Welcome news for Obama

Welcome news for Obama

Senate approves early release of bailout funds while a US$825b recovery plan is unveiled

WASHINGTON: Five days from becoming United States president, Mr Barack Obama won a major boost when the US Senate agreed to release financial bailout funds and Democratic lawmakers from his political party unveiled an US$825 billion (S$1.2 trillion) recovery plan.
The Senate voted on Thursday to clear the release of the second half of a US$700 billion financial bailout package devised under the Bush administration.

The Senate action, by a vote of 52-42, spares Mr Obama a legislative fight just as he takes office and gives him a US$350 billion war chest to further stabilise the financial sector.

The vote came amid renewed distress in the banking industry, including the further deterioration of Citigroup and a further government bailout for Bank of America.

Mr Obama had personally lobbied reluctant senators to release the money.

Meanwhile, Democratic lawmakers who make up the majority in the House of Representatives unveiled a US$825 billion spending and tax-cut plan to shore up the crippled economy. Mr Obama has said the plan would fulfil his vow to create or preserve more than three million jobs.

The passage of both measures would leave him with a US$1.175 trillion war chest to use against the most dramatic economic slide since the 1930s.

‘This is a significant down payment on our most urgent challenges,’ Mr Obama said of the plan. The House aims to vote on the Bill by Jan 28 and then send it to the Senate.

On Thursday, Mr Obama was to tour an Ohio company that manufactures parts for wind turbines, a fitting backdrop to promote alternative energy dollars included in his stimulus package. The event was the first in a series to generate support from Americans for his recession plan.

Meanwhile, a Senate committee overwhelmingly approved the nomination of Mrs Hillary Clinton as Secretary of State, and the upper chamber’s Judiciary Committee was expected to sign off on Attorney General-designate Eric Holder as well.

Both Cabinet positions will require a vote in the full Senate and both will likely be approved.

The Bush administration’s handling of the first half of the US$700 billion package soured many in Congress and the public because most of it went to banks with nothing for homeowners facing mortgage foreclosures.

But earlier this week, Mr Obama lobbied hard on Capitol Hill for release of the money, threatened to veto any Bill that blocked its release and promised to alter priorities for its use.

He is committed to spending up to US$100 billion to help home owners at risk.

Meanwhile, fellow Democrats House speaker Nancy Pelosi and Senate Majority Leader Harry Reid, have pledged to have the economic stimulus Bill ready for his signature by mid-February. Passage of the plan would mark a significant achievement at the outset of his presidency.

Education, energy and infrastructure the focus

US$550 billion (S$817 billion) for job-creating spending on infrastructure, science, energy and education programmes over two years.

US$275 billion in tax cuts for individuals and businesses.

Nearly 60 per cent of the spending would go to state and local governments and non-profit organisations to pay for things such as schools and health care.

The Bill calls for more spending than the President-elect had proposed, and a smaller tax cut, but it does include a key campaign pledge by Mr Obama: a tax credit of US$500 for individuals and US$1,000 for couples who earn less than US$200,000 per year.

ASSOCIATED PRESS, LOS ANGELES TIMES

Source : Straits Times - 17 Jan 2009

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2009 growth forecast to be revised again

2009 growth forecast to be revised again

Outlook is gloomier than it was a couple of weeks ago, PM indicates

By Goh Chin Lian

ST PHOTO: JOYCE FANG

SINGAPORE will revise its growth figures again ahead of Thursday’s Budget announcement, Prime Minister Lee Hsien Loong said yesterday.
This second revision within a month is prompted by unexpected developments, he said, citing the steep fall in Singapore’s December trade figures which show the economy of its major trading partners has taken a turn for the worse.

Speech by PM Lee Hsien Loong
The gloomier state of the economy was also affirmed at his meetings with businessmen and unionists since last week, as he met 30 of them on four separate days.

Mr Lee told reporters that one company had built up six months’ worth of goods with no buyers. At the PSA container terminals, cranes are lying idle. ‘It’s a situation which is already gloomier now than it was on New Year,’ he said after a lunch meeting with unionists.

