Explain the effect of the US slowdown on the Singapore’s economy in the 2009 financial crisis. [12]


The emergence of sub-prime loan losses in 2007 kickstarted the US slowdown and exposed other risky loans and over-inflated asset prices. As a result the US experienced a slowdown or recession spanning over 18 months beginning in December 2007 and ended in June 2009,

Like many open economies worldwide, the global financial crisis triggered a marked slowdown in Singapore’s economy and particularly for Singapore, in the following areas: Economic growth, unemployment, inflation and balance of payment.

Impact on GDP through decrease in consumption and investment

The impact of the financial shock on Singapore’s economy and GDP can be analysed through several key channels. There was firstly an immediate impact on sentiment-sensitive segments of the domestic sector. As falling asset prices led to declining household wealth, consumer spending contracted which affected property sales and financial intermediation activities. Secondly, there was an effect on investment spending. Prior to the sub-prime crisis the cost of corporate financing was at a historic low. The credit crisis led to increasing scarcity and higher financing costs. This affected investment spending as projects were postponed or cancelled if their returns could not justify the cost of funds.

In addition, international banks and institutional borrowers faced the stress of a credit crunch. With the exception of Hong Kong, Singapore’s financial sector experienced the greatest decline in cross-border loans as a percentage of GDP, which were very high prior to the crisis and shrank when risk appetite receded. In the two years prior to the global financial crisis, the gross value of financial account transactions increased by a factor of more than three in Singapore, mostly due to increases in portfolio investment.


Impact on Trade – physical goods

As an economy structurally dependent on international trade, Singapore’s export sectors were affected by a slump in export demand. It was observed that the most iconic industries of Singapore’s value-adding restructuring effort – bio-medicals and tourism – relied heavily on external demand and had ironically made Singapore more vulnerable to the recession. Singapore was also one of the most exposed Asian economies during the crisis; as although volumes of intra-Asian trade in intermediate goods increased, US markets remained the final export destinations of high-end manufacturing products such as electronics. In 2008, GDP contracted due to manufacturing in Q2 and then the slippage extended to construction and a broad range of services.

Impact on Trade – services

Singapore’s position as a trade hub supporting trade-related services from transportation to trade finance meant that the slowdown had ramifications exceeding the export-oriented manufacturing sector. Its financial services industry contracted and trading activities fell substantially in foreign exchange, stock brokerage, and fund management. This accounts for why Singapore was one of the hardest hit economies during the global downturn. In fact, this financial crisis was the worst Singapore experienced since its independence in 1965. The downward pull of the global recession on Singapore’s economy continued into 2009 as negative GDP growth was forecasted at -9% to -6%.

Depreciation of Exchange rate.

Sing dollar MAY depreciate as demand for Sing dollar falls. Provided MAS is willing to allow it to depreciate.


As explained above, BOT will worsen as exports fall. Imports may also fall but the extent will not be large as Singapore kept the exchange rate at zero appreciation.

Draw fall in AD graph

As a result of a decrease in consumption and trade which are the main components of AD, Singapore’s economy will experience a fall in AD leading to a more than proportionate fall in NY through the reverse multiplier process as the reduction in AD leads to a fall in NY and the fall in NY causes a futher fall in AD.

Increase in Unemployment

As a result of the fall in aggregate demand, there will also be an increase in unemployment. As production falls, unemployment will increase as labour is a derived demand.

Fall in inflation

Inflation rate will fall as the economy moves away from full employment level of national income.


Singapore will be negatively affected by the US slowdown due to it’s small and open economy. In spite of this heightened potential vulnerability to capital reversals in the region, Singapore’s vulnerability to a slowdown in the financial market and capital outflows may be buffered by a consistent current account surplus, and a high sovereign rating of AAA.


