revenue to fall by 0.2% of GDP in 2003, compared to                                                                     -1.0
 the baseline scenario that excludes the tax reform.55
 The result reflects the bigger loss of revenue, amounting
 to 0.8% of GDP, in the direct tax component as
 compared with the gain of 0.6% of GDP in indirect tax                                                                                                 Government Operating
 collection.   Coupled with the off-Budget measures                                                                      -2.0
 announced in 2001, the budget surplus is predicted to                                                                          2001    2003    2005     2007   2009     2011

 shrink by 0.9% of GDP in 2003, and 1.4% of GDP in

         The boost also reflects the exemption of housing services (actual and imputed rentals) from GST.
         We also calculated the net benefit to households, by subtracting the increase in consumption taxes from the total savings in
         individual income taxes payable and GST-offset packages. In nominal terms, households have a net gain of about $815 million
         in 2003, and their nominal disposal income increases by 3% above baseline.

Monetary Authority of Singapore                                                                                                                       Economics Department
Macroeconomic Review, July 2002                                                                                                                        95

 2005. Subsequently, with the last payment of the ERS
 being effected in 2005 and with the higher economic
 activity generated from the income tax cuts, the budget
 surplus will recover to 0.8% of GDP below the baseline
 scenario by 2008.56 (Chart 5.4) Our simulations show
 that the budget surplus remains healthy at around 1.8%
 of GDP over the period 2004 to 2007.

5.3 Long-Term Impact of the Budget
Tax changes should boost investment, leading to a
      build-up in productive capital stock…

The tax adjustments introduced in the FY2002 Budget
should have an expansionary impact on the economy in
the long term (after 2007), with the level of real GDP
about 3.0% higher compared with the baseline, and
output from all sectors above their baseline levels. The
key driver of this boost to economic activity is the
increase in private investment to about 12% above
baseline, which helps to build up the productive capital
stock of the economy. Private consumption also picks up
in the long term as the expansionary effect of the tax mix
finally kicks in, following its initial contraction below
baseline prior to 2007.      In the long term, private
consumption is seen to rise by 1.7% above the baseline
scenario, as the personal income tax reductions and
stronger economic growth boost households' real
disposable income to 3.0% above baseline. In addition,
the savings rate in the economy will be 1.2% points
higher than baseline, given that the tax mix tends to
favour savings and investment as the hike in GST raises
the opportunity cost of consumption.

     …which in turn leads to higher productivity.                                                                     Chart 5.5
                                                                                                                  Labour Productivity
In the medium to long term, the higher level of                                                       4

productive capital stock will support higher productivity
and economic growth. Indeed, labour productivity will be
                                                                          % Deviation from Baseline

3.5% above baseline by 2012. Coupled with the higher
pace of economic activity, this supports a rise in real                                               2
wages to about 1.5% above baseline by 2012. [Note that
both real wages and productivity grow at above 4.2%                                                   1
p.a. in the long term.] The benefits of the tax reform on
productivity become progressively larger over time.                                                   0
(Chart 5.5) This rise in productivity level subsequently
leads to greater employment creation with total                                                       -1
employment at 0.6% above baseline by 2012.                                                                 2001   2003   2005     2007   2009   2011

       Excluding 50% of NII and special transfers, the government’s balance is estimated to be 0.1% of GDP below the baseline in
       2003, and 0.6% of GDP lower than the baseline by 2008.

Monetary Authority of Singapore                                                                                                 Economics Department
Macroeconomic Review, July 2002                                                                                                    96

     Revenue and budget positions remain slightly
     below the baseline scenario for the simulation

On the fiscal front, government operating revenue57
collection remains about 1.5% of GDP below baseline in
the long term due to the cuts in income tax rates.58
Nevertheless, the level of operating revenue collection is
relatively resilient over the long term, as the higher
economic growth in later years will generate more tax
revenue. However, this figure is slightly lower than the
baseline, as the decline in tax revenue will have led to the
slower accumulation of public assets, which is carried
through into the long run. As a result, net investment
income will increase at a lower rate compared with the
baseline scenario. In addition, the tax changes imply a
greater reliance on indirect tax collection. From about
40% of total tax revenue at the moment, indirect taxes
will rise to account for 46% of total tax revenue in 2012.
On balance, the budget surplus remains at 0.7% of GDP
lower than baseline over the longer term.59 Given that
there is no significant increase in government
expenditures and with the economy converging to its
steady-state growth potential of around 5% over the
medium to long term, this will work out to a budget
surplus of about 2.5% of GDP over the period 2008 to

5.4 Summing up
Over the medium to long term, the tax reform measures
introduced in the FY2002 Budget will play a key role in
helping to enhance Singapore’s international competitive
position and lay the foundations for continued sustained
economic growth in an increasingly competitive economic
environment. Indeed, our simulations show that the
overall level of real GDP is sustained above baseline,
mainly due to the boost to the country’s capital stock.
This supports a higher level of real disposable income for
households in the long run.

       Government operating revenue includes 50% of NII.
       The lower revenue collection, as a percentage of GDP, is due to the lower revenue collected as well as a higher level of nominal
       GDP compared to the baseline.
       Excluding 50% of NII and special transfers, the government’s balance remains on average 0.5% of GDP below the baseline
       over the period 2008 to 2012.

Monetary Authority of Singapore                                                                        Economics Department
Macroeconomic Review, July 2002                                                   97

Statistical Appendices

Table 1: Real GDP Growth by Sector

Table 2: Real GDP Growth by Expenditure

Table 3: Consumer Price Index

Table 4: External Trade

Table 5: Non-oil Domestic Exports by Selected Countries

Table 6: Labour Market

Table 7: Monetary

Table 8: Fiscal

Table 9: Balance of Payments – Current Account

Table 10: Balance of Payments – Capital & Financial Accounts

Table 11: Exchange Rates

Monetary Authority of Singapore                                Economics Department


                                  Financial & Business                                               Transport                          Financial & Business                                             Transport
                                                                                   Commerce                                                                                         Commerce
                    Manu-               Services               Con-                                      &                Manu-               Services            Con-                                       &
           Total                                                                                                 Total
  Period           facturing           Financial    Business struction             Wholesale Hotels Commun-              facturing           Financial Business struction           Wholesale Hotels     Commun-
                                                                           Total                                                                                            Total
                               Total   Services     Services                        & Retail & Rest. ications                        Total   Services Services                       & Retail & Rest.     ications
                                                   Year-on-Year % Change                                                                Seasonally-adjusted Quarter-on-Quarter % Change

