Impact of a lockdown

However, during the evening rush hour on March 18, the interchange was quieter than usual. This was the first day of the fortnight-long movement control order announced by the Malaysian government in a bid to curb the spread of the Covid-19 virus among its residents.

Among the buses were a few from Singapore that ply the JB route and have been rerouted. As a result, they saw a substantial reduction in the number of passengers. The drivers are trying to get used to what was happening. “Lesser stress for us, of course lah,” one of them tells The Edge Singapore. “But at the same time, you need to think about this: Fewer passengers mean less money and fewer people going to work. Can we tahan or not?” Meanwhile, a store assistant at one of the interchange’s kiosks is already feeling the financial pressure. “We already knew the March holiday period would mean less business, but the Malaysian lockdown just made things worse,” she says.

It was a more drastic picture at the Causeway — the symbolic and physical link between Singapore and Malaysia, which are joined at the hip by geography and history. What was supposed to be the busiest international land border crossing in the world, was a surreal sight to behold on the morning of March 18.

Instead of a never-ending queue of vehicles inching their way slowly towards the customs checkpoints, the bridge was devoid of traffic and atypically quiet.

However, far away from the 1,065-metre-long bridge, there is a flurry of activities on both sides of the Causeway. While both governments were desperately trying to contain the outbreak, bosses in Singapore were trying to find alternative accommodation for their Malaysian employees. These included security guards, renovation contractors, chefs, bus drivers, technicians and office workers. (See “People and companies adapt”)

“I can’t think of any sector that won’t be affected,” says CIMB economist Song Seng Wun. “Malaysia’s lockdown, especially on travel and non-essential business, could have severe knock-on effects on Singapore’s economy,” warns Chua Hak Bin, economist at Maybank Kim Eng.

Impending recession

So far, the Covid-19 virus has infected more than 200,000 people across 160 countries and killed more than 8,900. China, where the pandemic started, reported no new local cases on March 19 but large swathes of the United States and Europe were hit by the virus and similar lockdowns have been put in place.

To mitigate the effects of an impending economic slowdown, the US government announced nearly US$2 trillion ($2.9 trillion) in stimulus and rescue packages while the Federal Reserve have cut the Fed Funds Rate to near zero.

But the market was hardly soothed. In less than four weeks, the Dow Jones Industrial promptly gave up all the gains made in the 40 months under the Trump administration.

As a result, major financial houses such as Morgan Stanley and Goldman Sachs are already calling for a global recession this year.

Given the nature of Singapore’s economy, it is “inevitable” that this country will suffer the same fate, says DBS senior economist Irvin Seah. “Global outlook hasn’t been grimmer than this since the Global Financial Crisis,” says Seah, who has cut his Singapore 2020 GDP growth forecast from 0.9% to –0.5% and warns of further cuts ahead if the situation worsens. “Considering the chaotic situation in many parts of the world and the economic costs of those restrictive measures on trade, investment, consumption and travel, this is evolving into a ‘self-induced’ global recession.

Being a small and open economy, Singapore will not be spared,” says Seah.

Practically, all sectors of the Singapore economy have been hit but it is the airlines and the tourism industries that are hurting badly.

Flag carrier Singapore Airlines announced it is halving its capacity as more countries ranging from Australia to Italy put in place travel restrictions. Further cuts are likely, warns SIA CEO Goh Choon Phong. “Make no mistake — we expect the pace of this deterioration to accelerate,” he adds. On March 19, SIA’s share price sunk to as low as $6.12 — a level not seen in more than 20 years.

On March 17, Genting Singapore, which operates Resorts World Sentosa, said it expects its financial results to be “significantly and adversely impacted” by the Covid-19 outbreak. It announced that its board of directors and top management would take pay cuts of 18% and 15% respectively. The group also slashed the base salaries for all its managerial staff by 9–18%.

The following day, Genting shares plunged by nearly 10% to close at 56 cents — a quarter of its $2.27 high back in November 2010. The last time the stock hit this level was back in 2009 at the depth of the Global Financial Crisis when the resort was still under construction. The stock closed at 51 cents on March 19.

Second rescue package

From what was originally a problem for China alone, the Covid-19 virus has shown it disregards nationality, ideology, race and religion.

What is needed, say economists, is a coordinated response from governments.

