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Straight Talk with Minister Tharman Shanmugaratnam, Minister For Finance with PAP Policy Forum Chairman, Satwant Singh

01 Nov 2009

"How well we do over the next 5-10 years is about what happens inside, not outside."

Satwant: What has been the most challenging aspect of this job since you became Minister for Finance in 2007?

Minister Tharman:

No doubt about this - the biggest challenge was the economic crisis that began in 2008. We were facing the most severe downturn in our history. We had to help Singaporeans get through this, and keep up confidence in the Singapore.

It got much worse when Lehman Brothers was allowed to fail in October 2008. Almost everything in global finance froze. Banks stopped lending to each other. Asian economies were seeing trade falling by 20%, 30%. For the first time in 70 years, many people actually feared a world depression. These were serious people.

We knew we had to intervene with full force, not half measures. In a grave crisis, it is better to over-do than under-do. Our Singapore banks were safe, but the tumble in the global economy meant that we had a big problem on our hands. We had to limit the damage to the economy and prevent big job losses among Singaporeans.

Companies were in a state of panic after Lehman, and we could see a wave of retrenchments coming this year. Even good, viable companies were at risk. We had to help as many of them as possible to stay afloat. If they went under, it meant putting their workers and managers out of a job. If they can’t get another job quickly, they often lose the skills and know-how gained over years of training. And we also lose the networks that the entrepreneurs behind the companies had built up.

So once you lose good local companies, you lose a lot of intangibles, not just the immediate loss of GDP and jobs. It takes a while to build up a new generation of companies, and get the dynamism back into the economy.

Satwant: The Jobs Credit scheme has been much talked about. Was there anything else different about the way Singapore tackled the crisis? What was the thinking behind the Resilience Package?

Minister Tharman:

Our aim was not to be unique. But we had to be effective, especially in preventing unemployment from shooting up.

We thought hard about the Resilience Package that we introduced in the 2009 Budget, and listened to many views. We introduced Jobs Credits to help companies keep their workers; SPUR to help workers pick up skills while the economy is down; the Special Risk-Sharing Initiative (SRI) to help companies get bank loans; tax cuts to support the recovery; a large increase in government investments in infrastructure; plus extra support for households, especially those in need. It all added up to a very large budget deficit this year, which meant a large government stimulus for the economy.

We actually responded with a larger package (as % of GDP) than most countries, and rolled it out much faster. Fortunately the US and China were also stimulating their economies in a big way. Their moves helped to reduce the scale of the global decline, and our moves helped reduce the impact of the global decline on Singaporeans.

But it was not just about putting money in the economy to support companies and workers today. We had to do this in a way that helps build Singapore up for tomorrow, not just get through the crisis today.

That is why a large part of the Resilience Package is really about preparing Singapore for our next phase of growth. It is about transforming Singapore into a high-capability economy, and an even better home for our people. We are stepping up investments in healthcare and education, in next generation broadband, in a better transport system and better neighbourhoods and parks.

But what is probably most unique is the way we funded the Resilience Package. How you fund a government deficit makes a difference to how effective the deficit is in supporting the economy. Most countries ran bigger budget deficits this year, and funded them by borrowing. But if people and businesses worry about whether Governments will raise taxes later to pay back the debts, it hurts confidence and hurts the recovery. That’s why they are now debating “exit strategies” or how governments can unwind their stimulus measures and commit to bringing down their debts eventually.

In countries like China, the central government did not have to borrow too much directly. But they used their banks to lend money to support local government programmes and stimulate the economy. Now they are concerned - their central bank governor and many others have spoken about this - that money lent out has ended up in the wrong places.

We managed to avoid these problems. We did not need to borrow to fund the Resilience Package. We could go in with full force, knowing that no one would worry about whether the Government would have to raise taxes later in order to pay for the deficit. We were in fact able to reduce corporate income taxes for the long term, in the midst of the recession.

Satwant: How did we avoid these problems?

Minister Tharman:

We had three fiscal advantages which turned out to be very helpful in the crisis.

First advantage: we had savings from surpluses earlier in the term of the present Government, especially in 2007, which we had deliberately conserved. We had kept it for a rainy day.

Second advantage: we had strengthened our revenues in time, before the crisis hit. We had raised the GST to 7% in 2007. We then revised the Constitution so that we could draw on more of the investment returns on our reserves, while still allowing the reserves to grow.

The additional revenues allowed us to do many things in the crisis, like boosting Workfare for lower-income workers, topping up Medisave for the elderly and providing something more for every household. They also allowed us to keep investing in infrastructure for Singapore’s future. We did not have to use up all our revenues in tackling the immediate problems of the crisis.

We put our revenues on a solid base before the crisis. Many other countries realized this need only during the crisis, but cannot raise taxes until the crisis has passed. In the meantime, their public debts build up. In the US, they are now talking about the need to introduce a VAT, which has the same effect as the GST. Malaysia is talking about introducing a GST.

Third advantage: our reserves. We had built them up through the years, by saving in good years and not spending it all subsequently. The Government asked and obtained the President’s approval to use our past reserves to fund the Jobs Credit and Special Risk-Sharing Initiative - which would cost over $4 billion. It was the first time we had ever drawn on past reserves, and we considered it very carefully before we went to the President. These were exceptional measures for exceptionally dangerous times. It was right for Singapore to use its reserves in these times.

These three advantages were really decisive. They allowed us to respond to the crisis with full confidence. We were also able to keep some savings as ammunition for the future, in case the global recession was prolonged or got worse.

