The biggest budget deficit since independence
An even bigger fiscal response to COVID-19
Finance Minister Heng presented on 26 May a S$33b fourth Budget for 2020. The fiscal deficit widens to S$74bn (15.4% of GDP) funded in large part by a S$52 drawdown of reserves (31bn of which relate to this latest package). This 'Fortitude' Budget follows 'Unity', 'Resilience' and 'Solidarity' Budgets. The total official COVID-19 stimulus effort now stands at S$93bn or 19% of GDP.
COVID fiscal impulse now 12% of GDP; Incremental stimulus focused on jobs
We estimate the Fortitude Budget increases the fiscal impulse in 2020 from around 8% of GDP to 12%. Our S$20bn estimate of the incremental impulse includes the S$3.8bn funding for the 21 April circuit breaker extension job support measures but excludes S$13bn placed in a contingency fund. The incremental budgetary fiscal impulse is focused on jobs, with the highest costing measures associated with job support or creation.
Worse growth outlook
Despite the stimulus and the better than expected Q1 GDP (-4.7% quarter over quarter seasonally adjusted annual rate [SAAR] vs. a preliminary estimate of -10.6%) the government revised its real GDP growth projection for 2020 to -4% to -7% (from -1% to -4%). Our standing 2020 forecast of -7.3% real GDP growth now features a very sharp 15% year over year contraction in Q2 2020 and assumes the recent strength in industrial production and exports due to pharmaceuticals/chemicals is reversed. Our 2021 real GDP projection remains +7%. We agree with the authorities that the labour market will worsen later in the year and project an unemployment rate over 4% in Q4 2020. We continue to see downside risks to our growth projections if 'most businesses are not open by July' as the government plans or if the virus lingers through 2021. However, the scale of the stimulus and the strength of the pharmaceutical sector mean we also see upside risks to our growth projections.
Monetary policy to remain stability orientated
Following the release of the Q1 GDP data and the government's reduced growth outlook, the Monetary Authority of Singapore (MAS) guided that next policy meeting would be as scheduled in October. We expect no further adjustment in FX policy this year and judge it would take a change in the nature of the economic shock rather than just lower GDP growth or inflation projections for MAS to change strategy. Our takeaway from the MAS's 'April' policy statement (MPS) was the focus on stability and liquidity provision while fiscal policy does the heavy lifting