Asian financial crisis, 1997-1998
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The Asian financial crisis started in Thailand with the
collapse of the Thai baht in July 1997 and quickly spread to
the rest of the region. What began as a currency crisis soon
affected the wider economy and led to economic downturns in
several countries. Singapore was not directly hit but suffered
the spillover effects of the economic slowdown among its
regional neighbours and fell into recession in the second half
of 1998. Realising that stimulating domestic demand was not a
viable option in a downturn caused by external circumstances,
the Singapore government implemented various measures to help
ease the cost burden on businesses and individuals.
Just before the Thai baht collapsed in July 1997, it had been the target of intense speculative attacks. For a while, the Thai government managed to defend the currency, which had been pegged to the United States (US) dollar. However on 2 July 1997, it announced that it would no longer intervene and would allow the baht to float. The sharp depreciation of the baht against the US dollar began that same day.
This immediately triggered a panic among investors, and other regional currencies such as the Philippine peso, Indonesian rupiah and Malaysian ringgit also began to experience selling pressure. Soon, foreign investors lost confidence in not only the currencies but in those economies that had what they saw as weak fundamentals. In countries most affected by the crisis, banks and other companies collapsed or had to be rescued and many others were forced to downsize, resulting in massive unemployment. In Indonesia, the crisis even led to the resignation of then president Suharto.
Impact on Singapore's Economy
Given its close economic linkages with other Asian countries, Singapore could not escape the effects of the financial crisis facing its regional neighbours despite strong economic fundamentals. Overall, the Singapore economy contracted by 1.4% in 1998 in terms of real gross domestic product (GDP). This was the first decline in real GDP since the 1985 recession and came after an average growth of 14% per annum from 1986 to 1997. The impact on Singapore was indirect but wide-ranging.
Many companies went out of business, leaving their workers without a job. To survive, other companies cut cost by retrenching staff, suspending new recruitment and reducing wages. In the last quarter of 1997, 4,280 workers were retrenched, more than three times higher compared to the previous quarter. The situation worsened in 1998, with quarterly retrenchments averaging about 7,300. Company closures and downsizing also translated into lower demand for commercial, industrial and residential properties, which put downward pressure on property prices and rentals. Stock prices fell and this had a negative wealth effect which further weakened consumer sentiment.
Because Singapore's petrochemical industry catered mainly to Asia, the regional economic slowdown meant lower demand for Singapore's oil domestic exports, which fell sharply by 15.3% in 1998. Non-oil domestic exports still grew, but at a slower rate of 0.9%. As manufacturers had to contend with weaker demand in both regional and local markets, the manufacturing sector contracted slightly by 0.6% in 1998.
The financial services sector, on the other hand, was one of the worst hit industries and registered a sharp contraction of 7.4% in 1998. Reflecting the poor economic outlook for Singapore and the erosion of confidence in the regional economies, banks curbed their local and offshore lending activities and generally lent less to both companies and individuals.
Also badly affected were the wholesale and retail trade sector and the hotels and restaurants sector, which contracted by 4.1% and 7.5% respectively in 1998. Faced with uncertain job and financial prospects, people generally became more cautious about their spending, especially on big-ticket and non-essential items. In addition, visitor arrivals fell sharply due to the economic slowdown in the regional markets, where most of Singapore's visitors come from, and the strengthening of the Singapore dollar against various regional currencies. With weaker domestic spending and fewer foreign visitors, retail sales (excluding motor vehicle sales) fell 8.6% in volume and 9.2% in value in 1998. Food and beverage outlets likewise reported a drop in business. Hotels saw a significant decline in their average occupancy rates and resorted to lowering room rates to boost occupancies, leading to a 19.4% drop in their room revenue in 1998.
Singapore Government's Response
The Singapore government implemented a host of measures in 1998 with two key objectives: lower business costs and provide relief to individuals and households. Some of these were in place until 1999 and some till 2000.
The Budget 1998 did not include strong measures to counter the effects of the regional financial crisis as the economy was still growing well at the time that it was announced in February 1998. However, it did have measures to help lower business costs, such as a 15% property tax rebate for commercial and industrial properties, property tax exemption of up to five years for land under development, and the removal of stamp duty on all instruments except for those which relate to stock and shares, and immovable properties. Individuals and households also received help, including a 5% personal income tax rebate, and rebates on the service and conservancy charges and rentals on Housing and Development Board flats.
Subsequently, regional economic conditions deteriorated and the outlook for Singapore worsened. In response, the government announced a package of off-budget measures in June 1998 worth S$2 billion. To cut business costs, the package included an additional 40% property tax rebate for commercial and industrial properties, reduced rents and rental rebates on various government properties and lower telecommunications tariffs. It also provided specific measures to mitigate the effects of the economic slowdown on the property market. For example, government land sales were suspended and successful tenderers of government land were allowed to dispose of these land parcels.
Then in November 1998, as Singapore slipped into recession, the government announced another package mainly aimed at further reducing costs for businesses. A major component was a 10-percentage-point cut in the employers' Central Provident Fund contribution rate. Other key measures included a 10% corporate tax rebate, a 5-8% wage reduction, and cuts in a wide range of government rentals, rates and fees.
Recovery in 1999
By early 1999, the Singapore economy was already showing signs of recovering. In the first quarter of 1999, the economy returned to positive growth, powered by a strong rebound in the manufacturing sector. Retrenchments during the quarter also declined. The recovery was sustained through the year and overall GDP for the whole of 1999 grew by 7.2%, much higher than the government's initial forecast of between -1% and +1%.
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The information in this article is valid as at 2009 and correct as far as we are able to ascertain from our sources. It is not intended to be an exhaustive or complete history of the subject. Please contact the Library for further reading materials on the topic.