Investors noticed what we did. Leading global companies are planning to increase their investments here. Confidence in Singapore has gone up since the crisis hit the world. No one worries about whether Singapore’s fiscal strategy is sustainable. Moody’s has just renewe d our triple-A rating after assessing everything we have done. They know Singapore’s finances will remain in good shape.

Satwant: Minister, even though the economic situation in 2007 was good and everyone was optimistic about the future, did you have any concerns over the health of the Singapore economy when you took over as Minister for Finance then?

Minister Tharman:

Things were going well for Singapore in 2007. But we could see storm-clouds gathering in the US and elsewhere, and knew we had to be prepared for a possibly bad turn of events.

Singapore’s fundamentals were strong. We knew we could not keep growing at 7% per year and growth would have to slow. But our economy had a solid base in both manufacturing and services, and Asia’s dynamism was going to continue. The real problems we had to watch out for were in the global financial system.

There was already concern about the US subprime crisis, and what was happening in global markets. I was in fact quite worried myself, and sent out public signals a few times by mid-2007 about the dangers we had to look out for. The financial markets were greatly underestimating risk, aided by the excessive liquidity that was in virtually every market. Too many investors were trying to leverage up their returns. It was not sustainable, and the bubble had to burst. No one could say exactly when it would happen, but when it happened it was likely to be sudden and disorderly, and the instability could spread globally.

We started thinking within Government about what we should do if there was a downturn. We could not say when it might happen, but wanted to be able to react quickly if things went bad. We began designing possible measures, and dug up and studied old measures that we had used in the past. We also kept close watch on financial developments, so that we would not be caught unprepared.

• But few people can claim to have predicted the scale of the economic disaster that would happen when the financial bubbles burst. Especially after Lehman fell, confidence in the advanced economies went down to levels not seen in over six decades. Both the depth of the crisis, and the speed with which the problems spread all around the world, exceeded all expectations.

There will be many lessons coming out of this. We cannot stop economic cycles and prevent every asset market bubble. But governments and regulators are trying to work out ways to prevent problems from building up on the large scale that we have seen, and to prevent things from collapsing in an uncontrolled way in future.

Satwant: What’s your biggest take on what has happened in Singapore in the last year?

Minister Tharman:

Overall, we have come out well. The Government moved quickly, and the Resilience Package has been effective. Not perfect, but effective. We prevented large job losses, and have prepared ourselves well for recovery.

But it was not just about the Government. What this crisis really showed was the strength of Singapore - the collective resilience of our people, and the way they responded to the Government’s efforts.

Nothing would have worked if everyone did not play their part. Businesses retained jobs wherever possible, and in many cases created new ones. They used SPUR instead of retrenching workers. Workers made sacrifices – took wage cuts and accepted shorter workweeks - and spent time and effort to get retrained. Banks continued lending to viable companies, taking advantage of the special risk-sharing initiative. The community sector - grassroot and VWO leaders, good-hearted volunteers from all walks of life, and our philanthropists - went out of their way to reach out to those in need.

That’s the real strength of Singapore - our flexibility, our ability to shift policies and act quickly when required, and the way our people and companies respond to changes in the world not by giving up, but by learning something new.

Satwant: Has the economy really recovered? What is your assessment of Singapore’s and the world economy’s growth in the next 5 years?

Minister Tharman:

The most that can be said about the global picture at this point is that we have moved back from the abyss. Confidence is slowly coming back, housing markets have stopped falling and are in some cases firming, and world trade is moving up from the extreme lows seen earlier this year.

But things are not back to normal. Many banks in the advanced economies are still totally dependent on support from their central banks. They will also need further recapitalisation. Growth in all the major economies remains well below pre-crisis levels. And most of the global recovery is also being driven by Governments’ fiscal and monetary actions, rather than private consumption and investment. This is true even in China, which is growing at over 8%.

So there remains a major question about how strong the recovery will be and how long it will last, especially when Governments have to begin unwinding their stimulus programmes. Will the recovery be V-shaped, U-shaped or W-shaped? Or as some economists now say, will it be “square-root shaped” - where we start off with a V-shaped recovery but it flattens out quickly?

We cannot rule out any of these possibilities. My own sense is that the getting the world economy back to normal will be a tough slog over the next 2-3 years. Things are getting better now, but there is good reason to be cautious about whether the advanced economies can sustain normal rates of growth after the next few quarters. I suspect they can’t. Demand from the Asian economies like China and India will grow, but it cannot compensate at this point for slow or no growth in the big advanced economies.

It does not mean we will fall into another recession in Singapore in a year or two. But how fast we grow - will it be, say, 3% or 5%? - over the next two years will depend on what happens in the advanced world.

But beyond the next few years, I’m an optimist. Asia is coming into its own. China, India and ASEAN have huge potential left. Reforms will promote domestic demand and create aspiring middle-classes. Asian wealth will grow. It will need to be managed, and Singapore will be the most neutral and trusted place to do it. Leading MNCs, and many smaller players in US and Europe, will also want to be part of Asia. They know us, and will want to move business or management operations here. We are already seeing these moves. Our home-bred companies, including many SMEs, are also rising to the challenge. They are developing solid capabilities in both ‘old’ and ‘new’ economy’ industries, venturing into overseas markets to grow, and acquiring a reputation in various global niches.

Ultimately though, how well we do over the next 5-10 years is about what happens inside, not outside. It will depend on our capabilities. Whether Singaporeans have the opportunity and are inspired to develop top quality skills in every job, whether they feel they can contribute, and whether they feel that this is where they can get a good life for their families. It also depends on whether we make Singapore a leading global city: a place that is among the 5-6 cities in the world that everyone knows will make a difference. I believe we can make this happen. And we will do it.