BUSINESS ECONOMICS – II

IMPACT OF COVID – 19
ON
THE ECONOMY OF SINGAPORE

Group 3:
 Chavi Garg (B2021069)
 Dinesh Kumar Suresh
Kumar Nair (B2021075)
 Keerthana K (B2021081)
 Sakshi Agarwal (B2021091)
 Sanket Naik (B2021092)

Submitted to:
Dr. Chinmaya Behera
Table of Contents

1. Executive Summary ……………………………………. 3

2. Impact of COVID – 19 …………………………………. 4
3. Impact on GDP …………………………………………. 5
a. A Brief History …………………………………….. 5
b. Current Scenario ………………………………….. 5
c. Inflation …………………………………………….. 7
d. Demand and Supply shocks …………………….. 7
e. Decrease in domestic consumption …………….. 8
f. Effect on outward oriented sectors ……………… 9
g. Slowdown in real estate and construction ……… 9
4. Exchange rate ………………………………………….. 10
5. Interest rate …………………………………………….. 11
6. IS – LM Model ………………………………………….. 12
7. References ……………………………………………... 18

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EXECUTIVE SUMMARY
The COVID-19 pandemic has wreaked havoc on worldwide economic activity, causing demand
and supply shocks in Singapore's economy.
Given the fast-changing scenario, authorities should use high-frequency and real-time economic
data to track COVID-19's effects on the Singapore economy.
COVID-19 has had a huge economic impact on Singapore. Those industries that rely on
international travel, such as air transportation, lodging, and other tourism-related industries, have
been the hardest hit. Domestic consumption has been cut back as a result of increasingly tougher
safe distance regulations, which has had a negative impact on consumer-facing sectors such as
retail and food services. Outward-oriented sectors such as manufacturing and wholesale
commerce have been harmed by a drop in external demand and supply chain disruptions, while
domestically-oriented sectors such as construction and real estate have been harmed by negative
spillovers from the domestic economy. However, with the surge in demand for online commerce
and services, there are some bright spots in the economy. Domestically, how well the Singapore
economy performs in the remaining quarters of the year will be determined the ability to restart
economic operations securely and without a resurgence of diseases in the community as the
Circuit Breaker period comes to a conclusion. To that aim, businesses must guarantee that safe
management practices are applied in the workplace and that employees are able to work from
home to the greatest extent practicable. Similarly, Singapore citizens should maintain their safe
distance measures, which include limiting their movements and social engagements to the
greatest extent possible.

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IMPACT OF COVID – 19
Singapore, an island nation in Southeast Asia has a population of approximately 5.7 million. A
major part of the country’s economy is dependent on the tourism industry which was the worst
affected due to the covid - 19 pandemic. Being a popular and busy commercial port, it was bound
to be susceptible to infectious diseases such as the one caused by SARS-CoV-2 virus.
Singapore’s commitment and approach to epidemic preparedness were shaped by its severe
acute respiratory syndrome (SARS) outbreak in 2003, which resulted in 228 cases and 33 deaths,
including health care workers. After the SARS epidemic, a long-term whole-of-government plan
was developed. Substantial upgrading of infrastructure increased isolation and intensive care unit
(ICU) capacity throughout public sector hospitals, and in 2019, a new purpose-built National
Center for Infectious Diseases was completed with over 300 beds, including negative pressure
isolation facilities and intensive care beds. Contingencies were developed, allowing rapid
expansion of national ICU bed capacity alongside creation of stockpiles of drugs, personal
protective equipment, and medical equipment, including ventilators. Training of health care
workers is a major focus, and strategic planning extended into the academic arena.

