Mr Speaker, Sir, in the FY98 Budget Statement, I informed the House that the Singapore economy would feel the full impact of the regional economic crisis this year. I announced several tax concessions and other measures to help ease business costs during this economic slowdown, and to help local businesses obtain working capital in a situation of tight liquidity. I also said that the Government would monitor the state of the economy closely and stood ready to implement appropriate off-budget measures if the economy slows down sharply. Since then, the external economic environment has deteriorated significantly. The US and the EU are still growing robustly, but Japan has slipped into recession. Closer home, the regional economic outlook has also worsened. After the change of government in May, Indonesia is now undergoing a difficult process of political transition and economic reconstruction. The negative growth rates registered in the first quarter of 1998 in Malaysia, Hong Kong and South Korea are indications of tougher times for Asian economies in the months ahead. The weakening Yen has also led to fears of another round of currency contagion. Regional currencies have therefore come under pressure. The prospects are for continued turbulence and uncertainty. Singapore's financial and economic fundamentals are good. But this deteriorating external environment has adversely affected us. This is inevitable, given the openness of our economy and our close linkages with the region. The latest figures confirm that growth momentum in Singapore has indeed slowed significantly. GDP growth moderated to 5.9% in the first quarter of 1998, from 7.8% in 1997. MTI's preliminary estimate for the second quarter, based on figures for April and May, is that growth has slowed further to 1.9%, with the seasonally adjusted annualised figure at 0.2%. The manufacturing sector has slowed down, due to weaker global demand and the regional economic crisis. The outlook for the worldwide electronics industry has turned less sanguine. Producers are cautious about demand and wary about rising inventories. The commerce sector continues to be affected by the decline in entrepot trade, slower tourist arrivals and weaker domestic consumer spending. This has in turn affected the transport and communications sector. The financial services sector has also slowed considerably as activity in the Asian Dollar Market and foreign exchange market remains weak, and domestic bank lending continues to slacken. The construction sector is still supported by the healthy pipeline of major public sector projects, although private construction activity has slowed down drastically. The Composite Leading Index, which leads economic activity by about three quarters, has continued to fall since the fourth quarter of 1997. The latest survey of business expectations in March 1998 also showed that the outlook for most sectors had deteriorated, especially the commerce and services sectors which are more exposed to the region. The trade figures confirm the growth estimates. Our trade performance has been weak. Non-oil domestic exports in the two months of April and May fell by 3.2% compared to a year ago. Electronics exports contracted by 4.8%, while non-oil re-exports fell by 2.4% due to a reduction in regional demand. Given the pessimistic external environment and domestic sentiments, MTI expects economic growth in the second half of the year to remain very weak, and possibly even become negative. However, for the full year of 1998, we should still see positive growth. MTI's previous GDP growth forecast of 2.5% to 4.5% for 1998 was made in February this year. After factoring in the substantial regional developments that have arisen since then, as well as possible future downsides in the external environment, MTI has revised this forecast down, to 0.5% to 1.5%. Additional measures The tax and budgetary measures announced in my FY98 Budget Statement were based on the economic outlook in February, against a volatile regional setting. Rather than reacting prematurely, the Government decided first to watch how external events would unfold, and ascertain the pace and extent of the economic slowdown. Now that developments are clearer, and we have revised our growth forecast downwards, we are ready to act to mitigate the impact of the regional troubles on our economy. The Government has therefore decided to implement a package of additional measures worth a total of $2 billion to cut business costs and stimulate the economy. In carrying out this package of additional measures, we should recognize that the primary cause of Singapore's current economic slowdown is the sharp fall in external demand, especially regional demand. It is not domestic problems inherent in our own economy. This is in contrast to the 1985/86 recession where the primary cause was the loss of competitiveness of the Singapore economy. In particular, in the early 1980s, labour cost increases had exceeded productivity growth significantly. As these were internal problems, we could rectify them swiftly by changing policies and making our own adjustments. Together with the quick recovery of global demand, the Singapore economy was able to bounce back within one year. This time, our export competitiveness position has not been too adversely affected, although we cannot be complacent and will have to monitor the situation for specific sectors. Our unit labour cost and unit business cost have been stable. While the Singapore dollar has indeed appreciated substantially against the baht, ringgit, rupiah, and won, it has depreciated against