    1993    12.7        9.6     15.2       25.0          6.6      9.0       19.7       23.2      6.0      10.7    12.7        9.6     15.2       25.0       6.6      9.0     19.7         23.2     6.0       10.7
    1994    11.4       12.8     11.6       11.7         11.5     15.5       12.1       13.7      5.0      10.2    11.4       12.8     11.6       11.7      11.5     15.5     12.1         13.7     5.0       10.2
    1995     8.0       10.0      5.3        2.8          7.9      9.6        8.8        9.6      4.9      10.6     8.0       10.0      5.3        2.8       7.9      9.6      8.8          9.6     4.9       10.6
    1996     7.7        2.9      8.5        7.3          9.6     23.2        6.1        6.1      6.0       8.2     7.7        2.9      8.5        7.3       9.6     23.2      6.1          6.1     6.0        8.2
    1997     8.5        4.5     13.4       18.6          8.4     16.3        6.4        6.4      6.5       8.8     8.5        4.5     13.4       18.6       8.4     16.3      6.4          6.4     6.5        8.8
    1998    -0.1       -0.6     -2.7       -7.4          2.3      2.8       -4.7       -4.1     -7.5       6.4    -0.1       -0.6     -2.7       -7.4       2.3      2.8     -4.7         -4.1    -7.5        6.4
    1999     6.9       13.6      4.4        5.1          3.7     -8.8        6.6        7.1      4.0       7.5     6.9       13.6      4.4        5.1       3.7     -8.8      6.6          7.1     4.0        7.5
    2000    10.3       15.3      6.0        4.6          7.3     -1.7       14.3       15.2      8.9       8.5    10.3       15.3      6.0        4.6       7.3     -1.7     14.3         15.2     8.9        8.5
    2001    -2.0      -11.5      2.5        2.2          2.8     -2.1       -2.8       -2.8     -2.6       2.7    -2.0      -11.5      2.5        2.2       2.8     -2.1     -2.8         -2.8    -2.6        2.7

 1998 Q1     4.3        6.4     -0.5       -6.7           6.2     15.1       0.8        1.9     -4.6       7.6    -6.1       -8.4    -14.2      -23.5      -4.1     -3.5     -9.9        -8.6    -16.2        7.3
      Q2     0.0       -0.3     -4.2      -12.3           4.7      8.7      -5.2       -4.9     -6.9       6.9    -4.4       -9.7     -5.7      -11.5       0.0     -0.2    -11.3       -12.2     -6.2        7.6
      Q3    -2.5       -4.3     -5.7      -11.7           0.7     -0.6      -6.9       -6.1    -11.0       5.2    -1.8       -1.7     -0.4        1.3      -1.9    -10.3     -3.0        -1.6    -10.6        0.1
      Q4    -1.7       -2.9     -0.1        1.9          -1.9     -8.9      -7.1       -7.1     -7.4       6.1     6.6       10.1     24.1       56.2      -1.0    -19.1     -3.3        -4.7      4.4       10.4
 1999 Q1     2.2        6.5     -0.6       -2.6           1.4     -4.0      -2.3       -2.3     -2.2       6.4     9.0       31.4    -15.9      -35.5       8.8     17.1      9.4        10.3      4.4        7.2
      Q2     7.9       14.6      9.8       17.3           2.9    -11.8       6.3        6.6      4.7       6.5    18.3       21.0     39.0       84.5       5.4    -28.7     24.1        24.5     22.1        8.3
      Q3     8.5       16.7      6.8        9.5           4.3    -11.7       8.8        9.4      5.6       8.4     1.0        5.7    -10.0      -22.0       3.8    -11.0      6.8         9.2     -5.6        7.8
      Q4     9.0       16.2      1.6       -3.2           6.3     -7.5      13.7       14.7      8.1       8.8     8.4        9.3      0.6       -6.5       7.9      0.0     15.6        16.0     13.2       12.4
 2000 Q1    10.0       13.2      8.7       11.4           6.2    -10.1      16.3       17.3     10.8       9.6    12.8       16.8     11.2       15.2       7.6      2.5     19.2        19.9     15.6        9.7
      Q2     8.7       13.6      1.8       -3.7           7.7     -2.0      14.0       15.3      7.0       9.4    13.0       23.4      6.5        2.0      11.0      1.2     14.3        15.9      5.5        7.8
      Q3    10.9       15.2      6.1        3.8           8.4      3.4      14.7       15.4     10.9       8.9     9.4       11.4      6.4        6.0       6.7      9.5     10.2        10.2     10.2        5.9
      Q4    11.4       18.8      7.6        8.3           7.0      2.3      12.2       13.1      7.2       6.1    10.5       24.4      6.5       10.1       3.2     -2.5      5.9         7.3     -1.6        1.6
 2001 Q1     5.0        2.9      4.4        2.8           5.9      2.0       6.5        7.2      2.6       4.8   -11.4      -34.5     -1.4       -5.9       3.0     -0.4     -4.0        -4.1     -3.3        4.0
      Q2    -0.5       -8.7      3.7        4.0           3.5      0.3      -0.9       -1.1     -0.2       2.8    -8.3      -23.6      3.5        6.4       0.8     -5.0    -14.2       -15.6     -5.6        0.0
      Q3    -5.4      -18.9      1.7        1.5           1.9     -3.9      -7.4       -8.0     -3.8       1.9   -10.5      -30.7     -1.4       -3.6       0.7     -7.6    -15.4       -17.2     -4.2        2.2
      Q4    -6.6      -18.6      0.4        0.6           0.3     -6.5      -8.6       -8.5     -8.8       1.1     5.6       26.9      1.3        6.2      -3.0    -12.3      0.3         4.6    -20.9       -1.5
 2002 Q1    -1.7       -3.7     -1.5       -3.2           0.1     -9.0      -4.0       -3.7     -5.8       4.9     7.7       28.0     -8.9      -19.4       1.9    -11.1     16.5        17.6      9.9       20.0

                                                                                                                                                                   Source: Singapore Department of Statistics

Monetary Authority of Singapore

TABLE 2: REAL GDP GROWTH by expenditure

                                                                                                                                        Year-on-Year % Change
                                                                                       Domestic Demand
                           Total                                                                                                                       External
               Period                                                   Consumption                          Gross Fixed Capital Formation
                          Demand          Total                                                                                                        Demand
                                                         Total            Private           Public       Total          Private          Public

                   1993           16.3            14.4           12.4           11.9             14.7            10.3         10.9             7.6            17.2
                   1994           15.3             4.0            5.8            7.5             -1.7             9.6          6.5            22.8            20.5
                   1995           12.5             8.6            4.4            3.0             11.7            11.8         14.6             1.7            14.0
                   1996            9.1            13.1           10.1            8.1             19.3            23.1         27.4             5.7             7.6
                   1997            7.9             8.9            5.8            5.5              7.1             9.7          7.1            22.3             7.5
                   1998           -5.8            -6.8           -1.5           -3.8              8.0            -6.1         -9.4             8.4            -5.4
                   1999            7.0             4.7            6.3            6.4              6.1            -4.0         -6.2             4.1             7.8
                   2000           14.3            11.8           10.8            9.9             14.0             6.3          8.2             0.3            15.3
                   2001           -7.7            -8.7            1.8            0.5              6.6            -4.6         -7.5             5.5            -7.3