Singapore had managed to control the spread of Covid-19 infections by the end-2020, following
the lockdown introduced in April 2020 when cases surged. Singapore moved to phase 3 on
December 28, 2020, the less stringent level of a three-phased approach to resume activities.
Recent increases in daily community infections since April 28, 2021 have led to tightened social
distancing, including reduced size for social gatherings and public events, and a return to Phase
2 (Heightened Alert) until June 13, 2021. A national COVID-19 vaccination program started on
December 30, 2020, with the objective to vaccinate all Singaporeans and long-term residents by
end-2021. Annual real GDP contracted by 5.4 percent in 2020, as activity has rebounded following
the record contraction of 13.3 percent (y/y) in the second quarter of 2020. The economy continued
to recover in 2021Q1, with growth reaching 1.3 percent year-on-year.

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IMPACT ON GDP
A BRIEF HISTORY:
Singapore went from being a low-income country to a high-income one in just a few decades
following independence. The city-GDP state's growth has been among the highest in the world,
averaging 7.7% since independence and surpassing 9.2% in the first 25 years. Manufacturing
became the main driver of growth when rapid industrialization in the 1960s propelled the island
nation's development trajectory. Singapore achieved full employment in the early 1970s, and a
decade later joined Hong Kong SAR, Republic of Korea, and Taiwan as Asia's rapidly
industrializing economies. Singapore's high-value-added economy is nevertheless anchored by
the industrial and services industries. In 2018, the Singapore economy grew by 3.2 percent
overall. Value-added manufacturing, especially in the electronics and precision engineering
sectors, as well as the services sector, particularly the information and communications industries,
which grew 6.0 percent year over year, and the finance and insurance industries, which grew 5.9
percent year over year, remain key drivers of growth. In 2019, economic growth is likely to slow,
with the government estimating a range of 1.5 percent to 3.5 percent, with the pace falling slightly
short of the middle of the range. Singapore is ranked first in the world in terms of human capital
development in the 2019 World Bank Human Capital Index. This means that a child born in
Singapore today will be 88 percent as productive as if she had complete education and good
health when she grows up.

CURRENT SCENARIO:
COVID-19 has had a huge economic impact on Singapore. Those industries that rely on
international travel, such as air transportation, lodging, and other tourism-related industries, have
been the hardest hit. Domestic consumption has been cut back as a result of increasingly tougher
safe distance regulations, which has had a negative impact on consumer-facing sectors such as
retail and food services. Outward-oriented industries such as manufacturing and wholesale
commerce have been harmed by a drop in external demand and supply chain disruptions, while
domestically-oriented sectors such as construction and real estate have been harmed by negative
spillovers from the domestic economy. However, with the surge in demand for online commerce
and services, there are some bright spots in the economy.

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Already, year-on-year growth in Singapore's manufacturing sector (core products include
electronics, machinery, and pharmaceuticals) fell to 11.2 percent in August for the second month
in a row. The country's benchmark non-oil domestic exports increased 2.7 percent for the second
month in a row.

Singapore’s economic recovery was already expected to slow to 3%-5% growth next year, from
about 7% this year, according to the trade ministry. However, electronic and pharmaceutical
manufacturing, which are generally immune to weaker global growth, can continue to boost
Singapore's economy. The unemployment rate is expected to drop to 1.9 percent next year, below
the pre-pandemic level of 2.2 percent, thanks to an increase in job openings.

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INFLATION:

Even as supply-chain bottlenecks and a global energy crisis drive up local food and electricity
rates, Singapore has spared the brunt of the price increases experienced in countries ranging
from the United States to Brazil. After core inflation hit its highest level in more than two years last
month, most observers expect the central bank to tighten monetary policy further at its April
meeting.

Inflationary pressures are projected to remain elevated until next year before easing. Singapore,
as a trade hub, may be more vulnerable than others to further snarls in global supply chains,
which might drive up worldwide costs.

