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Budget 2020's short-term stimulus could be smaller than it seems

Economists expect monetary easing at next MAS policy meet; given accumulated surpluses, more measures also possible

While Budget 2020's projected overall deficit is the largest in over a decade, its fiscal impulse should not be overstated, said economists. More support might be needed, not least if the Covid-19 outbreak persists longer than expected.


WHILE Budget 2020's projected overall deficit is the largest in over a decade, its fiscal impulse should not be overstated, said economists. More support might be needed, not least if the Covid-19 outbreak persists longer than expected.

And as fiscal policy alone may provide insufficient support, expectations are for monetary easing at the next Monetary Authority of Singapore (MAS) policy meeting in April.

Budget 2020's overall deficit of S$10.9 billion or 2.1 per cent of gross domestic product (GDP) exceeded most economists' expectations, and its measures were lauded as providing a robust response to the virus outbreak and broader uncertainty.

Still, there are caveats. Maybank Kim Eng analysts Chua Hak Bin and Lee Ju Ye noted that "the large fiscal deficit does not necessarily imply a large fiscal stimulus over the next year, as many items involve sums... to be deployed in the future". These include the S$6 billion package to go with the eventual goods and services tax (GST) hike, and S$5 billion for the Coastal and Flood Protection Fund.

Noting S$17.3 billion in transfers to endowment and trust funds, Barclays economist Brian Tan said that as such spending is disbursed over the medium term, its impact may only be felt beyond FY2020.

The Ministry of Finance's estimate for the Budget's fiscal impulse - the short-term stimulus to aggregate demand - is 1.6 per cent of GDP, though Mr Tan as well as Citi economists Kit Wei Zheng and Ang Kai Wei put the figure at 1.4 per cent. The Citi economists added that the actual deficit could prove smaller than projected, "as operating expenditure estimates appear aggressive by historical standards".

OCBC Bank head of treasury research and strategy Selena Ling said it remains to be seen if actual spending will be as planned, noting that the S$3.48 billion planned deficit for 2019 - "supposed to have been the largest deficit since 2015" - ended up significantly smaller at S$1.65 billion.

With S$6.4 billion in virus support - including S$4 billion for firms, S$1.6 billion for households, and S$800 million to frontline agencies - amounting to just over 1 per cent of GDP, ESSEC Business School economics professor Jamus Lim said the amount could have been higher "to maximise the bang for the fiscal buck", as fiscal stimulus tends to be most effective during contractions.

More direct government consumption and investment would be welcome, he added, such as government purchases in transport or aviation, or front-loading planned infrastructure.

Some noted that the packages, while generous, did have limitations. "The relief package may be sufficient to help firms cope with a short-lived one-quarter contraction, but may not be enough if the virus outbreak and contraction last for two quarters," said the Maybank economists.

Food stalls in government-managed hawker centres will get a one-month rental waiver, while eligible tenants in government-owned or managed facilities will get a half-month waiver. Said Ms Ling: "Some food services and retail businesses had probably hoped for more direct and extended help for a longer duration given the uncertainties about the Covid-19 outbreak."

While markets have largely bet that the outbreak will be contained after the first quarter, Prime Minister Lee Hsien Loong has said he does not expect the outbreak's conclusion to come as swiftly as for Sars, which lasted from March to July.

The Maybank economists added that the GST hike - due between 2022 and 2025 - and tighter foreign worker quotas for the construction, marine shipyard, and process sectors may "negate some of the fiscal support".

Other limitations have to do with timing. The Jobs Support Scheme provides 8 per cent wage offsets for locals for the last quarter of 2019, but payouts will be made only by July 31.

"Companies with urgent cash-flow issues will have to plan for other short-term interventions to tide them over until these subsidies are disbursed," said Withers KhattarWong partner Amarjit Kaur. Firms with many high-income employees will also "have to continue to bear the lion's share of their wages" due to the S$3,600 cap on qualifying wages.

On the bright side, a cumulative S$18.6 billion surplus over the previous four fiscal years implies that even after 2020's shortfall, "there is still enough fiscal 'powder' left for additional measures if the Covid-19 outbreak extends beyond mid-2020", said UOB economist Barnabas Gan.

For now, seeing fiscal policy as "unlikely to completely offset the economic effects of the outbreak", Barclays' Mr Tan expects the MAS to flatten the slope of the Singapore dollar nominal effective exchange rate in April.

"Even if the outbreak is contained by April, we believe MAS will conclude that a more accommodative FX policy stance is needed to help nurse the economy back to health," he said.

The Citi economists also expect such a move, as core inflation is likely to marginally undershoot MAS's forecast of 0.5 to 1.5 per cent ; the output gap is seen as exceeding 1 per cent of potential output; and virus outbreak headwinds are causing growth to weaken beyond manufacturing.


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