March 18, 2020 / 9:23 AM / 2 months ago

Malaysia travel ban, virus pushes Singapore closer to first recession in two decades

SINGAPORE (Reuters) - Singapore is edging towards its first full-year recession in nearly two decades as neighboring Malaysia’s travel ban cuts off a key source of labor and the coronavirus pandemic hits the economy, firming the case for the central bank to loosen policy.

FILE PHOTO: A view of new cars parked at Tanjong Pagar Container Terminal in Singapore March 9, 2020. REUTERS/Edgar Su/File Photo

The Southeast Asian nation has been widely praised for its response to the outbreak, but spiking cases elsewhere are adding pressure on the small and open economy. It has already signalled a chance of a recession this year and cut its growth forecasts.

“Financial conditions have tightened considerably in recent weeks, and the lockdown being imposed by countries to contain the COVID-19 outbreak means a recession in Singapore cannot be avoided,” said ANZ economist Khoon Goh.

Most economists have cemented their expectations for the Monetary Authority of Singapore to ease policy at its review scheduled for April, with some now even raising the possibility of the central bank stepping in early.

The MAS is likely to change the Singapore dollar’s pace of appreciation to a neutral “zero slope,” all nine economists in a Reuters survey said.

It may re-centre down the mid-point of the policy band in which the currency is allowed to trade, five said, a more drastic action taken a decade ago during the global financial crisis.

MAS manages policy through exchange rate settings, rather than through the conventional interest rates, letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed policy band.

Starting Wednesday, Malaysia is stopping citizens from traveling overseas and visitors from entering the country until March 31 to help stop the spread of the coronavirus.

That move is expected to hit Singapore businesses, which employ some 300,000 Malaysians who commute from across the Straits of Johor.

“It represents quite a big blow to services and SMEs (small and medium enterprises), which rely on labor force from across the causeway,” said Prakash Sakpal, an economist with ING.

While Erman Tan, the head of a chemicals plant, says four of his Malaysian staff are staying back in Singapore for the duration of the ban, he is still bracing for a slowdown in production as he expects disruption in raw material supply from the neighboring country.

Singapore is also set to unveil a second economic package to help businesses and workers, adding to the stimulus announced in the budget last month, which an economist said would be “more effective” than monetary action in the near term.

“Fiscal policy is going to provide direct assistance to small businesses,” said Steve Cochrane at Moody’s Analytics.

Some small businesses in Singapore are looking for extra support from the government to help them keep staff and lower costs, such as a cut in foreign workers levies.

“Now is the time when every dollar means a lot,” said John Kong, chief executive of local building materials supplier M Metal.

Singapore on Tuesday reported 23 new cases of coronavirus, its biggest daily jump, taking its tally to 266 infections. The spread of the virus on the island, however, has so far been relatively mild compared with exponential increases seen elsewhere.

Additional reporting by Anshuman Daga in Singapore; Editing by Sam Holmes

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