DEMAND AND SUPPLY SHOCKS:

The Singapore economy is likely to experience both demand and supply-side shocks. On the
demand side, the global recession will result in a dramatic decline in foreign demand for
Singapore's goods and services. On the supply side, the global economic slowdown has disrupted
global supply chains, which has impacted some corporate operations in Singapore. Domestically,
the outbreak's containment measures are projected to have an impact on the Singapore economy.
To begin, stronger border controls have been implemented to prevent the importation of COVID-
19 cases, while other countries have set travel restrictions to defend their borders as well. These
international and domestic travel limitations have resulted in a significant decrease in tourist
arrivals and air passengers handled at Changi Airport, lowering demand for tourism and air
transportation services in Singapore. Second, to reduce the community spread of COVID-19 in
Singapore, increasingly stricter safe distancing measures have been introduced, culminating in
the Circuit Breaker period from 7 April to 1 June.
First, to combat the spread of COVID-19, international and local travel restrictions have resulted
in a dramatic drop in tourist arrivals to Singapore and foreign air travel in general. This has had a
significant impact on the lodging, air transportation, and arts, entertainment, and recreation
sectors, as well as tourism-related components of the business services sector (e.g., travel
agents, tour operators, and meetings, incentives, conventions, and exhibits organisers).

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DECREASE IN DOMESTIC CONSUMPTION:
The COVID-19 outbreak has resulted in lower domestic consumption and travel, which has had
a severe impact on consumer-facing industries like food services, retail commerce, and land
transportation. We found that mobility in the form of driving, public transportation, and walking has
decreased since the first verified case of COVID-19 in Singapore using data from the Apple
Mobility Trends Report. Following the implementation of safe distancing measures in March (e.g.,
the closing of entertainment places like as pubs and theatres) and the Circuit Breaker measures,
which have been in effect since 7 April to reduce COVID-19 community transmission, mobility has
decreased even more. The Department of Statistics' (DOS) Retail Sales Index and Food &
Beverage Sales Index declined 9.6% and 16.4% year-on-year in February, respectively, due to
more people remaining at home, before worsening to falls of 14.1 percent and 23.6 percent in
March.

As spending patterns adapt to the COVID-19 situation, demand for online sales and services is
projected to rise in the future. This, in turn, is likely to open doors for firms with an e-commerce
presence, such as those who deliver food and groceries. With telecommuting and safe distance
becoming the new normal, more businesses are turning to the internet to communicate with their
consumers, as well as implementing digital solutions to streamline procedures like e-payment and
e-invoicing.

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EFFECT ON OUTWARD-ORIENTED SECTORS:
The drop in external demand and supply chain disruptions have harmed outward-oriented sectors
such as manufacturing, wholesale trade, and transportation and storage. The manufacturing
Purchasing Managers' Index, for example, has fallen considerably since February, driven down
by a drop in new orders, showing weak external demand conditions and weakening business
moods. Furthermore, sentiment-sensitive sectors like finance and insurance have seen increased
volatility as a result of increased uncertainty and fears about the spread of COVID-19. Weak
global demand and supply chain disruptions have also impacted international trade, resulting in
a decrease in air and marine cargo handled at our air and sea ports.

SLOWDOWN IN REAL ESTATE & CONSTRUCTION:

The slowdown in domestic economic activity has had negative spillovers, as well as poorer
emotions, in domestically-oriented industries like as construction, real estate, and other business
services.
Certified progress payments, which are a proxy for nominal construction production, fell by 1.2
percent year over year in March, while residential property purchases fell by 22% and 57% year
over year in March and April, respectively. In the short term, personnel disruptions are likely in
the construction sector as a result of additional steps taken to prevent COVID-19 from spreading
at construction sites and foreign worker dorms (e.g., movement restrictions at the foreign worker
dormitories).
Fifth, the Circuit Breaker period's closure of most workplaces impacted businesses across the
board, particularly those that couldn't fully operate from home. With the progressive lifting of the
Circuit Breaker restrictions from June 2 onwards, this impact should lessen over time as more
enterprises are allowed to restart operations.

