Event

On 10 July, the ruling People’s Action party (PAP) once again won the general elections with 61% of the vote. As a result, the PAP and PM Lee Hsien Loong will keep a solid majority (with 83 seats out of 93) in parliament. This result is nevertheless weaker than in 2015 (70%), it shows the PAP’s gradual erosion of popularity over time and is probably also explained by the fallout of the covid-19 socio-economic crisis. Renewed political stability indeed occurs in a recession year for Singapore.

Impact

The PAP has ruled Singapore since the independence in 1965. The island’s economic success story in a rather authoritarian democratic system has contributed to make the city island a wealthy and high-tech place for business and a world reference in economic and political management. The covid-19 crisis has again highlighted Singapore’s efficiency. Singapore handled the first pandemic hit effectively through early testing and rapid actions (travel restrictions, contact tracing, stimulus package already launched in February). However, controlling the epidemic in a lasting way is not an easy task. In early April, new clusters of contamination broke out in migrant worker dormitories and led to the imposition of a nearly total lockdown until 1 June. Singapore saw the total number of contaminations rise to more than 45,000 cases (in mid-July) which is now one of the highest number in South East Asia.

On the economic side, the covid-19 impact has been severe as Singapore’s economy is extremely open, export-led and integrated in regional supply chains. This came in addition to the trade war that already harmed the economy last year. Moreover, the two-month lockdown, which led to the closure of most workplaces, has hit domestic business activity and consumption hard. As a result, in last April, the IMF forecasted a record 3.5% GDP contraction for this year whereas Singapore’s authorities fear it could deepen further between -4 and -7% in 2020. The IMF forecasts a 3% recovery in 2021. A slow rebound is expected in the second half of this year, notably as external demand (first from China) slowly recovers and the domestic economy benefits from one of the world’s sharpest government stimulus. Four coronavirus support packages amounting to nearly 20% of GDP and several accommodative monetary measures will cushion the recession impact on companies and workers. The top downside risk lies in the duration and severity of the pandemic and its impact on external demand on which the island’s economy crucially relies. Should it last longer than expected, extra government support would likely be the outcome, thanks to Singapore’s strong buffers. Since the beginning of the covid-19 crisis, Credendo has downgraded Singapore’s commercial risk from A to B. At the same time, Credendo has kept the excellent political risks ratings (for short-term and medium- to long-term political risks) in category 1/7 and is likely to maintain them unchanged in the one-year outlook. As a matter of fact, the island’s solid liquidity position, strong economic and financial fundamentals, sound policy-making and domestic political stability (as the latest elections illustrated) are expected to help overcome the covid-19 economic shock even though macroeconomic performances could be weaker in the coming years.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com