The day after New Year, the Government revised downwards this year’s growth forecast to between -2 and 1 per cent, from November’s projection of between -1 and 2 per cent.

In the past couple of weeks, growth and trade numbers in Asia and elsewhere have fallen very drastically, Mr Lee said.

Yesterday, Singapore reported that its non-oil exports fell by 21 per cent last month compared to the same month a year earlier.

Most economists interviewed expect Singapore’s economy to contract by 3 per cent. Said CIMB-GK economist Song Seng Wun, who predicts a worst case scenario of between -2 and -5 per cent: ‘We should be more aggressive in providing support for the local economy.’

The business and union leaders who met Mr Lee suggested reducing business costs such as property tax, and the rental of space from HDB and JTC Corporation.

Others want the Government’s $600 million Skills Programme for Upgrading and Resilience to take in more professionals and middle managers. Unionists also urged Mr Lee to help middle-income workers, who are hit by the turmoil too.

The Prime Minister said the Government would need to balance the various suggestions, adding that the Budget will run into a deficit this year and if necessary, the Government will dig into the reserves.

‘The Government’s job is not to do everything which is asked for but to look to see which are the items which will be most effective and then how do I raise the money which I need to fund all the things which I need to do, either from the Budget revenues this year or from the reserves which we have accumulated.’

He also said that Singapore can make the necessary adjustments, ‘but what happens after that depends on what happens around the world’.

Mr Lee declined to give specifics of the Budget but indicated it would not follow that of other countries in spending money to boost demand because of Singapore’s open economy.

‘People will spend it once and then most of the money will leak overseas and that’s the end of the warm feeling.’

The Budget focus will be to help companies stay afloat and save jobs, so that workers can look after their families throughout the downturn, he said.

It will also deal with the longer-term concerns of competitiveness and creating new capabilities, he added.

This is important because employers, particularly multinational companies that have weathered previous crises, see long-term opportunities in Asia, said the Prime Minister.

They also think Singapore is a good springboard for exploiting these opportunities when conditions improve, he added.

One lunch participant, Mr Daniel McHugh, chief executive officer of express cargo carrier DHL Express (Asia Pacific), cited the government efforts to train and re-train workers as one reason for his confidence in Singapore. ‘I’ve been in Asia for 25 years and I’ve not seen this level of government commitment to working with MNCs on people development.’

Mr Lee also gave his reason for holding his lunch meetings, as other ministers and government agencies have also sought views from businesses, unionists, grassroots leaders and members of the public on the Budget.

He said he wanted to have his own feel of the ground. ‘I usually have a sounding of a range of views during the year and particularly before Budget. But this time I’m doing more because it’s a very critical moment…it’s not an ordinary Budget.’

Despite the gloomy picture, Mr Lee is heartened that unionists and bosses share similar views on the need to work together to keep jobs and companies viable.

‘It’s a tremendous strength for us, in a situation like this, which not many other countries would be able to do,’ he said.

5 DAYS TO BUDGET 2009
It promises to be a Budget like no other. But what will the Government unveil on Jan 22?

IN THE SATURDAY SPECIAL REPORT:

Lessons from past downturn Budgets

Wishlists of companies, individuals

What the experts say

Source : Straits Times - 17 Jan 2009

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Citigroup splits into two, unveils US$8.2b loss New York

Citigroup splits into two, unveils US$8.2b loss New York

Its stock rises after optimism over good bank, bad bank plan

(New York)

BACK TO BASICS
Citi’s latest plan reveals its focus on lending and deposit gathering, and dismantles the ‘financial supermarket’ created a decade ago
CITIGROUP unveiled a plan to break into two businesses as a way to shed troubled assets, and reported a US$8.29 billion fourth-quarter loss, twice as much as analysts expected.

In Citigroup’s reorganisation, one business, Citicorp, will focus on traditional banking around the world, while the other, Citi Holdings, will hold the company’s riskier assets.