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EXCHANGE RATE
Unlike most other countries, Singapore has adopted the use of the exchange rate rather than the
interest rate as the instrument of monetary policy. The choice of the exchange rate is predicated
on the Singapore economy’s small size and its high degree of openness to trade and capital flows.
The basket, band and crawl features of the exchange rate system have served as an effective
anchor of price stability, keeping inflation low and stable over the past 30 years. In addition,
Singapore has complemented monetary policy with micro- and macro prudential measures to
ensure overall price and financial stability in the economy.

The Covid-19 outbreak has accentuated the negative implications for international trade, as well
as domestic productivity and tourism in Singapore, triggering significant uncertainty and concern
for the local economy.
For the majority of 2019, the S$NEER defied economic gravity, tightly adhering to the top end of
its trading range (Fig 1a), while the SGD outperformed many regional currencies (Fig 1b).

The unexpected Covid-19 outbreak, with its negative implications for international trade, domestic
productivity and tourism has triggered significant uncertainty and concern – especially after
Singapore raised its disease outbreak response condition level.
Acknowledging the downside risks, the government downgraded its 2020 growth forecast by 1%
to a range of -0.5% to 1.5%.

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INTEREST RATE
The banking system's assets include its net foreign assets and net domestic credit. Net domestic
credit includes credit extended to the private sector and general government and credit extended
to the nonfinancial public sector in the form of investments in short- and long-term government
securities and loans to state enterprises; liabilities to the public and private sectors in the form of
deposits with the banking system are netted out. Net domestic credit also includes credit to
banking and nonbank financial institutions. Domestic credit is the main vehicle through which
changes in the money supply are regulated, with central bank lending to the government often
playing the most important role. The central bank can regulate lending to the private sector in
several ways - for example, by adjusting the cost of the refinancing facilities it provides to banks,
by changing market interest rates through open market operations, or by controlling the availability
of credit through changes in the reserve requirements imposed on banks and ceilings on the credit
provided by banks to the private sector. The real interest rate is used in various economic theories
to explain such phenomena as the capital flight, business cycle and economic bubbles. When the
real rate of interest is high, that is, demand for credit is high, then money will, all other things being
equal, move from consumption to savings. Conversely, when the real rate of interest is low,
demand will move from savings to investment and consumption.

The Monetary Authority of Singapore does not control the monetary system by monitoring interest
rates. Instead, it manages the Singapore dollar (SGD) exchange rate against a trade-weighted basket
of currencies of Singapore's major trading partners and competitors. The Singapore Overnight Rate
Average or SORA is the volume-weighted average rate of borrowing transactions in the unsecured
overnight interbank SGD cash market in Singapore between 8.00am and 6.15pm.

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IS-LM CURVE MODEL
The IS-LM model stands for "investment-savings" (IS) and "liquidity preference-money
supply" (LM). It is a Keynesian macroeconomic model that shows how the market for
economic goods (IS) interacts with the loanable funds market (LM) or money market. The
goal of the model is to show what determines national income for a given price level.
There are two ways to interpret this exercise. We can view the IS–LM model as showing
what causes income to change in the short run when the price level is fixed because all
prices are sticky. Or we can view the model as showing what causes the aggregate
demand curve to shift. These two interpretations of the model are equivalent as in the
short run when the price level is fixed, shifts in the aggregate demand curve led to
changes in the equilibrium level of national income.
The two equations of IS-LM model are:
IS → Y = C(Y − T ) + I(r) +G
LM → M/P = L(r, Y )
The model takes fiscal policy G and T, monetary policy M, and
the price level P as exogenous. Given these exogenous variables, the IS curve
provides the combinations of r and Y that satisfy the equation representing the
goods market, and the LM curve provides the combinations of r and Y that
satisfy the equation representing the money market.