most OECD currencies. On a trade weighted basket basis, the Singapore dollar has appreciated only slightly. Furthermore our inflation has been low, whereas several of these regional countries are suffering from high inflation and cost of capital as a result of their weaker currencies. The problems we face this time are largely outside our control. We cannot change the external environment, or determine the course of events in the region. However, we can cushion the fallout from the regional economic slowdown on the Singapore economy. We should also use the opportunity to consolidate our strengths and further enhance our capabilities. In this respect, the package (Cols. 359 - 360) of additional budget measures has three broad objectives : (i) to reduce business costs; (ii) to build economic infrastructure and capabilities; and (iii) to help stabilize specific sectors of the Singapore economy. Package - OFF-BUDGET PACKAGE (Cols. 359 - 360) Land - Rentals and Charges With our limited land resource, land-related costs like rentals are a significant proportion of business cost. To help ease the pressures of land-related business costs, the Government will implement the following measures. Additional Property Tax Rebate First, in addition to the 15% property tax rebate which was announced during the FY98 Budget Statement, the Government will grant an additional 40% property tax rebate on commercial and industrial properties for the year commencing 1st July 1998 for a total of 55%. The additional revenue loss to Government is estimated at $400 million. HDB and JTC will pass on all of this rebate to their tenants and lessees. Likewise, the Government strongly urges private sector landlords to pass on at least half of this rebate to their tenants. Rental rebates by JTC & HDB Second, JTC and HDB will increase the rental concessions to their tenants and lessees. As part of JTC's continuing efforts to adjust its rents to varying market conditions, JTC will reduce its posted rents by up to 12%. This will benefit new tenants and those whose tenancies come up for renewal. In addition, JTC will also grant enhanced rental rebates of up to 20%, depending on how far the existing rents are from JTC's posted rents. About three quarters of JTC tenants and lessees, who are currently paying more than 80% of the posted rent, will enjoy the full reduction of 20%. Those paying less than 30% of posted rent, about 2% of the total, will get a freeze in rents. The rest of the tenants and lessees will enjoy pro-rated net reductions. These measures supersede those announced at the FY98 Budget, and are estimated to cost JTC an additional $200 million over a 12-month period. Similarly, HDB will reduce its posted rents in line with market rents. For industrial properties, HDB revises its posted rents every quarter in line with the market. It has already reduced posted rents by 10% in the first half of this year, and will implement a further reduction of up to 5% in the 3rd quarter. In addition, HDB will also grant a net rebate on its industrial land leases of up to 20%. Tenants of HDB industrial and commercial space will enjoy a flat 10% rebate on their gross rents. These rebates are estimated to cost about $80 million. JTC and HDB will be releasing more details on these additional concessions shortly. Rental rebates by Civil Aviation Authority of Singapore (CAAS) CAAS will also extend a 15% rebate on the rentals for its office, warehouse and retail tenants for 12 months with effect from 1st July 1998. In addition, it will continue with the rebate on airport concession fees which was given in the first half of 1998. These additional measures are estimated to cost CAAS $54 million. Labour Costs Labour costs form a significant proportion of business cost in Singapore. Appropriate wage restraint will be a key measure to keep labour costs down. The priority must be to protect jobs. Cutting wage costs was also a key response during the 1985 recession. However, at that time our wage system was too rigid. To trim wage costs, we had no choice but to cut the employers' CPF contribution rate. After the recession, we set up the flexible wage system. Over the years, we have built up a variable component of wages which can serve as a buffer and be reduced during difficult times. Today, in the civil service the variable component has increased to over 20% of annual wages, while the corresponding figure in the private sector is about 16%. This sizeable variable wage component will provide a useful first line of defence to reduce wage costs. As the National Wages Council has pointed out, wage restraint is an integral part of our response to the current problems, for both the private and public sectors. The civil service will take the lead in this. In February, the Government announced a freeze on salaries of Ministers and senior civil servants this year. In line with NWC recommendations, the civil service also reduced the mid-year portion of the Annual Variable Component (AVC) to � month, from the usual _ month. At the same time, the Government indicated that the end-of-year AVC would be reviewed when the economic situation and outlook became clearer. The deteriorating outlook has made it more probable that we will have to reduce the end-of-year AVC. We will decide on the actual adjustment nearer the end of the year, taking into account the economic conditions prevailing at that time. Wage restraint will complement Government's ongoing efforts and new initiatives for worker training, job matching and upgrading the employability of Singaporean workers. These include the Education Training