S'pore's growth model works, says Tharman
Despite the ups and downs, being plugged to the rich economies is still the best approach
'It's right that governments recapitalised banks in the West and they're trying their best to incentivise new lending,' said Mr Tharman. -- ST PHOTO: ALAN LIM
SINGAPORE, facing its deepest recession since independence, said the economic growth model that makes it vulnerable to swings in global demand still works.
The country is in its fourth contraction since 1998 as exports slump and the global economic slowdown hurts its financial services and tourism industries.
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Transcript of Mr Tharman's interview with Bloomberg TV
The Government will keep restructuring the economy to emerge 'leaner and smarter' after each downturn, Finance Minister Tharman Shanmugaratnam said in an interview with Bloomberg Television on Wednesday.
'The fundamentals of our growth model are sound,' he said, adding that 'we should not be less susceptible to global markets. That's our future, that's where our fortunes are tied to'.
Singapore's economy may shrink a record 5 per cent this year as the global recession erodes demand for exports and companies lay off workers.
The Government last week announced plans to cut corporate taxes for the second time in three years and said it will tap its reserves in an unprecedented move to fund record spending and preserve jobs.
Singapore's two biggest export destinations of Europe and the United States are in recession, while China, its third largest market, expanded at the slowest pace in seven years last quarter.
'We are plugged into the markets that are largely in the rich countries and when we go through a global crisis like this, we come down very quickly,' Mr Tharman said, adding that there was no Asian domestic demand to provide a cushion for Singapore.
Singapore has experienced recessions previously during the 1997-1998 Asian financial crisis and in 2001 after the dot.com bubble burst.
The Government plans to spend $20.5 billion this year to help businesses and workers navigate the downturn. It is extending loans and giving cash grants to companies to limit retrenchments, and sharing the risk of defaults with banks to encourage lending.
It is also reducing the maximum corporate tax rate to 17 per cent from 18 per cent this year. The tax cut will narrow Singapore's gap with Hong Kong as the Republic aims to attract investment in services and manufacturing industries.
'Singapore will come out of this,' said Mr Tharman. 'We will bounce back the way we've bounced back three times already in 10 years.'
On the global front, the minister said that the world's biggest banks still have toxic assets on their balance sheets, which are clogging up their ability to lend. Banks are still focusing on replenishing capital 'and estimates of the extent of bad assets on their books are still on the upswing', he said. 'We haven't seen the worst yet.'
The International Monetary Fund (IMF) report released on Wednesday signalled that writedowns and losses at banks totalling US$1.1 trillion (S$1.7 trillion) so far are only half of what is to come. Losses on that scale would leave banks needing at least US$500 billion in fresh capital to restore confidence in their balance sheets, the fund said.
Governments worldwide have injected capital into banks to ensure that lending to companies and consumers does not freeze up. 'It's right that governments recapitalised banks in the West and they're trying their best to incentivise new lending,' Mr Tharman said. 'It's too early to say how successful this will be. Governments have to take more risk, and that means taxpayers have to be willing to foot part of the bill.'
The Government of Singapore Investment Corporation (GIC) and Temasek Holdings have invested about US$24 billion in UBS, Citigroup and Merrill Lynch in the past 14 months, said Bloomberg.
Temasek and GIC remain 'well diversified' enough in their portfolios to offer the long-term returns the Government seeks, Mr Tharman said.
'We would be worried if global banks comprise a large proportion of the portfolios of GIC and Temasek, or for that matter, any other highly vulnerable industry globally,' he said. 'But these are diversified portfolios, with not a large degree of concentration risk.'
Temasek and GIC have performed 'credibly by international standards', he said. Temasek averages an annual 18 per cent return on investment; GIC averages 7.8 per cent in US dollar terms, compared with 6 per cent for the MSCI World Index.
GIC also said last year that it is boosting investments in emerging markets, private equity and other asset classes to raise returns after cutting back stocks and holdings in developed nations.
'I'm comfortable with the actions both Temasek and GIC have taken early in this crisis to reduce risk, to move into more liquid asset allocation and to prepare for opportunities in this downturn,' Mr Tharman said.
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