EMPLOYMENT : Singapore’s labour market in 2001 was affected by the deterioration in the external environment. A rapid contraction in economic activity saw retrenchments hitting 25,838 in 2001, more than double the 11,624 seen in 2000. Employment in goods-producing industries experienced a sharp decline, but this was mitigated by employment growth in the services sectors. At the end of 2001, the overall unemployment rate rose to 4.4 percent. For the whole of 2001, the unemployment rate averaged 3.3 percent, compared to 3.1 percent in 2000.

BALANCE OF PAYMENTS : Singapore’s overall balance of payments recorded a deficit of $1.6 billion in 2001, compared with a surplus of $11.8 billion in 2000. Despite an expansion in the current account surplus, the overall balance declined due to significantly larger outflows from the capital and financial account. Specifically, direct investments recorded net outflows, while outflows from the volatile "other investments" account jumped by $20.2 billion over the year before. Nonetheless, Singapore’s official foreign reserves rose to $140 billion as at end-2001 (equivalent to 8.1 months of current imports), as valuation gains offset the contractionary impact of the balance of payments deficit.

GROSS EXTERNAL DEBT : As at end-December 2001, the Singapore government did not have any external debt.

EXCHANGE RATE : The Singapore dollar weakened against the US dollar and the Euro but strengthened against most Northeast Asian currencies in 2001.

The Singapore dollar’s fall against the US dollar in the first half of 2001 was due to expectations of fresh merger and acquisition activities by Singapore companies and persistent weakness in regional currencies. Market sentiments also shifted against the domestic currency when weak economic data pointed to a sharp downturn in the economy. In the months prior to 11 September, the domestic currency recovered against the US dollar to the levels prevailing at end-January 2001, reflecting a fall in the US dollar against the Japanese yen and euro. The attacks on 11 September further dragged down the US dollar and at end-September, the domestic currency had strengthened by 3.1 percent from end-June 2001 to $1.7651 to the US dollar. From October, however, the gains were reversed, and the Singapore dollar weakened against the US dollar, in line with the depreciating Yen.

Overall, the domestic currency depreciated by 3.8 percent against the US dollar and 0.8 percent against the Euro in 2001. Nevertheless, the Singapore dollar performed slightly better against the Pound Sterling by 1.3 percent and strengthened against the beleaguered yen by 8.5 percent.

INTEREST RATES : In line with the spate of interest rate cuts by the US Federal Reserve, domestic interest rates were on a declining trend throughout most of 2001. In the first half of 2001, the 3-month US$ Singapore Interbank Offered Rate (SIBOR) eased steadily from 6.39 per cent at end-2000 to 4.88 percent at end-March 2001 and 3.83 percent at end-June. This, in turn, has translated into lower domestic interest rates since the end of 2000, with the 3-month interbank rate easing from 2.81 percent in December 2000 to 2.25 percent at end-June 2001. As a result, the differential between the two rates narrowed from 358 basis points at end-2000 to 158 basis points at end-June 2001, lower than its historical average of 167 basis points over the pre-crisis period of 1991-1996. Reflecting further monetary easing by the US Federal Reserve, the 3-month US$ SIBOR continued to edge downwards during the third quarter of 2001, down by about 123 basis points from end-June. The rate fell sharply in September, as both the Federal Reserve and the European central bank cut their interest rates by 50 basis points each to boost liquidity in the financial system after the terrorist attacks on the US. As at end-September, the US$ SIBOR stood at 2.60 percent. The domestic 3-month interbank rate also ended lower, at 1.81 percent in September, compared with 2.25 percent at end-June. As interest rates in the major economies continued to ease in response to uncertainty in the global economy, the 3-month US$ SIBOR and 3-month interbank rate hit their lowest levels in almost twenty years to end the year at 1.88 percent and 1.25 percent respectively.

FISCAL POLICY : Fiscal policy seeks to create an environment that promotes a dynamic private sector, generates robust growth and employment, and advances the development of Singapore.

The focus of government expenditure is on the delivery of essential public goods and services, particularly in the key areas of education, housing, economic infrastructure, basic healthcare and national security. As in previous years, the bulk of government expenditure in 2001 was allocated to social development (42 percent) and security and external relations (37 percent). Economic development accounted for another 16 percent of total expenditure.

On the revenue side, taxation policy in 2001 continued to focus on ensuring an internationally competitive tax structure that would encourage entrepreneurship and attract investments and talent. Despite the sharp deterioration in the external environment and the slowdown in the Singapore economy, sufficient revenue was raised to finance the Government’s operating and development expenditures.

MONETARY POLICY : Monetary policy remained focused on maintaining low and stable inflation over the medium-term, while ensuring support for economic activity during a period of weak external demand conditions and subdued inflationary pressure.