                1998 Q1             3.5         6.0               2.0           -0.4              9.2         14.4            13.8            17.2             2.5
                     Q2            -6.1        -4.9              -0.3           -2.2             10.1         -3.1            -5.9             9.1            -6.6
                     Q3            -8.6       -13.6              -6.3           -8.0              1.9        -11.4           -13.7            -1.5            -6.6
                     Q4           -10.9       -13.9              -1.6           -4.3             10.4        -20.2           -26.9            10.5            -9.8
                1999 Q1            -4.5        -6.9               5.7            0.8             19.7        -16.5           -26.2            24.2            -3.5
                     Q2             7.2         6.6               4.3            5.6             -2.0         -1.4            -1.3            -1.9             7.5
                     Q3             9.3        12.6               7.3            8.6              1.8          1.9             2.3             0.2             8.1
                     Q4            16.2         8.4               8.1           10.8             -2.1          1.8             4.1            -5.0            19.2
                2000 Q1            15.5        11.7               8.3            9.2              6.2          3.2             9.0           -11.2            17.1
                     Q2            12.1        12.1              10.4           11.3              5.6          4.6             6.1            -0.7            12.1
                     Q3            15.6         7.3               9.9           10.8              6.1          7.9             9.3             2.8            18.7
                     Q4            14.0        16.2              14.6            8.4             41.2          9.2             8.3            12.2            13.3
                2001 Q1             5.7         2.0               3.9            7.1             -4.0          7.6             4.5            16.9             7.2
                     Q2            -5.6        -8.3               6.0            2.2             25.8         -2.3            -6.3            13.7            -4.6
                     Q3           -14.3        -9.6               3.6           -2.1             30.3        -11.0           -14.3             1.9           -16.0
                     Q4           -14.6       -18.4              -5.7           -4.9             -8.1        -11.1           -11.9            -8.5           -13.2
                2002 Q1            -8.8        -9.3              -3.0           -2.9             -3.1        -15.9           -16.5           -14.2            -8.7

                                                                                                                        Source: Singapore Department of Statistics

Monetary Authority of Singapore


                                                             Transport                                                                          Transport
                                                                        Education                                                                          Education
                                                                 &                                Misc-      All                                    &                               Misc-
                All Items   Food     Housing     Clothing                    &       Health                         Food    Housing   Clothing                  &       Health
       Period                                                Commun-                           ellaneous   Items                                Commun-                          ellaneous
                                                                        Stationery                                                                         Stationery
                                                              ications                                                                           ications
                                               Nov 1997- Oct 1998 = 100                                                               Year-on-Year % Change

         1993       92.2      90.4      93.5         96.3        93.2        86.9       86.5       94.6       2.3     0.8       3.2       1.2         2.6         3.3      3.7          4.1
         1994       95.1      93.6      94.7         98.5        99.5        89.1       89.2       96.2       3.1     3.6       1.3       2.2         6.7         2.5      3.1          1.7
         1995       96.7      95.7      95.4         99.9       100.1        92.8       90.7       98.6       1.7     2.3       0.7       1.5         0.6         4.2      1.6          2.5
         1996       98.0      97.7      95.9        100.4       100.4        95.6       92.7      100.4       1.4     2.1       0.5       0.5         0.4         3.0      2.3          1.8
         1997      100.0      99.7      98.1        101.1       104.3        97.1       96.1      100.6       2.0     2.0       2.3       0.7         3.9         1.5      3.7          0.2
         1998       99.7      99.9      99.9         99.8        99.2       100.1      100.2       99.5      -0.3     0.2       1.9      -1.3        -4.9         3.1      4.3         -1.1
         1999       99.8     100.8      98.6         97.9        98.7       101.6      100.8      100.3       0.0     0.9      -1.4      -1.9        -0.6         1.5      0.6          0.8
         2000      101.1     101.4     100.6         97.1       100.7       102.9      102.3      101.9       1.3     0.6       2.0      -0.8         2.1         1.3      1.5          1.5
         2001      102.1     101.9     101.8         97.5        99.4       105.1      105.7      105.2       1.0     0.5       1.3       0.5        -1.4         2.2      3.3          3.2

      1998 Q1      100.2     100.3     100.4        100.3       100.1        99.5      100.0      100.5       1.1     0.8       3.9      -1.2        -1.5         3.2      6.6         -0.2
           Q2       99.7     100.0      99.7         99.9        99.8        99.7      100.1       99.2       0.1     0.6       2.6      -1.0        -3.9         3.3      4.8         -1.6
           Q3       99.6      99.8     100.0         99.4        99.2       100.9      100.4       98.6      -0.9    -0.2       1.3      -1.3        -6.8         3.4      3.9         -1.4
           Q4       99.4      99.7      99.7         99.5        97.9       100.2      100.6       99.6      -1.4    -0.3      -0.1      -1.8        -7.2         2.5      2.0         -1.1
      1999 Q1       99.5     100.3      99.1         99.4        97.2       101.7      100.9      100.1      -0.7     0.0      -1.3      -0.8        -2.9         2.2      1.0         -0.4
           Q2       99.7     101.0      98.4         98.2        98.2       101.6      100.6      100.6       0.0     1.0      -1.3      -1.7        -1.6         1.9      0.5          1.4
           Q3       99.9     101.1      98.5         97.6        99.3       101.7      100.8      100.2       0.3     1.3      -1.4      -1.7         0.1         0.8      0.5          1.6
           Q4       99.9     101.0      98.2         96.3       100.0       101.4      101.0      100.5       0.5     1.3      -1.4      -3.3         2.2         1.2      0.4          0.8
      2000 Q1      100.6     102.1      99.2         96.7       100.4       101.7      101.1      101.0       1.1     1.8       0.1      -2.7         3.4         0.0      0.2          0.9
           Q2      100.5     101.3      99.5         95.8       100.1       102.4      101.7      101.4       0.8     0.3       1.1      -2.4         1.9         0.8      1.2          0.9
           Q3      101.4     101.1     101.4         97.5       101.3       103.8      102.6      101.7       1.5     0.0       2.9      -0.2         2.0         2.0      1.8          1.5
           Q4      101.9     101.1     102.2         98.4       101.2       103.6      103.7      103.3       2.0     0.1       4.0       2.2         1.2         2.2      2.7          2.8
      2001 Q1      102.4     102.5     103.0         97.7       100.1       104.0      104.8      103.9       1.7     0.4       3.8       1.0        -0.3         2.3      3.6          2.8
           Q2      102.2     101.9     102.1         97.1        99.7       104.5      105.6      105.5       1.7     0.6       2.7       1.4        -0.4         2.0      3.8          4.0
           Q3      102.3     101.8     101.4         98.2        99.7       105.9      106.0      105.8       0.8     0.6       0.0       0.8        -1.6         2.0      3.3          4.0
           Q4      101.7     101.5     100.8         97.2        98.0       106.0      106.3      105.5      -0.2     0.4      -1.3      -1.3        -3.1         2.3      2.6          2.2
      2002 Q1      101.5     102.3      99.6         96.3        97.7       106.2      107.3      105.1      -0.9    -0.2      -3.3      -1.4        -2.4         2.0      2.4          1.2

