Morgan Stanley: 'What the Singapore govt can and should do'

The government announced the FY2009 budget on the evening of January 22, bringing it forward from the usual February timetable in light of the severity of the macro downturn. Overall, the budget is constructive and expansionary in our view. The government expects a fiscal deficit of -3.5 percent of GDP for FY2009 (versus -0.8 percent of GDP for FY2008). For basic balance (which excludes top-ups to endowment and trust funds and net investment income/returns revenue), it expects -6.0 percent of GDP (versus -1.0 percent of GDP in FY2008). Specifically, government revenue is expected to fall from 15.1 percent of GDP in FY2008 to 13.4 percent in FY2009. Total expenditure (including special transfers) is expected to increase from 17.2 percent of GDP to 20 percent of GDP in FY2009. In terms of size, the budget announced is in line with our overall expectation of 3-percent fiscal stimulus (i.e. increase in expenditure), dated January 13, 2009). We maintain our view of -3.5-percent YoY GDP growth for 2009 and +3.0 percent YoY for 2010.

Doing the Necessary
In terms of measures, we believe investors should ask the question of what the government can and should do. As we highlighted in our previous note, the budget needed to address two broad objectives in our view: 1) supporting demand and preventing adverse social impact of a slowdown from income compression and unemployment; and (2) easing credit conditions and reducing the systemic risks of asset market price corrections and corporate credit failures on the banking sector. In this regard, we believe the centrepiece of the budget, a S$20.5-billion package (8.2 percent of GDP) (not all are new spending or costs), focused on measures of the right nature.