Motion Response Speech by MOS Alvin Tan on tackling the macro picture in rising cost of living challenges

1. Mdm. Deputy Speaker, I thank the Member for tabling today’s Motion.

2. I will respond to the Member’s Motion in two parts.  I will start by addressing the macro picture, before zooming into the micro picture.

MACRO

3. A hallmark of our Government since our independence has been our ability to look and plan long term. We see the big picture – the macro picture. This includes assessing the world and the winds of change, as well as identifying the trends, opportunities and challenges for Singapore.

4. In this House yesterday, I shared our economic outlook for Singapore, including our GDP growth and inflation projections. For the sake of brevity in this response, I shall not repeat those details. Members can refer to my speech yesterday.

5. What I would like to focus on in my response, is how we have planned for and laid the foundations for the long term.

a. First, we maintain a stable macroeconomic environment so businesses and households can make economic decisions with confidence. A core tenet is our exchange rate-centred monetary policy, which has helped us manage inflation. During this period of rising inflationary pressures, MAS has pre-emptively tightened monetary policy since October last year.¹ This longstanding policy has directly helped dampen imported inflation. How?

i. While global food commodity prices increased by an average of 25.4% year-on-year over the first five months of 2022, domestic food prices increased by an average of 3.6% year-on-year over the same period.

ii. Likewise, even as global energy prices rose by 27.5%, energy-related components in Singapore’s Consumer Price Index, which include the cost of electricity, gas and petrol, increased by 13.6% year-on-year between January and May.

b. Second, we continue to build our trade links to the world, to diversify our sources of imports and exports, even as the world is experiencing a retreat of globalisation.

i. We concluded the world’s largest Free Trade Agreement (FTA), the Regional Comprehensive Economic Partnership Agreement (RCEP), in November 2020, and are part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). We also signed the Pacific Alliance-Singapore Free Trade Agreement (PASFTA) in January, and are on track to conclude an FTA with Mercosur.

ii. We have also signed Digital Economy Agreements (DEAs), Digital Economy Partnership Agreements (DEPAs), and are negotiating a green economy agreement with Australia.

iii. These agreements help us diversify our imports, open markets for our businesses and future proof our economy.

c. Third, we continue to stay open and connected to the world, and to innovation, investments and talent. Despite the challenges posed by the COVID-19 pandemic, we attracted S$11.8 billion in Fixed Asset Investments (FAI) last year. We have also secured significant investments. For example, Sanofi has committed to setting up a €400 million vaccine production facility in Singapore. These inbound investments create good jobs for Singaporeans, make our economy vibrant and competitive, and prepare us for the next pandemic – long term. Overall, strong growth will support job creation, wage growth, and help address inflationary pressures.

MICRO

6. As we continue to plan and execute our macro and strategic plans, we also keep our eye firmly on the micro – the ground picture. This is reflected in how we navigate Singapore through the COVID crisis, and support Singaporeans and local businesses during this period of rising costs.

a. During the height of COVID, we committed close to $100 billion over the last two years, part of it to support businesses hit by COVID restrictions.

i. In particular, our Jobs Support Scheme, which provided wage subsidies to employers to help them retain workers, saved 165,000 local jobs between March and December 2020.

ii. We also rolled out our SingapoRediscovers Vouchers (SRV) for our embattled tourism sector. Collectively, about $300 million in vouchers and out-of-pocket payments were generated through SRV transactions. This provided crucial support to our local tourism businesses. In addition, the scheme contributed more than $100 million in ancillary spending such as retail, food and beverage, and transport. For example, the SRV scheme helped Monster Day Tours (By Woopa Travels) to increase their overall sales by 60%.

b. Budget 2022

i. In anticipation of higher prices, we rolled out support for Singaporeans in Budget 2022 including the Jobs and Business Support Package to help businesses and workers, as well as the Household Support Package to help households with their daily needs. To help Singaporeans cope with rising inflationary pressures, we also brought forward the implementation of some of the measures, including our CDC Vouchers and Small Business Recovery Grant.

ii. The additional S$1.5 billion support package DPM Lawrence Wong announced on 21 June provides immediate and targeted relief to lower-income and vulnerable Singaporeans, who are disproportionately affected by higher prices.

iii. The measures included in the package also help our local companies transform and cope with rising energy costs by becoming more energy efficient. It also provides targeted relief for specific groups, such as self-employed persons who depend on their vehicles for their livelihoods and are hence more adversely affected by energy cost increases. These include taxi drivers and delivery drivers.

iv. Overall, we designed the package to avoid stoking further inflationary pressures and distorting price signals, while being fiscally responsible and sustainable. And as DPM Wong said yesterday, if the situation worsens significantly, we will be prepared to do more.