                                                                                                                                                Source: Singapore Department of Statistics

Monetary Authority of Singapore


                                                                                                                                                                             Year-on-Year % Change
                                                          Domestic Exports                                                                      Domestic Exports
                  Total                                                                                  Re-                                                                      Re-
       Period               Exports                                                         Non-                  Imports    Exports    Total         Oil          Non-oil                 Imports
                  Trade                Total     Oil           Total     Electronics                   exports                                                                  exports
                                                          At Current Prices                                                                            At 1995 Prices

          1993      16.4       15.6       13.7      8.6           14.9            21.4          4.9       19.1        17.1      17.2       16.1         15.6           16.3         18.9          18.9
          1994      18.1       23.3       17.4     -3.9           22.5            30.3          8.4       33.4        13.7      27.6       24.0         11.0           26.8         33.5          14.7
          1995      13.2       13.7       11.2     -1.9           13.7            16.3          8.1       17.4        12.7      16.5       14.9         -0.1           17.7         18.8          14.0
          1996       5.1        5.2        5.2     20.6            2.7             4.3         -1.0        5.3         5.0      10.1        9.3          3.6           10.3         11.1           9.5
          1997       5.7        5.3        3.8     -3.9            5.3             3.4          9.8        7.4         6.2      11.6       11.2          0.1           12.9         12.2          10.2
          1998      -7.5       -1.0       -1.5    -15.3            0.9            -0.5          4.2       -0.3       -13.6      -0.3        0.7          8.5           -0.4         -1.6         -12.9
          1999       8.1        5.7        9.8     12.4            9.5             6.1         16.8        0.2        10.8       5.4        8.1         -9.3           10.6          1.6           9.5
          2000      22.9       22.4       16.9     51.0           11.8            10.1         15.0       30.7        23.4      16.8       10.2         -6.0           12.2         26.7          14.8
          2001      -9.4       -8.3      -12.9     -5.0          -14.5           -20.7         -2.4       -2.3       -10.5      -8.6      -11.0          3.9          -12.5         -5.4         -12.4

        1998 Q1       4.1        9.7       6.7    -14.1           10.7             8.5         15.9        14.0       -1.1        9.3       7.7         11.5            7.2         11.4          -0.7
             Q2      -7.7       -1.3      -3.3    -19.5           -0.2            -2.1          4.3         1.4      -13.8       -0.9      -1.2         -2.2           -1.0         -0.5         -13.8
             Q3      -9.3       -1.1      -0.9    -15.4            1.4            -0.6          6.0        -1.3      -16.9       -2.3      -1.4          4.2           -2.1         -3.5         -17.4
             Q4     -15.5       -9.7      -7.4    -11.8           -6.7            -6.6         -7.0       -12.8      -21.0       -5.8      -1.5         22.9           -4.3        -11.8         -18.0
        1999 Q1      -9.4       -9.0      -3.8     -7.9           -3.2            -4.8          0.2       -15.7       -9.9       -5.5       0.6          3.5            0.2        -13.7          -7.2
             Q2       8.0        5.2       9.8      6.9           10.3             5.4         21.1        -1.0       11.1        4.6       8.2         -2.0            9.7         -0.4           9.8
             Q3      10.3        5.2       9.6     13.7            9.0             5.1         17.3        -0.6       16.0        5.1       7.4        -20.0           11.2          1.9          15.0
             Q4      24.6       21.9      23.6     37.8           21.5            18.4         28.5        19.6       27.4       17.2      15.6        -18.5           20.7         19.8          21.2
        2000 Q1      23.7       22.8      19.4     53.5           14.5            13.4         16.8        27.9       24.6       17.4      10.7        -21.0           15.6         27.9          16.8
             Q2      20.7       18.7      13.4     42.6            9.1             6.5         14.1        26.5       22.9       13.1       6.9        -14.8            9.7         22.7          13.2
             Q3      26.8       28.4      22.9     59.7           17.8            19.9         13.9        36.6       25.1       22.3      16.8          4.9           18.0         30.3          15.9
             Q4      20.6       19.9      12.4     49.3            6.3             2.0         15.6        31.1       21.4       14.5       6.8         12.1            6.3         26.0          13.5
        2001 Q1       9.9       10.6       6.4     20.8            3.6            -3.8         18.4        16.5        9.1        8.0       5.9         19.1            4.5         11.0           4.0
             Q2      -5.1       -2.5      -7.6      1.7           -9.4           -13.7         -1.7         4.2       -7.8       -4.4      -8.3         -4.1           -8.7          0.8         -10.3
             Q3     -18.5      -18.7     -24.5     -3.8          -28.3           -36.4        -12.0       -11.0      -18.3      -18.6     -23.0          9.5          -25.8        -12.9         -20.2
             Q4     -19.5      -18.1     -21.7    -29.5          -19.9           -25.1        -10.2       -13.5      -20.9      -15.9     -15.8         -6.5          -16.8        -16.1         -20.2
        2002 Q1     -11.9      -11.4     -17.4    -27.9          -15.0           -18.6         -9.1        -3.7      -12.4       -9.7     -13.3        -17.1          -12.9         -4.9         -11.7

                                                                                                                                                      Source: International Enterprise Singapore

Monetary Authority of Singapore

TABLE 5: NON-OIL DOMESTIC EXPORTS by selected countries

                                                  ASEAN                                                      NIEs
                                       of which
    Period     Countries    Total                                                   Total         Hong Kong         S. Korea    Taiwan     USA            Japan         EU-15         Others
                                       Malaysia           Thailand    Philippines
                                                                                            Year-on-Year % Change

       1997           5.3        7.1          4.9               1.3          40.3        9.2              9.7            -1.7       16.6       4.6            -15.4          12.0           6.1
       1998           0.9       -9.6         -9.7              -9.1         -10.2      -10.4             -9.3           -22.2       -4.6       3.1             -8.7          11.1          16.3
       1999           9.5       11.7         12.4              18.5          11.4       20.2              2.2            50.3       32.3       2.2             27.7           7.0           7.6
       2000          11.8       17.1         19.6              13.3          13.7       35.4             17.0            44.2       52.1       1.7             26.8          -5.3          21.0
       2001         -14.5      -12.6        -16.9             -13.5          10.4      -15.7             -6.8            -9.6      -27.2     -24.2             -7.0         -13.0          -4.5