CEO Vikram Pandit’s move will allow Citigroup to sell or spin off the Citi Holdings assets to raise cash. It also reveals the company’s growing focus on back-to-basics lending and deposit-gathering, and dismantles the ‘financial supermarket’ created a decade ago.

Citigroup shares rose 14.9 per cent to US$4.40 in premarket trading, in part because of hope about the bank’s plans to restructure and separate its good assets from its bad ones.

Some investors have been calling for a breakup of Citigroup for years, as it struggled to keep up with its Wall Street peers.

There has been harsh blame for Citigroup’s woes directed at the board, too - and the company said yesterday it plans to get rid of more board members after the recent departure of long-time director and former Treasury Secretary Robert Rubin.

‘There has been one announced departure from the board. Together with other anticipated departures, this gives us the opportunity to reconstitute the board and we will do so as quickly as possible,’ said Richard Parsons, Citi’s lead director.

‘It’s one of the first steps towards some positive news and the end of this nightmare,’ said Michael Holland, founder of Holland & Co in New York, which oversees more than US$4 billion of assets.

Citigroup posted US$28.3 billion of writedowns and credit losses, bringing its total credit losses over 15 months to more than US$92 billion.

The net loss of US$1.72 a share compared with a loss of US$9.8 billion, or US$1.99, a year earlier. Excluding a US$3.9 billion gain from the sale of a German consumer bank and other results from discontinued operations, the bank’s loss was US$2.44 a share. On that basis, the loss was more than twice as wide as the US$1.08 average estimate of analysts in a Bloomberg survey.

As Citigroup plunged 77 per cent last year in New York trading, the bank was forced to accept US$45 billion of US government rescue funds.

‘It looks like a kitchen-sink quarter,’ said Peter Sorrentino at Huntington Asset Advisors in Cincinnati. ‘Sweep it all in there and get this behind us.’

Citigroup is splitting into two operating units, one of which will focus on universal banking, the other on brokerage and retail asset management, local consumer finance, and a pool of assets that require special management.

Anticipated for some time, this step is seen as a ‘good bank/bad bank’ plan. The good assets will be in the universal bank known as Citicorp and led by Mr Pandit, while the troubled assets will be in the unit known as Citi Holdings.

Citi Holdings will include Citi’s asset management and consumer finance segments, including CitiMortgage and CitiFinancial. It will also be in charge of Citi’s 49 per cent stake in the joint brokerage with Morgan Stanley, and the pool of about US$300 billion in mortgages and other risky assets that the US government agreed to backstop last year. The bank said it was searching for someone to run Citi Holdings.

In the fourth quarter, revenue fell 13 per cent to US$5.6 billion, reflecting weak capital markets. The company’s global credit card business saw revenue decline 27 per cent on weakness in North America.

Consumer banking revenues declined 22 per cent, driven by a 47 per cent drop in investment sales. And its institutional clients group, securities and banking revenues were negative US$10.6 billion, mainly due to net losses and writedowns of US$7.8 billion.

‘Our results continued to be depressed by an unprecedented dislocation in capital markets and a weak economy,’ Mr Pandit said. — Bloomberg, Reuters, AP

Source : Business Times - 17 Jan 2009

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Wanted: A Budget that ‘holds the fort’

Wanted: A Budget that ‘holds the fort’

A government-funded lender for SMEs and restructuring home loans will help

By VIKRAM KHANNA
ASSOCIATE EDITOR

THE upcoming Singapore Budget due to be unveiled on Jan 22 - earlier than normal, but not a moment too soon - will be the most important, at least since the Asian crisis of 1997/98. It will be important because this time around, the stakes - for the economy, for companies and for workers - are particularly high. The 2009 Budget will help determine how well the Singapore economy and the workforce will weather the devastating recession that is upon us.

HOUSING RELIEF
We need a Budget that protects people. For the mass of the people, reliefs on housing-related payments would be most helpful in augmenting household cash flows
As the Q408 numbers confirmed, the economy is now contracting. With exports declining, many large projects postponed or cancelled and layoffs already underway, the economy is likely to continue sliding for most of this year.