7. Let me now turn to a few of the specific issues raised by Associate Professor Jamus Lim in his speech.

a. On MAS’ monetary policy response to inflation. We need to recognise the global nature of the price pressures we are facing, which is affecting all of our trading partners. The sharp pick up of inflation of food and oil prices since Q4 last year, principally reflects the effects of serious disruption of global supply including due to the Ukraine conflict. It is inevitable that some of these price increases will affect our economy.  Many Singaporeans do accept that the situation requires some adjustment to the higher prices, given the circumstances as I will explain below.

i. The MAS, using its monetary policy has strengthened the exchange rate (trade-weighted S$) by at least 5% on an annualized basis², which has capped domestic food inflation, for example, to 1/5th of global food inflation thus far. The MAS in deciding the extent of tightening the exchange rate, takes many factors into account. Foremost is the fact that a strengthening exchange rate cannot fully offset global prices without causing immediate negative consequences on growth and therefore the labour market. Indeed, this is precisely the reason, why many advanced central banks are guarded in the speed and extent to which they will hike interest rates.  Monetary policy action in of themselves have attendant spillover effects that must be taken into account in the uncertain challenging economic environment.

ii. Therefore, a judicious blend of tight monetary policy and targeted supportive fiscal policy that is carefully calibrated is most appropriate. It is our assessment that the macroeconomic policies that we have been putting together have been appropriate from this perspective.  For example, the combined Budgets of 2020-21 together with monetary policy decisions that were made, supported Singapore’s GDP growth by about 1% point in 2021, and prevented the deterioration of unemployment rate by 4% points even as the combined expansionary macroeconomic policy responses was non-inflationary.

iii. At this juncture, the current round of combined fiscal and monetary policy responses is expected to contain medium-term inflation without causing significant loss of output, or inadvertently adding further to the underlying tightness in the economy.³

b. On indexing financial assistance payments to inflation, the Government regularly reviews our schemes to take into account needs and affordability. Inflation is one of many factors taken into consideration.

Conclusion

8. Mdm. Deputy Speaker, allow me to sum up.

9. I have responded to the Member’s Motion by articulating our Government’s macro and micro approach. We plan and execute for the long term, and at the same time, continue to have the dexterity to zoom into the details that matter on the ground to Singaporeans and Singaporean businesses. Indeed, the livelihoods of our people are not a theoretical exercise to us. Rather, we focus on strong job creation and wage growth as the best ways to help Singaporeans tide through these immediate difficult times and ensure that we have sufficient resources to tackle the long term challenges. This mindset and bias towards action have allowed us to weather storms and seize opportunities throughout our history. This is the hallmark of our government. This is our commitment to Singapore, and we will continue to do our utmost to deliver on this commitment. Especially in these challenging times.

10. Thank you.

¹ DPM Wong’s PQ response on 4 July 2022: “MAS has been pre-emptive in tightening monetary policy in response to rising inflationary pressures. MAS has raised the appreciation path of the Singapore dollar nominal effective exchange rate (S$NEER) policy band three times in the past nine months – in October last year, in January and in April this year. In April, MAS also re-centred the mid-point of the exchange rate policy band upwards.”  

² DPM Wong’s PQ response on 4 July 2022: “The effects of MAS’ successive monetary policy tightening moves are still working their way through the economy, and will continue to moderate some of the externally-induced price increases.” 

³ Consistent with this, MAS remains vigilant to evolving global growth and inflation developments and is prepared to respond as necessary to ensure medium-term price stability in the economy.