     1999 Q1         -3.2       -8.6         -7.1              -5.7         -14.3       -7.6            -21.3            43.3      -10.0      -6.8             -0.9           6.4           0.1
          Q2         10.3        9.9         12.5              11.4          15.3       12.2            -14.8            50.2       44.6       2.3             38.9          10.2          13.0
          Q3          9.0       10.4          6.0              31.0          14.8       25.7             12.0            44.8       37.5       3.2             27.3           6.3           1.9
          Q4         21.5       35.8         38.3              43.0          32.1       52.8             41.7            60.3       62.7       9.9             48.4           5.6          15.4
     2000 Q1         14.5       26.6         29.0              17.0          41.5       54.6             44.7            60.5       62.8       4.5             33.6          -9.3          14.7
          Q2          9.1       17.5         15.6              21.5          20.5       46.4             27.7            53.2       64.3      -4.7             14.2         -11.6          21.3
          Q3         17.8       25.6         34.4              12.1           6.7       44.6             16.1            53.1       76.6       6.9             40.1          -3.4          25.9
          Q4          6.3        2.8          4.0               4.2          -4.4        6.3             -9.3            19.3       16.3       0.1             22.5           2.2          20.9
     2001 Q1          3.6        8.9         -1.4              -1.3          85.9       -8.1             -8.2            -3.8      -11.0      -5.1             17.9           1.8          20.0
          Q2         -9.4      -10.0        -10.0             -14.4          -3.0      -17.9             -5.4           -19.8      -28.3     -16.9              9.8          -3.1          -5.1
          Q3        -28.3      -26.4        -29.6             -22.8         -22.6      -27.3            -16.2           -13.6      -43.0     -41.3            -25.7         -23.8         -14.4
          Q4        -19.9      -18.5        -21.5             -14.0         -21.9       -6.9              4.3            -1.2      -20.1     -29.0            -23.6         -22.7         -12.5
     2002 Q1        -15.0      -17.6        -13.6              -1.3         -58.3       -3.9             -8.1            -4.1        1.1     -23.2            -17.0         -20.5          -0.6

                                                                                            % Share of All Countries

       1997         100.0       20.1        12.8                3.9           2.1       13.0              6.5             2.5        4.0     29.0                 7.6        19.3          10.9
       1998         100.0       18.0        11.5                3.5           1.9       11.5              5.8             2.0        3.7     29.7                 6.9        21.3          12.6
       1999         100.0       18.4        11.8                3.8           1.9       12.7              5.4             2.7        4.5     27.7                 8.0        20.8          12.4
       2000         100.0       19.3        12.6                3.8           1.9       15.3              5.7             3.5        6.2     25.2                 9.1        17.6          13.4
       2001         100.0       19.7        12.2                3.9           2.5       15.1              6.2             3.7        5.2     22.3                 9.9        17.9          15.0

                                                                                                                                                     Source: International Enterprise Singapore

Monetary Authority of Singapore


                                                        Labour Productivity                                     Unit Labour Cost                                      Changes in Employment
                                                                            Transport                                                                                                     Transport
          Average                                       Whole      Hotels                                                                                               Whole      Hotels
 Period                All      Manu-        Con-                               &       Financial   Business    Overall    Manu-        All      Manu-        Con-                             &       Financial   Business
          Monthly                                      & Retail   & Rest-                                                                                              & Retail & Rest-
                     Sectors   facturing   struction                        Commun-     Services    Services   Economy    facturing   Sectors   facturing   struction                     Commun-      Services    Services
          Earnings                                      Trade     aurants                                                                                               Trade     aurants
                                                                             ications                                                                                                       ications
                                                            Year-on-Year % Change                                                                                           Thousand

   1993        6.3       9.2        11.6       -4.9       18.6         6.4        6.1        18.7        1.6       -0.9       -2.5       70.8        -3.1       26.4      12.3       2.6         4.8         4.8       7.3
   1994        8.8       6.6        11.3        4.0       10.0         0.8        8.1         3.2        4.3        2.4       -3.1       72.1        11.6       13.1       8.6       4.8         2.6         5.1      10.9
   1995        6.4       2.9         6.5       -2.9        6.2         3.5        6.1        -4.0       -0.9        2.5       -1.4      109.0        12.5       40.6      11.4       2.7         9.3         4.8      13.2
   1996        5.8       1.4         2.9       -1.8        3.2         2.9        3.4         1.2        0.4        2.5        2.4      102.6        -7.7       52.8       5.7       3.2         6.2         5.4      13.0
   1997        5.7       2.3         5.5       -3.2        3.9         1.9        4.6         9.3       -0.4        0.7        0.8      120.3         3.7       45.8       7.5       5.2         6.2         8.1      18.0
   1998        2.8      -2.8         1.4       -4.4       -3.3        -9.0        4.7        -9.8       -5.3        4.0       -1.2      -23.4       -27.6       -4.7     -11.9      -1.6        -0.5        -2.0       8.5
   1999        2.7       7.4        17.6       -2.2        8.8         3.9        6.7         4.0       -2.5      -10.4      -16.9       39.9         4.4      -18.0       3.4       1.4         4.5         4.7      17.4
   2000        8.9       5.9        11.6       -0.5       10.9         6.5        3.5        -3.5       -2.7       -0.2       -3.9      108.5        25.8        1.1      15.2       3.5        10.4         8.1      23.0
   2001        2.3      -5.4       -13.5        0.2       -6.2        -4.4       -1.3        -3.7       -6.7        7.3       12.2        0.1       -14.3      -20.5       2.8      -1.6         2.3         1.1      13.2

1998 Q1       4.8       -1.5        5.4         0.8        0.0        -8.2        3.9       -13.7       -4.7        5.0       -3.5        9.1        -1.0        7.1      -1.7      -3.7        -0.6        -1.0       3.3
     Q2       4.3       -4.0        0.0        -2.3       -4.7        -8.3        4.5       -16.4       -3.2        7.0        1.6       -5.9        -8.0        0.9      -5.0      -0.4         0.3         0.4       0.7
     Q3       2.9       -4.3       -1.5        -6.0       -4.6       -12.5        4.1       -11.5       -6.1        5.4        1.0      -20.3       -10.6       -4.1      -3.8      -0.5        -0.4        -3.8       5.3
     Q4      -0.3       -1.2        2.9        -9.0       -3.9        -7.1        6.3         4.0       -7.1       -0.7       -3.3       -6.3        -7.9       -8.6      -1.3       3.0         0.2         2.3      -0.8
1999 Q1      -0.3        4.0       14.1         0.3        1.4        -0.7        6.8        -0.1       -2.4       -8.6      -14.0       -9.6        -3.3      -10.5      -0.2      -2.9        -0.2        -0.6       2.7
     Q2       1.0        9.3       20.5        -4.6        8.9         4.5        6.3        18.9       -3.6      -14.5      -22.2       15.5         4.1       -3.3       0.0       0.7         1.0         1.1       7.0
     Q3       3.5        8.7       19.1        -3.7       11.0         5.2        7.0         5.9       -2.0      -12.6      -19.5        7.7         2.4       -5.1      -0.8      -0.1         1.8         2.0       2.8
     Q4       5.9        7.5       15.7        -1.0       13.9         6.8        6.5        -7.8       -1.8       -6.4      -12.6       26.3         1.2        0.9       4.4       3.8         2.0         2.1       4.9
2000 Q1       8.1        6.9       11.3        -6.4       15.0         8.4        5.9         3.8       -3.7       -1.5       -3.8       13.7        -0.5       -2.2       3.9      -1.8         2.0         1.7       5.9
     Q2       7.2        4.9       11.4        -0.1       11.4         4.6        4.6       -11.3       -1.8       -0.4       -4.1       29.7         6.5        2.3       4.5       0.4         2.7         2.0       6.8
     Q3       8.7        6.0       11.1         3.2        9.9         8.9        3.7        -4.4       -1.9       -0.1       -3.2       30.0        11.1        1.7       2.5      -0.2         2.6         1.9       4.4
     Q4      11.1        5.9       12.4         1.7        7.8         4.5        0.1        -0.5       -3.3        1.0       -4.5       35.1         8.7       -0.6       4.3       5.1         3.1         2.6       6.0
2001 Q1       5.7       -0.6       -2.9         1.5        2.0        -0.1       -0.9        -5.3       -6.1        6.2        3.4       23.2        -1.1       -2.2       4.5      -2.0         1.5         1.7      11.0
     Q2       6.0       -5.0      -12.4         1.2       -5.5        -2.9       -2.1        -4.2       -7.5        9.4       11.9        3.3        -5.1       -4.0       2.2       0.6         1.3         1.6       4.1
     Q3       4.8       -8.2      -19.8        -0.9      -10.7        -6.0       -1.7        -4.3       -6.9       11.9       21.6      -12.5        -3.8       -4.9      -3.1      -1.7        -0.6        -1.0      -0.4
     Q4      -5.2       -7.4      -16.8        -0.8       -9.9        -8.5       -0.5        -1.2       -6.2        3.4       14.2      -14.0        -4.3       -9.5      -0.8       1.5         0.0        -1.1      -1.4
2002 Q1       0.5       -0.6       -0.3        -1.1       -3.5        -4.4        4.8        -2.0       -1.2        1.6       -1.7      -13.8        -1.8       -9.9      -1.5      -1.8        -0.8        -1.8      -2.4