The government’s growth forecast for 2009 is minus 2 to one per cent - and could yet be cut. OCBC, HSBC, Citigroup and BNP Paribas forecast minus 2.8 per cent. Deutsche Bank projects a 4.5 per cent decline. We could be staring in the face of one of the worst recessions in Singapore’s history, if not the worst.

If ever there was a time for a bold, radical Budget, this is it. What we need is a Budget for the here and now, which will be fast acting, with lots of firepower directed at three essential tasks: preserving jobs, creating jobs and protecting people.

Let’s start with preserving jobs. About 60 per cent of Singapore’s workforce is employed by small and medium sized enterprises (SMEs), of which there are some 160,000. If these firms run into serious trouble, mass bankruptcies and layoffs could result. Keeping as many of Singapore’s SMEs afloat as possible, even if they are not doing well, should be the top priority in this Budget.

The key is to help these companies where they are most vulnerable, and that is in the area of financing. SMEs are highly dependent on banks. But banks have slashed their lending just when companies need it most. Even commercially sound companies who have never defaulted on a loan have had their credit lines pulled, because their bankers are worried about ‘counterparty risk’ - the fear that even if the companies themselves are creditworthy, their business counterparties might not be.

Such behaviour might be rational from the point of view of individual banks, but the collective consequences can be devastating - eventually also for the banks themselves. Deprived of working capital and trade finance, even well run, profitable companies can go under.

In the face of this problem, the government announced, last November, a package of $2.3 billion of loans to companies through risk sharing schemes administered by Spring Singapore. The government increased its share of loan insurance premiums from 50 per cent to 80 per cent (and later, to 90 per cent). Its risk share of loans made under the local enterprise financing scheme (for loans up to $15 million) and the microloan programme (for loans up to $100,000) were also raised to 80 per cent.

However, anecdotal evidence suggests that these measures have not, so far, had their intended effects. By mid-December, banks had only approved 30 applications out of 140 for the schemes, implying a rejection rate of almost 80 per cent. They had lent out a mere $5 million in total. The vast majority of SMEs have been shut out by the banks, despite the generous government guarantees.

At a Spring seminar last month, a banker from a major local bank was asked whether his bank would relax its tightened credit standards given that the government’s guarantees had been raised, and his answer was that repayment ability was still the most important consideration. In other words, more a ‘no’ than a ‘yes’.

It remains to be seen whether the raising of the government’s risk share of loan insurance premium from 80 per cent to 90 per cent will make a difference. Many would not be surprised if it did not. And if it does not, SMEs could start accelerating layoffs as the year goes on.

Given the banks’ current extraordinary aversion to risk, relying on them to support struggling SMEs at this time, even with generous risk-sharing by government, is itself too risky; we are at a point where lending is too critical for the economy’s health to be left to bankers.

What are the alternatives? One is to increase the government’s risk sharing to 100 per cent for a temporary period, but with some government oversight on lending so that lending standards do not swing to the other extreme. Another is to establish a government agency that guarantees all kinds of credits, which works via other financial institutions. However, there would still be a question mark over whether those credits would be extended to companies in the first place.

A third alternative is to establish a new, government-funded lending institution that can lend with more confidence (and less paperwork) than banks currently do - and against a wider variety of collateral, including equity.

Singapore needs at least one of these three alternatives in the Budget. Or else another mechanism which ensures that funds continue to flow to SMEs during this crisis, and which is fool-proof. Otherwise, a mass of jobs could be needlessly lost. Measures to improve companies’ cashflows - like extended loss carry-back provisions against taxable income of previous years - would also help.

On creating jobs, Singapore’s options in a year like this are limited. Unlike larger economies, it cannot rely much on traditional fiscal stimulus measures. Out of every dollar the government spends, more than half leaks out in the form of imports. Nevertheless, it is worth capturing, and maximising, the positive impact of whatever remains at home. With total construction demand expected to fall by 36 per cent, one option would be bring forward as many public sector projects as possible.