Fund and various manpower development and training initiatives under EDB's Economic Development Assistance Scheme (EDAS). Recently, the Government and SDF contributed $50 million each to expand the Skills Redevelopment Programme (SRP). The SRP provides training courses to raise the employability of less educated and older workers by equipping them with certifiable skills, so that they can find suitable employment. The Government will extend an additional $20 million grant to expand the training facilities and capacity to support the SRP. This includes establishing a new Skills Development Centre to cater to growing demand for training places, and expand the range of courses through the Singapore National Employers Federation and the network of industry associations. The Ministry of Manpower will be announcing further details when they are finalised. Costs of Capital The availability and cost of capital to support business activities are a third area of concern amongst businessmen during this period of uncertainty. Interest rates have indeed risen in recent months, but this is largely a reflection of the rising risk premium in Asia. In fact, Singapore's interest rates remain relatively low, compared to other countries in Asia with perhaps the exception of Japan. There have been calls from the public for the Government to reduce interest rates and to encourage banks to be more forthcoming in their lending. However, the scope for doing this is very limited. Given the openness of our financial system, MAS can only manage the exchange rate. The level of interest rates is set by market forces based on foreign interest rates and market expectation of the movement of our exchange rate. For individual loans, banks set the interest rates based on their cost of funds and their assessment of the credit risks of individual borrowers. If the MAS were to start pumping in liquidity to bring down interest rates, foreign investors would move out of the Singapore dollar. And then, we will end up with even higher interest rates because investors will start demanding a higher premium to hold Singapore dollar deposits. The banks would in turn have to raise their lending rates because their cost of funds would have gone up. So it is better for interest rates to be determined by the market. Neither can Government instruct the banks to extend loans to companies. These are commercial decisions which the banks themselves have to take. The Government is not in a position to second guess their judgments, or to take responsibility for the consequences if the loans turn bad. However, what the Government can do to help local businesses continue to have sufficient working capital is to provide support through the Local Enterprise Financing Scheme (LEFS). Under this scheme, banks undertake the necessary credit assessment, while the Government co-shares the risks with them. This is a practical way to help local enterprises address the problem of credit availability. In the FY98 Budget the Government enhanced the LEFS scheme, to increase the loan line to $1.1 billion. We also increased the co-sharing of risks by Government and the maximum loan quantums, and extended the scheme to cover more local enterprises. The response so far to the enhanced LEFS scheme has been encouraging. The Government will now increase the LEFS loan line further, to $2 billion and more if necessary. We will also study further enhancements to the scheme to respond to changes in the credit situation. Services Charges Fees and service charges are a fourth area of business costs containment which Government will address. Suspension of Parking Surcharge Scheme Currently, a surcharge of $60 per lot per month is levied on all non-residential car parks with at least 5 parking lots in and around the Restricted Zone (RZ). The surcharge supplements the Area Licensing Scheme (ALS) as a road usage restraint measure to keep traffic free flowing within the CBD. The retailers have been asking the Government to suspend this Parking Surcharge Scheme for some time. We were unable to do so earlier because the Parking Surcharge Scheme was an important component of the total traffic management system within the CBD. The Electronic Road Pricing (ERP) scheme will be a more flexible and effective way to control traffic congestion. With the extension of the ERP to the Restricted Zone from 1st September 1998, the Land Transport Authority (LTA) will be suspending the Parking Surcharge Scheme. The suspension will benefit the owners of car parks currently under surcharge. The Government urges these owners to pass on their savings in the form of lower parking charges to benefit their tenants, retailers, and motorists who use their car parks. This measure is estimated to cost $37 million a year. Retailers in the CBD have also requested that ALS hours be shortened on Saturdays to encourage shoppers to drive into the CBD. With the implementation of the ERP for the CBD, the LTA will be able to make this adjustment as well. The Ministry of Communications will release the details in a few weeks' time, when it announces full details of the new ERP charges. Port-Related Tariffs Responding to market conditions and customer requirements on an on-going basis, PSA Corporation has already extended various rebates to its shipping customers through its customised agreements. Similarly, it has reduced its distripark and warehouse rentals. For shippers who use Jurong Port, JTC will also offer a 20% rebate on Jurong Port tariffs with effect from 1st July 1998. This is estimated to save $20 million for some 1,000 companies. Telecommunications