                                                                                                                                                                           Source: Singapore Department of Statistics/
                                                                                                                                                                                                Ministry of Manpower

Monetary Authority of Singapore


                                                         Money Supply                                                                            Interest Rates
   End of                                                                                                                                                                    Banks
              Narrow      Broad            Broad                   Narrow        Broad         Broad                   Prime       3-month         3-month
   Period                                             Reserve                                              Reserve                                                               12-month
              Money       Money            Money                   Money         Money         Money                  Lending     Interbank         SIBOR          Savings
                                                       Money                                               Money                                                                   Fixed
                M1         M2               M3                       M1           M2            M3                     Rate          Rate           (US$)           Rate
                                                                                                                                                                                Deposit Rate
                              S$ Billion                                        Year-on-Year % Change                                         Rate (% Per Annum)

       1993        22.9       82.1            111.4       14.7          23.6          8.5           9.7         8.4        5.34         3.31             3.38           1.59            2.79
       1994        23.4       94.0            125.8       15.6           2.3         14.4          13.0         6.2        6.49         4.38             6.50           2.93            4.23
       1995        25.3      102.0            136.7       17.0           8.3          8.5           8.7         9.4        6.26         2.56             5.56           2.72            4.01
       1996        27.0      112.0            148.5       18.2           6.7          9.8           8.6         6.7        6.26         3.13             5.56           2.72            3.99
       1997        27.5      123.4            160.8       19.2           1.7         10.3           8.3         5.6        6.96         6.75             5.81           3.08            4.41
       1998        27.2      160.8            173.6       16.6          -1.0         30.2           8.0       -13.3        5.90         1.88             5.13           1.43            2.51
       1999        31.1      174.5            186.2       21.4          14.2          8.5           7.3        28.6        5.80         2.75             6.06           1.36            2.46
       2000        33.3      170.9            182.9       18.5           6.9         -2.0          -1.8       -13.7        5.80         2.81             6.39           1.30            2.42
       2001        36.1      180.9            190.3       20.0           8.5          5.9           4.0         8.5        5.35         1.25             1.88           0.84            1.63

    1998 Q1        26.6      128.0            164.8       19.1           -6.5         9.4            7.1       -1.3        7.74         5.00             5.69           3.46            5.32
         Q2        24.9      128.7            165.5       18.8          -11.8         8.1            5.9        2.5        7.79         6.25             5.69           3.49            5.38
         Q3        24.9      132.6            169.5       15.2          -11.0        10.0            7.4      -18.3        7.54         4.13             5.31           3.24            4.94
         Q4        27.2      160.8            173.6       16.6           -1.0        30.2            8.0      -13.3        5.90         1.88             5.13           1.43            2.51
    1999 Q1        29.0      163.6            176.0       17.3            8.9        27.8            6.8       -9.5        5.80         1.75             5.00           1.36            2.46
         Q2        29.6      167.9            179.6       16.7           18.9        30.4            8.5      -10.9        5.80         1.88             5.34           1.36            2.46
         Q3        28.8      170.3            181.8       17.0           15.4        28.4            7.3       11.5        5.80         2.50             6.06           1.36            2.46
         Q4        31.1      174.5            186.2       21.4           14.2         8.5            7.3       28.6        5.80         2.75             6.06           1.36            2.46
    2000 Q1        32.1      172.7            184.5       17.7           10.6         5.6            4.9        2.2        5.85         2.38             6.28           1.33            2.46
         Q2        33.1      171.7            183.3       17.7           11.6         2.3            2.1        5.8        5.85         2.50             6.78           1.33            2.46
         Q3        31.7      166.6            178.4       17.4           10.3        -2.2           -1.9        2.5        5.85         2.56             6.81           1.33            2.46
         Q4        33.3      170.9            182.9       18.5            6.9        -2.0           -1.8      -13.7        5.80         2.81             6.39           1.30            2.42
    2001 Q1        34.7      176.4            186.1       19.0            8.0         2.2            0.8        7.3        5.80         2.38             4.88           1.30            2.38
         Q2        34.2      175.1            184.7       18.4            3.4         1.9            0.8        4.3        5.80         2.25             3.83           1.30            2.37
         Q3        34.3      174.9            184.5       17.8            8.0         5.0            3.4        2.7        5.48         1.81             2.60           0.99            1.97
         Q4        36.1      180.9            190.3       20.0            8.5         5.9            4.0        8.5        5.35         1.25             1.88           0.84            1.63
    2002 Q1        36.3      182.5            191.9       19.9            4.7         3.5            3.1        4.7        5.40         1.06             2.04           0.80            1.54

                                                                                                                                              Source: The Monetary Authority of Singapore

Monetary Authority of Singapore


                                                                           Operating Revenue                                                         Expenditure
                                                                             Tax Revenue
                                                                                                                                                                                      Surplus (+)/
             Period                                      of which                                                             Non-tax
                                    Total                                                                                                 Total      Operating        Development      Deficit (−)
                                               Total       Income               Asset          Stamp                          Revenue
                                                             Tax                Taxes           Duty
                                                                                                              S$ Million