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FISCAL POLICIES

● To soften the impact of the pandemic, the government have announced multiple
packages of fiscal support measures totaling roughly S$92 billion (February 18,
March 26, April 6, April 21, May 26, August 17, 2020). All Singaporeans get a cash
payment (which is larger for families with children under the age of 20), as well as
supplementary benefits for low-income persons and the unemployed. Wage
subsidies (extended through March 2021, with degrees of support varying by
sector), job creation, rental cost support, improved financing schemes, and more
support for the self-employed and industries most directly affected are all examples
of support for businesses and workers (aviation, tourism, construction,
transportation, arts and culture).The government has raised its contingency funds
for unforeseen expenditures and put aside S$22 billion in lending capital to assist
firms facing cash flow problems due to loan obligations and insurance premium
payments. Support for R&D investment, a national stockpile of health supplies, and
a food resilience programme are among the other economic resilience initiatives.
● The FY2021 budget, which enters into force on April 1,2021, underpins a move
from comprehensive emergency relief to more targeted support as the economy
recovers. It includes a S$11 billion COVID-19 Resilience Package aimed at
extending a few measures from the FY2020 stimulus package. These include
(i) public health care measures to support a safe reopening of the economy,
including through testing, contact tracing, and vaccination (S$4.8 billion)
(ii) targeted support to workers and businesses, in particular an extension of wage
subsidies under the Jobs Support Scheme with a lower level of wage support
(S$2.9 billion) and an extension of the SGUnited Jobs and Skills Package to
support local hiring and training opportunities (S$1.5 billion)
(iii) targeted support to the hardest hit sectors such as aviation, tourism, transport,
and entertainment (S$1.2 billion).
● To mitigate the economic impact of the return to Phase-2 (Heightened Alert), the
government announced some temporary measures totaling S$800 million on May
28, 2021 to support the impacted workers, businesses, and individuals. These
include enhanced support under the Jobs Support Scheme, additional cash payout
to eligible individuals and workers, and rental support for qualifying tenants of
commercial properties.

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Effect on IS curve

Increase in Government expenditure shifts the IS curve to the right, interest rate increases

Effect on LM curve

In this short time, any impact on the LM curve cannot be accurately measured and hence,
there is no significant movement in it.

MONETARY POLICIES

● On February 14, the Monetary Authority of Singapore (MAS) welcomed the

announcements from banks and insurers in Singapore to support their customers
facing financial difficulties due to the impact of the COVID-19 outbreak, while
adhering to prudent risk assessments. On March 31, the MAS and the financial
industry announced a detailed package of measures to help individuals and SMEs
facing temporary cash flow difficulties. The package has three components: (i) help
individuals meet their loan and insurance commitment.
(ii) support SMEs with continued access to bank credit and insurance cover; and
(iii) ensure interbank funding markets remain liquid and well-functioning.
second package announced on April 30 extends the scope of relief for individuals
to a broader set of loan commitments.
● On March 19, the MAS announced the establishment of a US $ 60 billion swap
facility with the US Federal Reserve. The MAS is drawing on this facility to provide
USD liquidity to Singapore banks through weekly auctions held every Monday
since late March. On December 17, MAS announced that the swap facility has
been further extended to end-September 2021.