 Assess the effectiveness of the policies adopted by the Singapore government to improve the economic performance in the 2009 economic downturn. [13]


Singapore enjoyed budget surpluses in the years preceding the crisis which enabled it to draw on S$4.9 billion of fiscal reserves to spend on a significantly expansionary budget for 2009, in order to sustain a fiscal stimulus package. The government budget for 2009 was brought forward by a month to January, even as resilience measures had already been implemented in late 2008 to help struggling local firms. The 2009 budget’s “Resilience Package”, aiming at helping businesses to retain workers, amounted to S$ 20.5 billion. S$5.1 billion of this was spent on helping to preserve jobs, and S$5.8 billion extended to stimulate bank lending through a Special Risk-Sharing Initiative (SRI).

The Resilience Package has five components consisting of:

1) Jobs for Singaporeans (
To help Singaporeans stay employed, Government will spend $5.1 billion by:

  • Introducing the Jobs Credit Scheme
  • Enhancing the Skills Programme for Upgrading and Resilience (SPUR)
  • Providing the Workfare Income Supplement (WIS) Special Payment
  • Expanding recruitment across the public sector
2) Stimulating Bank Lending
To ensure that viable companies continue to have access to credit to sustain their operations and keep jobs, government will spend $5.8 billion to stimulate bank lending by:

  • Enhancing existing bank lending schemes
  • Introducing the Special Risk-Sharing Initiative (SRI) comprising a new Bridging Loan Programme and risk-sharing schemes for trade financing
3) Enhancing Business Cash-flow and Competitiveness
Government will spend $2.6 billion to support business cash-flow and strengthen Singapore’s competitiveness through:

  • Tax concessions and measures
  • Easing cash-flow and sharpening Singapore’s competitiveness
4) Supporting Families
$2.6 billion will be spent to provide additional support for families and communities during this downturn through:

  • Direct assistance for Singaporean households
  • Increased targeted help for vulnerable groups
  • Additional support for Charitable Giving and the Community
5) Building A Home for the Future
Government will spend $4.4 billion to develop Singapore as a global-city and best-home for Singaporeans by:

  • Bringing forward infrastructure projects
  • Rejuvenating public housing estates
  • Enhancing sustainable development programmes
  • Upgrading education and health infrastructure


The government’s fiscal policy as described above has both direct impact on the AD as well as supply side effects.

Singapore also adopted a zero appreciation of it’s exchange rate to further improve trade.

In this essay, we shall assess the effectiveness of the policies adopted by the Singapore’s govt to improve the economic performance in the 2009 economic downturn.

Thesis – Fiscal policy is effective

Fiscal policy is effective as it involves the use of government expenditure and taxation to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment through the fiscal policy transmission mechanism.

This flow-chart identifies some of the channels involved with the fiscal policy transmission mechanism and how the Singapore’s resilience package is effective in improving the Singapore’s economy.

Fiscal policy transmission mechanism

Multiplier Effect

An initial change in aggregate demand can have a much greater final impact on equilibrium national income. This is known as the multiplier effect. It comes about because injections of new demand for goods and services into the circular flow of income stimulate further rounds of spending – in other words “one person’s spending is another’s income”. This can also lead to a bigger eventual effect on output and employment which increases the AD and lifts the economy out of the downturn.

SS side effect

The fiscal policies also have a supply side effect. Through the reduction of cost of production (through job credits scheme), building infrastructure and investing in education and RnD, the productive capacity of the economy can be increased. This expansionary fiscal policy and supply side policy will lead to a more than proportionate increase in national income and prevent further job losses.

Therefore the current fiscal policy adopted by the Singapore government is effective because there are short term implementation lags, no trade offs on long term objectives and no crowding out effect as the government is essentially using it’s reserves to fund the injections.

Anti-thesis – Fiscal policy may not be effective


  1. Time lags

It takes time to recognise that aggregate demand has changed. It may take some six months to collect reliable statistics on national output. Even then, it takes time to change fiscal policy. And once the policy change has been implemented, it takes time to work through all the steps of the multiplier process before the full effect of the policy works its way through the economy. By the time the fiscal policy works its way through the economy, the economy might be back at full employment and further increase in AD through the expansionary policy might cause inflation. Alternatively, during the time the fiscal policy works its way through, the contractionary gap might have widened and the size of the fiscal stimulus is found to be in adequate.