In the wake of the emergency cuts to the US Fed Funds Rate, Asean central banks quickly followed suit. Malaysia is expected to cut 50 basis points to 2%; Indonesia the same quantum to 4.25%; Thailand to 0.5%; and the Philippines to 3.25%, estimates Maybank Kim Eng. Singapore, which prefers to wield its control via the exchange rate, is likely to ease the Singdollar to a “neutral” bias and probably re-centre the S$NEER (Singapore Dollar Nominal Effective Exchange Rate) downwards to the prevailing level following the April policy meeting.

Still, monetary easing will not be enough and Asean governments are likely to provide additional support measures as the outbreak worsens. Neighbouring Indonesia has already announced a second round of measures including tax cuts worth US$1.6 billion ($2.3 billion).

Meanwhile, the Singapore government is widely expected to announce its second support package soon. This is on top of what was already announced last month in the FY2020 Budget as the government takes on the role as “insurer of last resort”, says Maybank Kim Eng.

With the outbreak taking a turn for the worse in just over a month, business owners, bosses and workers will expect more financial support. President Halimah Yacob, who holds the “second key” to the reserves, has already indicated that the government must “consider using the past reserves if necessary”. She notes that many businesses “are bleeding because of disrupted supply chains, rapidly falling demand and tightening cash flows”. Likely areas to be addressed include further help for workers to keep their jobs, additional subsidies for SMEs to keep workers employed and a temporary cut in corporate tax, says Mohamed Faiz Nagutha, Asean economist at Bank of America Merrill Lynch.

How big will this second rescue package be? For reference, Nagutha says previous “offbudget” packages announced during the 2003 SARS outbreak and 2008 Global Financial Crisis ranged from 6.5% to over 9% of Singapore’s GDP. Nagutha estimates that the second package can be in the range of 3–4% of the GDP, double the first package already announced in Budget 2020.

“We believe at least a doubling of that impulse is needed at this juncture (so another 1.5% of GDP), but doing so will require the package to have a significantly bigger face value as it will also likely contain support measures such as soft loans and risk sharing which do not translate into extra spending,” says the economist.

According to Nagutha, the Singapore government can easily fund the second package.

While the FY2020 Budget announced in February expected a deficit of $11 billion, there was an accumulated surplus of $7.7 billion. If not utilised before the current term of government ends, this would be added to the pool of reserves of at least $850 billion, says Nagutha.

Despite its vast reserves, the Singapore government has rarely tapped on them. It was during the GFC when the government drew on the reserves, after obtaining the President’s approval to draw $4.9 billion to specifically fund part of its $20.5 billion support package. In the end, less than $4 billion was actually drawn, after which the economy made a V-shaped recovery, and the money was returned to the reserves.

Enough seats

This time round, investors are hoping for a similar V-shaped recovery. The virus, for one, is expected to die off around the middle of the year, setting the stage for a recovery by the end of the year. (See “Covid-19 crisis: What are we missing?” on page 17)

As of March 19, the benchmark STI closed at 2,318.71 points, down 29% year to date.

Based on historical valuations, this is indeed an attractive level for investors to enter the Singapore market. However, Terence Wong, CEO of Azure Capital, warns investors that earnings of companies are almost certainly likely to suffer. So instead of looking at earnings ratio, he believes book value is a more reliable measure to check if a certain stock is worth buying.

Wong sees a 10% fall in the book value of the STI between 2020 and 2019. He advises investors to start entering the market when the STI hits 2,360 points, or two standard deviations down from the P/B level of 2919.8 points.

In the event the situation worsens, the next level to enter is when the STI is at 2.5 times standard deviations below, or, 2,100 points.

In the extreme, worst-case scenario, at three standard deviations down, or when the index hits 1,840 points and P/B hits 0.7 times. “We have gone there before and we have also recovered. The market will always come back,” says Wong.

Away from the financial markets, the lockdown of the Causeway is not exactly bad news for everyone. For as long as Rabbani Rosli, an administrative assistant who stays at Woodlands, can remember, he has had to miss a few buses before he could board one which is not as crowded. But on the morning of March 18, the bus was just half filled. “For once, there were enough seats for everyone,” he says. — Reporting by Jeffrey Tan, Pauline Wong, Samantha Chiew, Amala Balakrishner and Uma Devi