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● On March 30, the MAS adopted a zero percent annual rate of appreciation of the
policy band and reduced the mid-point to the prevailing level of the $NEER, with
no change to the width of the band.
● On April 7 the MAS announced that it will adjust selected regulatory requirements
and supervisory programs to enable financial institutions to better deal with issues
related to the pandemic.
● On April 8, 2020, the MAS announced a $125 million support package to sustain
and strengthen financial services and FinTech capabilities. The package, funded
by the Financial Sector Development Fund, has three main pillars:
(i) supporting workforce training and manpower costs
(ii) strengthening digitalization and operational resilience
(iii) enhancing FinTech firms’ access to digital tools.
● On July 29, the MAS called on locally-incorporated banks headquartered in
Singapore to cap their total dividends per share to 60 percent of the FY2019 level
and offer shareholders the option to receive dividends in scrip (as shares) instead
of cash. On Aug 7 MAS urged Finance companies incorporated in Singapore to
also cap their total dividends per share for FY2020 at 60 percent of FY2019’s level.
● On September 3, the MAS announced measures to enhance the banking system’s
access to Singapore dollar (SGD) and US dollar (USD) funding effective
September 28. A new MAS SGD term facility will offer SGD funds in the 1-month
and 3-month tenors, complementing the existing overnight MAS Standing Facility.
A wider range of collateral comprising cash and marketable securities in SGD and
major currencies will be accepted. Domestic systemically important banks that are
incorporated in Singapore will be able to also pledge eligible residential property
loans as collateral at the term facility. Pricing will be set above prevailing market
rates, in line with the facility’s objective to serve as a liquidity backstop. MAS will
also expand the range of collateral that banks in Singapore can use to access USD
liquidity from the MAS USD facility, in line with what is accepted at the new SGD
term facility.
● On October 5, the MAS and the financial industry announced extended support for
individuals and (SMEs) that need more time to resume loan repayments.
Individuals with residential, commercial and industrial property loans who are
unable to resume making full loan repayments can apply to make reduced
installment payments pegged at 60 percent of their monthly installment, and
eligible SMEs may opt to defer 80 percent of principal payments on secured loans.
These measures will gradually expire in 2021.
● On November 23, the MAS announced that it will provide up to RMB 25 billion
($5.1 billion) of funding to banks in Singapore, in an effort to deepen renminbi
liquidity and further strengthen banks' ability to meet the growing renminbi
business needs of their customers in Singapore and the region.

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 ● In January 2021, the authorities announced that micro and small firms severely
impacted by COVID-19 could
(i) apply for a Simplified Insolvency Programme to help restructure their debts or
facilitate orderly winding up
(ii) enter into renegotiation of certain contracts such as leases or licenses for
commercial property, under the realign Framework.

Effect of Monetary Policies on LM curve:

Loans were available at a cheaper rate of interest thereby encouraging people to borrow more
indicating an increasing money supply. This implies an outward movement in the LM curve
as well.

Increase in Government Spending:

An increase in government spending shifts the IS curve towards right,interest rate
increases .In Singapore, government Spending increased to 14697.10 SGD Million in the
fourth quarter of 2021 from 14631.30 SGD Million in the third quarter of 2021.

IS curve shifts right, interest rate increases

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Increase in Investment Spending

 In the latest reports, Singapore GDP expanded 0.2 % YoY in Mar 2021.
 Singapore Nominal GDP reached 87.9 USD bn in Dec 2020.
 Its GDP deflator (implicit price deflator) fell 3.8 % in Dec 2020.
 Singapore GDP Per Capita reached 59,819.0 USD in Dec 2020.
 Its Gross Savings Rate was measured at 45.8 % in Dec 2020.

As investment expenditure increases, income increases multiplier (K) times the change in
investment. This shifts the IS curve horizontally by a distance equal to the multiplier times the
change in autonomous spending.

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REFERENCES

[1] https://am.jpmorgan.com/hk/en/asset-management/liq/insights/liquidity-
insights/updates/singapore-dollar-no-longer-defying-gravity-implications-for-cash-investors/

[2] https://www.singstat.gov.sg/modules/infographics/economy

[3] https://www.singstat.gov.sg/find-data/search-by-theme?theme=economy&type=publications

[4] https://www.heritage.org/index/visualize?cnts=singapore&type=2

[5] https://www.gov.sg/article/coping-with-covid-19-economic-measures

[6] https://www.gov.sg/article/coping-with-covid-19-economic-measures

[7] https://databank.worldbank.org/source/world-development-indicators

[8] Lam, Yan Tung. 2016. “Box 1.1: Economic Sentiments in Singapore”, Economic Survey of
Singapore Second Quarter 2016.

[9] Chia, Keat Loong and Jessica Foo. 2018. “Box 1.1: Recent Trends in Singapore News
Economic Sentiments”, Economic Survey of Singapore First Quarter 2018.

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