                   FY1993             20,656    16,224         7,735               1,645          1,107               0           4,432     12,896         9,001             3,895          7,759
                   FY1994             23,713    19,000         8,296               1,844          1,394           1,523           4,713     14,043        10,072             3,971          9,670
                   FY1995             25,255    19,896         8,773               1,757          1,271           1,626           5,359     17,410        11,449             5,962          7,844
                   FY1996             28,930    23,205        10,951               1,823          1,878           1,746           5,724     23,286        14,159             9,128          5,643
                   FY1997             29,181    23,011        10,195               2,335          1,688           1,927           6,170     23,043        14,080             8,963          6,139
                   FY1998             27,911    21,551        11,331               1,529            953           1,657           6,360     26,934        14,652            12,282            977
                   FY1999             30,645    22,623        11,748               1,314          1,413           1,995           8,022     25,079        14,868            10,211          5,566
                   FY2000             33,726    25,628        13,538               1,606          1,257           2,121           8,099     27,908        18,415             9,494          5,818
          FY2001 (Revised)            31,530    24,025           n.a.                n.a.           750           1,850           7,505     27,691        18,730             8,961          3,840
         FY2002 (Estimate)            29,214    22,905           n.a.                n.a.           n.a.          2,010           6,309     28,328        19,543             8,785            886

                                                                                                           % of Nominal GDP

                   FY1993               21.3      16.7               8.0              1.7           1.1               0.0           4.6       13.3           9.3               4.0               8.0
                   FY1994               21.8      17.5               7.6              1.7           1.3               1.4           4.3       12.9           9.3               3.6               8.9
                   FY1995               20.8      16.4               7.2              1.4           1.0               1.3           4.4       14.3           9.4               4.9               6.5
                   FY1996               22.3      17.9               8.4              1.4           1.4               1.3           4.4       17.9          10.9               7.0               4.3
                   FY1997               20.5      16.2               7.2              1.6           1.2               1.4           4.3       16.2           9.9               6.3               4.3
                   FY1998               20.6      15.9               8.4              1.1           0.7               1.2           4.7       19.9          10.8               9.1               0.7
                   FY1999               21.2      15.6               8.1              0.9           1.0               1.4           5.5       17.3          10.3               7.1               3.8
                   FY2000               20.8      15.8               8.4              1.0           0.8               1.3           5.0       17.2          11.4               5.9               3.6
          FY2001 (Revised)              20.8      15.8              n.a.             n.a.           0.5               1.2           4.9       18.2          12.3               5.9               2.5
         FY2002 (Estimate)              18.2      14.3              n.a.             n.a.          n.a.               1.3           3.9       17.7          12.2               5.5               0.5

             n.a. : not available                                                                                                                                  Source: Ministry of Finance

Monetary Authority of Singapore


                Current Account Balance                Goods Account                                                Services Account
                                                                                                                                                                           Income         Current
     Period                                                                                                                                   Government                   Balance       Transfers
                                           Exports        Imports      Balance     Total      Transportation      Travel        Insurance                    Other
                S$ Million    % of GNP                                                                                                         Services
                                                                                                               S$ Million

         1993        6,804          7.3     125,802         130,204       -4,401    11,757           -1,359           5,253            -599           -8        8,469            315           -866
         1994       17,413         16.0     149,566         147,497        2,069    13,970           -1,153           4,450            -674           10       11,337          2,384         -1,010
         1995       21,119         17.4     167,897         166,512        1,384    17,407           -1,376           4,413            -878          -36       15,284          3,583         -1,255
         1996       17,726         13.6     177,681         174,590        3,092    14,259           -1,516           2,235            -847           -4       14,390          1,886         -1,511
         1997       26,908         18.0     186,688         185,157        1,531    18,000           -1,783           2,095            -198          -38       17,925          9,171         -1,794
         1998       32,980         22.6     185,086         160,138       24,948     1,764           -2,221             545            -498          -32        3,969          8,254         -1.986
         1999       28,012         19.5     195,791         176,762       19,029     7,552           -3,017             457            -511          -54       10,678          3,437         -2,005
         2000       27,447         17.1     239,725         219,776       19,949     8,737           -4,687             404             -14          -59       13,092          1,025         -2,264
         2001       32,044         20.7     219,446         196,383       23,064    10,259           -4,137            -126             523         -104       14,103          1,189         -2,468

     1998 Q1         5,557          n.a.      46,651         42,063        4,588       -569            -528             248            -188          -31          -71          2,022          -484
          Q2         8,334          n.a.      45,590         39,074        6,516        -22            -536              17             -98            2          594          2,333          -494
          Q3         9,428          n.a.      47,546         40,354        7,192        744            -732             314            -153           -3        1,318          2,001          -509
          Q4         9,661          n.a.      45,299         38,646        6,652      1,610            -425             -34             -59            0        2,128          1,898          -499
     1999 Q1         5,854          n.a.      42,320         37,739        4,581        615            -540             141            -126          -35        1,176          1,157          -499
          Q2         7,534          n.a.      48,088         43,196        4,892      2,278          -1,013             214            -129            0        3,207            861          -498
          Q3         6,885          n.a.      50,264         46,645        3,619      3,063            -655             495            -153          -10        3,385            702          -498
          Q4         7,739          n.a.      55,119         49,183        5,936      1,596            -809            -393            -102          -10        2,910            717          -510
     2000 Q1         6,576          n.a.      52,093         47,307        4,786      1,461          -1,132             313             -70          -43        2,392            860          -531
          Q2         6,485          n.a.      57,209         53,457        3,753      2,492          -1,174              24             -43           -2        3,686            794          -553
          Q3         8,013          n.a.      64,284         58,783        5,501      2,842          -1,178             362            -132           -6        3,796            249          -579
          Q4         6,373          n.a.      66,139         60,229        5,909      1,943          -1,203            -295             231           -8        3,218           -878          -602
     2001 Q1         7,341          n.a.      57,585         51,833        5,751      1,733          -1,287              34             108          -40        2,919            454          -597
          Q2         9,181          n.a.      55,564         49,314        6,249      2,034          -1,114            -286              81          -17        3,370          1,509          -611
          Q3         7,495          n.a.      52,318         47,817        4,501      3,881            -941             228             143          -22        4,473           -272          -614
          Q4         8,026          n.a.      53,981         47,418        6,563      2,610            -795            -102             191          -25        3,340           -501          -646
     2002 Q1         8,752          n.a.      51,204         45,183        6,021      3,017            -691              87             -31          -57        3,710            301          -587

                                                                                                                                                       Source: Singapore Department of Statistics

Monetary Authority of Singapore

TABLE 10: BALANCE OF PAYMENTS – Capital & Financial Accounts

                                                                                                                                                                      S$ Million
                    Capital &                                               Financial Account                                                                          Official
                    Financial     Capital                                                             Other Investment                Errors &       Overall           Foreign
        Period                                              Direct       Portfolio
                    Account       Account     Total                                                                                  Omissions       Balance          Reserves
                                                         Investment    Investment         Total            Banks         Others
                    Balance                                                                                                                                        (End of Period)