Tariffs Similarly, as part of its regular schedule of tariff reductions, Singapore Telecoms has informed the Government that it will be offering further rate reductions on its International Direct Dialling, Subscriber Trunk Dialling, Local Leased Circuit, International Leased Circuit, and Frame Relay services beginning the second half of this year. These changes are expected to result in customer savings totalling $100 million. Electricity Tariffs Since corporatisation, Singapore Power has made substantial productivity gains, reducing costs and improving financial returns. It will give a one-off 3.5% rebate on the non-fuel component of electricity tariff for 1 year with effect from 1st July 1998. This is equivalent to a 2.6% reduction in average electricity tariff and is estimated to result in cost savings of about $81 million for all users. This is separate from any adjustments which will be made on the fuel component of electricity tariffs in line with movements in fuel cost every quarter. Water Tariffs The Government will not hold back or reduce the PUB water tariff increases for households, scheduled for 1st July. The increases are a long term strategic move to get water tariffs to reflect the true scarcity value of water in Singapore, and to make Singaporeans conscious of the vital importance of conserving water. The increases will not cause any hardship to lower income households, as they will be fully offset by the PUB rebates and service and conservancy charge grants for the HDB 1-4 room flat dwellers. Economic Infrastructure/Capabilities Building Public Sector Projects Given the open nature of our economy, it is difficult to stimulate domestic economic activity through pump priming or boosting consumption. However, even as we seek to reduce costs to maintain our competitiveness, there are projects which the Government can undertake which contribute to building our economic infrastructure and enhancing our capabilities for the longer term. To put in place such economic infrastructure and capabilities for the future, Government will speed up several on-going public sector infra-structure projects as well as bring forward suitable new development projects. In total, close to $1.9 billion worth of new development projects have been approved. Together with the on-going projects which will be speeded up, it will result in an estimated additional $670 million in new disbursements in FY98 alone. Education will continue to be the key focus, accounting for over 40% of the newly approved projects. Human talent remains our most precious resource and we want to develop it to the maximum. Major projects brought forward will include the expansion of our Primary School Building Programme to increase the number of Primary schools to be built in new and mature towns from 18 to 27; the incorporation of IT into Primary and Secondary Schools under construction; upgrading of NUS and NTU; and enhanced computer facilities at our polytechnics. MOE will also expand its recruitment of teachers to raise the effectiveness of the education system. Economic infrastructure will be the other area of focus. Key projects include increased investment for commercial rollout of Singapore One; Jurong Island development; and development of industrial land. We will also provide additional funds for EDB's Economic Development Assistance Scheme Phase III which provides loans and grants support for companies and manpower initiatives, and for TDB to undertake more trade promotion and facilitation work. Measures For Specific Sectors Aside from cost reduction and infrastructure enhancement measures, the Government will adopt several specific measures to help stabilise and strengthen certain sectors of the economy. This is to ensure that such sectors, whose health affects the rest of the economy, are not subject to severe stress. Property Market The property market is one area of particular concern. A weak property market can affect confidence and asset values, and also have repercussions on the financial sector. In November 1997 and again during the FY98 Budget Statement, Government made adjustments to its land sales programme, to avoid aggravating the excess supply in the market. Since the last review, the property market situation has continued to weaken. To help stabilise the market, the Government will adopt the following additional measures. First, we will suspend sale of sites for private residential, executive condominiums and commercial development for the rest of 1998 and 1999, except for the following: a. Sengkang site to tie in with the development of the MRT/LRT station and bus interchange in Sengkang New Town. b. Clarke Quay MRT site to tie in with the development of the North-East MRT line. c. Four small infill sites within the Chinatown Conservation Area. The Government will resume selling a steady supply of land when the property market recovers. We will review the situation at the end of 1999 to decide whether to resume land sales in the year 2000. Second, we will suspend the 5% per annum premium that is currently levied on developers of private residential properties for every year of extension of their Project Completion Period (PCP). Developers can now apply for extension of PCP up to 8 years without penalty. The suspension will apply to applications made before the end of 1999. Third, we will allow the reassignment of government land sale parcels, as a temporary measure, until the end of 1999. This will allow consolidation within the property development industry, as some successful tenderers may no longer be in a financial position to complete the