In January 2001, the Monetary Authority of Singapore (MAS) decided to maintain the stance of a modest appreciation of the trade-weighted Singapore dollar within an unchanged policy band. It aimed to cap medium-term inflationary pressures, while continuing to be supportive of economic activity as growth came off its cyclical high and moderated to a slower pace. In July, against the backdrop of a weaker external environment and subsiding inflationary pressure, the MAS shifted to a neutral exchange rate policy stance, with the policy band reflecting a zero per cent appreciation of the trade-weighted nominal effective exchange rate (S$NEER). With heightened uncertainty in the external environment following the terrorist attacks in the US, the MAS decided to widen the policy band in October, so as to allow greater flexibility in managing the exchange rate. The widened policy band continued to be centered on a zero appreciation of the S$NEER.

MEDIUM-TERM OUTLOOK : After a dismal performance of 2.4 percent in 2001, the global economy is expected to pick up this year. The US and the EU economies are recovering, led by improvements in sentiments. The US economy saw positive growth of 2.7 percent in the fourth quarter, supported by higher consumer and government spending. For the EU, the spate of interest rate and tax cuts has held up consumer sentiments. The manufacturing Purchasing Managers’ Index in March 2002 also indicated that manufacturing activity in the euro zone has stopped contracting for the first time since March 2001. While the Japanese economy also showed some signs of bottoming out, it remains weak, plagued by flagging economic confidence and sluggish household and business spending.

The global electronics industry, which saw a record decline of 32 percent last year, is also expected to turn around this year. The drop in worldwide semiconductor sales has moderated but the pace of recovery is still uncertain. Industry monitoring group Gartner Dataquest expects the industry to grow by -5 to +8 percent while the Semiconductor Industry Association’s forecast is 6.3 percent. On the domestic front, forward-looking indicators have also improved. The composite leading index (CLI) has recorded three positive quarterly readings since the fourth quarter. The business expectations surveys show that while business sentiments remain subdued, more businesses in the manufacturing and services sectors expect an improvement in the economy.

The Ministry of Trade and Industry’s (MTI) preliminary 2002 growth forecast, made in October 2001, was -2 to +2 per cent. This was in view of the great uncertainties following the terrorist attacks in September 2001. As the outlook of the global economy has improved since then, the MTI has revised Singapore’s 2002 growth forecast upwards to 3-4 percent (August 2002).

CHANGES UNDERTAKEN TO STRENGTHEN MARKETS

Free Trade Agreements

Singapore is one of the strongest supporters of the multilateral trading system under the World Trade Organization (WTO). We are highly committed to the Doha Development Agenda agreed to by world trade ministers at the fourth WTO Ministerial Conference in November 2001. Meanwhile, Singapore will push the envelope of free trade through bilateral Free Trade Agreements (FTAs), in line with APEC's Bogor Goals to achieve free trade and investment by 2010 for developed economies and 2020 for developing economies. Singapore is a member of AFTA and had concluded FTAs with New Zealand and Japan as at end-2001. Negotiations with the United States, Mexico, Canada, Australia and a collective bloc of Scandinavian countries were in progress as at end-2001.

Enterprise Ecosystem

We have implemented various initiatives to bring about a conducive environment for enterprises to start, grow and thrive. Singapore is being developed as a business financing centre with a broad range of funds to support the formation and growth of enterprises. Incentives to encourage our enterprises to exploit intellectual property have been introduced, such as giving a writing down allowance for IP transferred. One-north, a science hub close to the universities and research institutes, is being developed to be a technopreneurial hotbed where talent and companies can congregate.

Science and Technology

The Science & Technology (S&T) 2005 Plan for the next five years was launched in 2000. A key thrust is to support industry research and development (R&D), with S$2 billion of the S&T 2005 Plan allocated for this purpose. During the previous 5-years (FY1996-2000) about four dollars were attracted from the industry partners for every dollar spent by the government on R&D. This is an important market discipline to ensure that public R&D funds go into economically relevant pursuits. The target is for private sector research to account for two-thirds of Singapore’s overall expenditure on R&D by 2005.

Liberalisation of Electricity and Gas Industries

The new wholesale electricity market which would enhance competition in the electricity generation and retail sectors in Singapore is scheduled to open by the second half of 2002. In addition to the energy spot market, there will be a market for reserve. Consumers will have the choice of an interuptible supply of energy at a lower price. The electricity retail market will be further liberalised in phases. More consumers will be able to choose their electricity retailers. The monopolistic businesses of electricity transmission and gas transportation will continue to be regulated. The Energy Market Authority of Singapore (EMA) is the authority responsible for regulating the electricity and gas industries. The EMA will also regulate the monopoly providers of district cooling services.

Annex I

SINGAPORE: OVERALL ECONOMIC PERFORMANCE

Annex II

SINGAPORE: FORCAST SUMMARY (percent change from previous year)

Annex III

SINGAPORE: MEDIUM-TERM TREND FORECAST (percent)