             1993       -2,074         -115     -1,958         4,095        -8,024            1,971            4,391        -2,421         7,423         12,154            77,867
             1994      -13,633         -129    -13,504         6,069       -11,801           -7,772            1,707        -9,479         3,522          7,302            85,166
             1995       -1,345         -101     -1,244         7,577       -10,430            1,609            7,904        -6,295        -7,600         12,174            97,337
             1996      -12,579         -196    -12,383         2,511       -16,639            1,745            6,344        -4,599         5,260         10,407           107,751
             1997      -20,512         -257    -20,255         1,902       -22,220               62            9,362        -9,299         5,460         11,856           119,617
             1998      -35,538         -378    -35,160         9,362       -16,620          -27,903          -17,689       -10,214         7,539          4,981           124,584
             1999      -19,577         -324    -19,253        12,757        -9,537          -22,474          -12,636        -9,838        -1,114          7,321           128,457
             2000      -18,962         -281    -18,682           759       -17,070           -2,371           15,313       -17,684         3,351         11,835           139,260
             2001      -33,916         -289    -33,627        -2,879        -8,128          -22,620           -5,732       -16,888           270         -1,602           139,942

         1998 Q1       -12,989          -84    -12,905         1,055         -3,189         -10,771           -7,877        -2,894        7,771             340           119,956
              Q2       -14,937         -108    -14,830         2,288         -4,590         -12,527             -979       -11,548        7,813           1,210           121,196
              Q3        -4,703         -101     -4,602         2,533         -4,721          -2,414           -7,985         5,570       -3,859             866           122,062
              Q4        -2,909          -86     -2,823         3,487         -4,119          -2,190             -849        -1,342       -4,187           2,566           124,584
         1999 Q1       -17,071          -83    -16,988         6,286         -2,254         -21,020           -5,965       -15,055       10,802            -415           124,327
              Q2        -8,089          -93     -7,996           258         -2,331          -5,923             -358        -5,566        5,354           4,799           125,856
              Q3          -225          -82       -143           245         -1,512           1,124           -9,026        10,150       -6,666              -6           129,593
              Q4         5,808          -66      5,874         5,968         -3,440           3,345            2,713           632      -10,604           2,943           128,457
         2000 Q1        -8,623          -71     -8,552           987         -6,106          -3,433           -1,645        -1,788         -124          -2,171           128,159
              Q2         2,057          -79      2,136          -160         -4,232           6,528            6,245           283       -2,683           5,860           134,431
              Q3        -3,957          -71     -3,886          -186         -3,278            -425            7,489        -7,915          338           4,394           135,953
              Q4        -8,439          -59     -8,379           115         -3,454          -5,041            3,225        -8,265        5,819           3,753           139,260
         2001 Q1        -7,905          -65     -7,841         1,459         -3,112          -6,187           -1,185        -5,002        1,619           1,054           140,327
              Q2       -19,717          -79    -19,638         1,636         -2,092         -19,181           -5,798       -13,383        6,152          -4,385           136,000
              Q3         3,353          -79      3,432        -9,662         -1,866          14,960            3,618        11,342      -13,079          -2,230           133,381
              Q4        -9,647          -66     -9,580         3,688         -1,057         -12,211           -2,367        -9,845        5,579           3,959           139,942
         2002 Q1          -166          -54       -112         2,716         -1,247          -1,580             -694          -887       -7,028           1,558           140,010

                                                                                                                                      Source: Singapore Department of Statistics/
                                                                                                                                            The Monetary Authority of Singapore

Monetary Authority of Singapore


                                                                            Singapore Dollar Per
        End of
        Period       US            Pound                  100 Swiss    100 Japanese      Malaysian    Hong Kong       100 New       100 Korean      Australian
                    Dollar        Sterling                  Franc           Yen            Ringgit      Dollar      Taiwan Dollar      Won            Dollar

            1993       1.6080         2.3802                  108.61         1.4364          0.5953       0.2082          6.0338         0.1989          1.0885
            1994       1.4607         2.2782                  111.18         1.4628          0.5707       0.1888          5.5370         0.1850          1.1341
            1995       1.4143         2.1884                  122.61         1.3744          0.5567       0.1829          5.1821         0.1827          1.0540
            1996       1.3998         2.3670                  103.80         1.2046          0.5538       0.1809          5.0919         0.1657          1.1150
            1997       1.6755         2.7771                  115.23         1.2893          0.4313       0.2162          5.1433         0.0993          1.0935
            1998       1.6605         2.7666                  120.15         1.4484          0.4370       0.2143          5.1552         0.1394          1.0190
            1999       1.6660         2.6914     1.6810       104.50         1.6272          0.4384       0.2143          5.3142         0.1471          1.0896
            2000       1.7315         2.5818     1.6095       105.86         1.5091          0.4557       0.2220          5.2224         0.1377          0.9605
            2001       1.8510         2.6880     1.6397       110.85         1.4105          0.4871       0.2374          5.2871         0.1404          0.9445

         1998 Q1       1.6060         2.6926                  105.54         1.2200          0.4412       0.2073          4.8951         0.1155          1.0673
              Q2       1.7068         2.8461                  112.16         1.2141          0.4098       0.2203          4.9509         0.1237          1.0462
              Q3       1.6850         2.8783                  121.59         1.2456          0.4434       0.2175          4.8954         0.1216          1.0070
              Q4       1.6605         2.7666                  120.15         1.4484          0.4370       0.2143          5.1552         0.1394          1.0190
         1999 Q1       1.7322         2.7914     1.8548       116.21         1.4385          0.4558       0.2235          5.2253         0.1413          1.0886
              Q2       1.7013         2.6787     1.7562       109.76         1.4105          0.4477       0.2193          5.2736         0.1468          1.1255
              Q3       1.7026         2.8002     1.8129       113.28         1.5941          0.4480       0.2192          5.3556         0.1399          1.1124
              Q4       1.6660         2.6914     1.6810       104.50         1.6272          0.4384       0.2143          5.3142         0.1471          1.0896
         2000 Q1       1.7189         2.7406     1.6488       103.48         1.6279          0.4523       0.2208          5.6394         0.1554          1.0431
              Q2       1.7294         2.6252     1.6468       105.76         1.6393          0.4551       0.2218          5.6139         0.1551          1.0348
              Q3       1.7410         2.5479     1.5336       100.62         1.6122          0.4582       0.2233          5.5587         0.1561          0.9472
              Q4       1.7315         2.5818     1.6095       105.86         1.5091          0.4557       0.2220          5.2224         0.1377          0.9605
         2001 Q1       1.8005         2.5714     1.5825       103.85         1.4471          0.4738       0.2309          5.4860         0.1353          0.8822
              Q2       1.8207         2.5663     1.5407       101.23         1.4670          0.4791       0.2334          5.2866         0.1400          0.9228
              Q3       1.7651         2.5983     1.6148       109.29         1.4802          0.4645       0.2263          5.1117         0.1348          0.8645
              Q4       1.8510         2.6880     1.6397       110.85         1.4105          0.4871       0.2374          5.2871         0.1404          0.9445
         2002 Q1       1.8425         2.6284     1.6099       109.84         1.3896          0.4849       0.2362          5.2643         0.1394          0.9781
              Q2       1.7645         2.6962     1.7459       118.53         1.4775          0.4643       0.2262          5.2593         0.1479          0.9986

                                                                                                                   Source: The Monetary Authority of Singapore

Monetary Authority of Singapore