development. Fourth, we will defer payment of stamp duty by purchasers of uncompleted properties until TOP or time of subsequent sale, whichever is earlier. This will also apply to subsequent buyers of an uncompleted property. It will help to improve the cash flow of property purchasers. This is a refinement of the measure introduced during the May 1996 property curbs. The estimated revenue impact on Government is $85 million. The Ministry of National Development will be announcing more details of these measures separately. Financial Sector Tax Deduction for Bank Provisions Besides the property market, another key area is our financial sector. Our banking system is strong and sound. However, to encourage banks to make adequate provisions for loan exposure to the region and to further promote stability in the banking sector, the Government has decided to lift the current 3% limit on tax deduction for general provisions made by banks and merchant banks for Year of Assessment 1999, provided such provisions exceeding 3% are approved by the Monetary Authority of Singapore. General provisions exceeding 3% will be brought to tax when they are written back to the bank's Profit & Loss Account later. The tax rate to be applied will be the tax rate prevailing when the provisions were made. If at the end of 5 years, the general provisions still exceed 3%, the provisions in excess of 3% will be brought back to tax. Again, the tax rate to apply will be that prevailing at the time when the provisions were made. Stamp Duty for Contract Notes At the same time, the Government has also decided to suspend the stamp duty on contract notes for share transactions for one year, with effect from 30th June 1998. This is in recognition of the marked weakness in the stock-broking industry. Compared to the average monthly turnover in 1997, stock market turnover in the month of May 1998 declined by over 40% in value terms. Consequently, earnings for stockbrokers as a group have also fallen sharply. The immediate outlook for the industry also remains weak. The suspension of stamp duty will help to lower transaction costs. This measure is estimated to cost the Government about $50 million. Hotel Sector Refurbishment Of Hotels The hospitality sector has been one of the most severely hit. Tourist arrivals have declined by about 17% in the first five months of this year. Hotel occupancy has also fallen. Government will give a tax allowance of up to 150% for qualifying expenditure incurred in the refurbishment of hotels, to encourage hotels to upgrade during this lull period. This incentive is applicable for a period of 5 years and focused more on hotels in the core zone. Conclusion The whole package of measures will inject an estimated $2 billion into the economy. Of this, about $1.6 billion is expected to affect the Budget balance directly. Based on revised revenue and expenditure estimates, the introduction of the package will result in a budget deficit of about $800 million for FY98. The Government believes that this level of budget deficit, relative to the size of our economy and at a difficult time like this, is still in line with our prudent approach towards fiscal policy. As a small open economy with extensive links to the region, we cannot generate strong economic growth through our own actions, so long as the regional environment and external demand remains depressed. Sustained resumption of economic growth can only come about with the stabilisation and recovery of the regional economies and increased global demand for the goods and services we produce. We must brace ourselves for slower economic growth during the next few years of regional transition and recovery. Some industries and companies will feel the fall in business demand and profits more acutely than others. Some may have to merge or relocate. Retrenchments will increase as businesses consolidate and re-structure themselves. This process will be painful but we must accept it as the only way to adapt to the changed economic conditions and resume growth again. The Government will continue to monitor the external and domestic economic situation closely and take additional suitable measures where necessary to maintain the framework for economic activity. With more retrenchments this year, workers should have more realistic expectations, accept wage restraint and retrain themselves to acquire new capabilities and remain employable. New jobs are being created, but Singaporeans must acquire the necessary skills and knowledge to perform these jobs. On their part, companies should streamline their operations, improve their efficiency and productivity, and upgrade their workers. They too should make the necessary adjustments to stay the course and position themselves to capitalise on the opportunities when the region recovers. The regional economic crisis poses us a formidable challenge. But there is no reason to be daunted or disheartened. Our financial and economic fundamentals are sound. We do not suffer from the problems which beset some other regional countries. Analysts and investors know this. To quote a recent report by SG Securities Research, "Overall the Singapore economy will face a difficult environment but, like a well maintained ship with plenty of ballast, state-of-the-art navigational facilities and a good crew, will safely navigate the choppy waters and not only stay afloat but slowly move against the storm". By taking appropriate measures now to counter the adverse conditions, and to develop our long term potential, we will emerge more resilient and competitive when the region recovers. [Applause.]