  1. Uncertainty

The government may not know exactly how much and when fiscal policy should be changed. It does not know for certain the values of key variables such as the multiplier. It only has estimates obtained from past data. Mistakes in estimating the multiplier will induce incorrect decisions about the extent of the fiscal change needed to change equilibrium output by a given amount. The sustainability of the fiscal policy is also in question as it is a huge burden on the government budget, which is unlikely to be sustainable if the global recession drags on longer than expected.

  1. Size of multiplier

The multiplier effects of an expansionary fiscal policy depend on how much spare productive capacity the economy has; how much of any increase in disposable income is spent rather than saved or spent on imports.

The size of the multiplier is determined by the marginal propensity to withdraw (MPS, MPT, MPM). A country like Singapore with high savings rate and heavy import dependence will possess a smll multiplier. It will be difficult for fiscal policy to raise output and employment to the desired level.

  1. Lack of Reversibility.

Once a rise in G is affected, it may be difficult to cut back on such expenditure once the economy recovers. This is especially so if major public works has been undertaken. They cannot be stopped midway even if the economy had recovered from a recession.

  1. Conflicts with other macro-economic goals.

Singapore’s economy run the risk of demand pull inflation with the unprecedented injection of large funds into the economy. This occurs when aggregate demand rises in excess of aggregate supply, exerting an inflationary pressure in the economy, pushing general price level upwards. If the MAS can anticipate such events, it can implement a contractionary monetary policy as a counter measure to keep AD from rising, thereby maintaining price stability.

Thesis – Exchange rate policy is effective

Singapore adopted a zero-appreciation policy stance (compared to previous gradual appreciating stance before the recession). With a non appreciation of the Singapore dollar, price of exports in terms of the amount of Singapore dollar paid falls. This increases the export competitiveness of the goods and will lead to an increase in exports.

The non-appreciation of the sing dollar also increases the price of imports in domestic currency terms. This encourages Singaporeans to buy less imports and more domestically produced goods and services.

Anti -Thesis – Exchange rate policy is ineffective

Ceteris Paribus assumption: Changes in the exchange rate have quite a powerful effect on the economy but we tend to assume ceteris paribus – all other factors held constant – which of course is highly unlikely to be the case.

Time lags: it takes time for demand for exports and imports to change following a movement in the currency. Businesses need to have the capacity and access to credit to expand their production.

Inflation: Many of the consumer goods that we enjoy in Singapore are imported. Increase in import prices will have a huge impact on our cost of living and domestic inflation rate. Furthermore, our exports have high import content i.e. much of what we export is produced form imported parts. Price of import thus have a huge bearing on the cost of production, export competitiveness and the balance of trade.

Low elasticities of demand: In the short term, the effects of exchange rates on export and import demand tends to be low because of low price elasticity of demand. Effectiveness of exchange rate policies also depend on whether the M-L condition is met.

Other countries response to the challenge of a lower exchange rate: Businesses in other countries can and do adapt to a low exchange rate. There are several ways in which industries can adjust to the competitive pressures that a weaker sing dollar imposes. For example, outsourcing , decreasing profit margin or the country itself may also adopt a lower exchange rate.

Global recession: The exchange rate policy is also limited as the recession is caused by a global recession and not due to a fall in the country’s competitiveness.


Conclusion – Emerging from the crisis

The array of policies used by the Singapore government to improve the economic performance is effective to the extent that it dampens the fall in national income brought about by fall in exports and improves business expectations. This reduced the extent of unemployment which could have prevented the worsening of the recession. It is evident that the Singapore economy has rebounded significantly and is expected to grow by 13 – 15% in 2010, with manufacturing and services spearheading the recovery.

As the root cause of the recession in Singapore was due to external factors, unless the world’s economy recovers, there’s a limit to what the government can do to improve the economic situation.

Thus, while the immediate outlook is encouraging, Singapore will remain alert because the structural headwinds to growth in advanced economies remain. The transition from government-led stimulus to sustained private-sector driven growth may be more challenging in those economies which are small and open like Singapore. As global liquidity conditions normalize, following the unprecedented easing of interest rates by major central banks, financial markets could experience bouts of volatility as a range of asset classes are re-priced and this could impact negatively on various interest-sensitive industries.