Budget deficit could widen to 2.3-2.6% of GDP amidst nCov dilemma

The government is expected to provide a wider expansionary budget to prop up businesses.

The primary budget deficit may widen to 2.3%-2.6% of the GDP as the 2019 novel coronavirus (2019 nCov) scare continues to drag various business sectors, according to Fitch Solutions.

Whilst the analysis report stated that their forecast remains at 2.2% of GDP, downside risks continue to rise.

“These downside risks stem mainly from the 2019 n-CoV outbreak that has infected close to 10,000 people in China. The likely economic slowdown as a result of restrictive measures aimed at containing the disease in China will see Singapore’s open economy similarly affected,” Fitch Solutions stated.

The report added that there is also the risk of a community outbreak within Singapore itself, which has already reported 18 confirmed cases as of 3 February. This could be a further blow to the economy that would require more stimulus whilst weighing on revenue, widening the primary deficit.

Furthermore, Fitch noted that another key driving factor behind its consideration of a wider primary deficit forecast is the rising downside risk to their real 2020 GDP growth forecast of 1.7%. Singapore’s economy is expected to be hit hard in H1 2020, led by the tourism industry and the export-oriented manufacturing sector. 

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“To be sure, 18.5% of international arrivals in Singapore are from Mainland China. This figure increases to 23.5% if we include the whole of Greater China. Singapore currently has entry restrictions in place for Chinese residents in the province of Hubei but that could be extended to more parts of China. According to the World Travel & Tourism Council estimates, tourism contributed, both directly and indirectly, 10.2% of Singapore’s total GDP in 2017,” the report added.

Similarly, the fortunes of the export-oriented manufacturing sector are closely tied to those of China’s manufacturing sector. Various media reports in late January of indefinite closures of factories by the likes of Honda, Ford, Tesla and Foxconn in China, which will bode well for Singapore.

“We expect the government to implement an even more expansionary budget than we previously anticipated in response to a more dire economic situation. This would mean increased expenditures, likely to prop up smaller businesses in the retail sector amongst other measures, posing upside risk to our current expenditure forecast for 2020 of S$8 7.9b,” Fitch Solutions said.