The Building and Construction Authority announced that it will award a record $19 billion worth of projects this year, including several smaller projects ($50 million or less) which would help smaller local firms. This is a step in the right direction.

Jobs can also be created in the services sectors (where there are fewer ‘import leakages’) by expanding employment in health, education and other government services that add to the productivity of the economy; some ministries have already announced more hiring, but there is scope for more to do so.

An expansion of training and job-matching schemes, would also help reduce ‘frictional unemployment’ - that is, the number of people in between jobs, which, too, is likely to rise.

Finally, we need a Budget that protects people. For the mass of people, reliefs on housing-related payments would be most helpful in augmenting household cash flows. Effective measures here would include a restructuring of housing loans, through a shift to interest-only mortgages by the HDB (and by more private banks), allowing tax deductions on mortgage payments and cuts in property-related taxes. These changes would also help arrest the sharp decline in property prices, which discourage refinancing, erode household wealth and make banks even more loan-shy.

Measures to help vulnerable groups are also needed. Despite the best efforts, there will unavoidably be people who will be laid off or have their pay severely cut.

But the key is design. Whatever help is provided should put a floor under consumption, but without compromising incentives to work. The most direct and effective measure would be a means-tested cash transfer programme that is temporary (up to six months after retrenchment, and to be terminated when a worker finds a new job). This can be institutionalised so it that can serve as an automatic stabiliser for the economy.

CPF top-ups would not be appropriate, as they do not address immediate consumption needs - unless there is a mechanism to allow individuals to access part of their CPF balances as a ‘loan’ to be ‘repaid’ upon finding employment. The latter measure would minimise budgetary costs.

Tax rebates for individuals would be welcomed, although they would benefit a relatively small group (since most people pay no income tax) and would more likely be saved than spent. Such rebates would be more a nice-to-have than a must-have.

The ‘must-haves’ for this Budget are fast-acting measures, a focus on keeping companies alive, improving household cash-flows, protecting the vulnerable and creating jobs. If the Budget can thus ‘hold the fort’ for one year, it will have done its job.

Source : Business Times - 17 Jan 2009

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Growth pains

Growth pains

GDP forecasts may be revised again in light of bad news: PM Lee

By CHUANG PECK MING

THINGS are worsening fast on the economic front. Barely two weeks after the government trimmed its economic growth forecast for 2009, it is looking to revise its estimate, Prime Minister Lee Hsien Loong told reporters yesterday.

And it is likely that there will be a further cut in the government’s current growth projection of minus 2 per cent to plus one per cent for this year.

‘It’s a situation which is already now gloomier than it was on New Year,’ Mr Lee said after meeting with business leaders at the Istana to get a ‘direct feel’ of business on the ground.

It was in his customary New Year speech on Jan 1 that Mr Lee, painting a gloomy economic outlook, said that the government had reduced its 2009 growth forecast made in November, from the minus one per cent to plus 2 per cent range to minus 2 per cent to plus one per cent.

But since then, he said yesterday, there have been more bad news from other countries.

‘Their growth numbers have come down all over Asia,’ Mr Lee said. ‘The trade numbers have come down very drastically all over Asia. The Koreans have come down by 40-something per cent. The Americans are down, all our major trading partners are seeing this tremendous downturn.’

Indicating that the government has to again revise its 2009 growth estimate, he said that the Ministry of Trade and Industry is already working on it and ‘we have a new growth estimate before the Budget on Thursday (next week)’.

He said that this year’s Budget - which has been brought forward by a month - would be unveiled at ‘a critical moment’, when the global economic problems are ‘very severe’ - and Singapore has been hit ’sharply’.

‘We just had some more data today - the trade figures have been very bad because our non-oil domestic exports were down 20 per cent in December. So it’s no ordinary Budget,’ Mr Lee said.

Apart from sussing out business prospects from the horses’ mouths, he also sounded out business leaders about the measures that the government has rolled out to help cut costs and save jobs - such as the $600 million Skills Programme for Upgrading and Resilience (SPUR) - and what more needs to be done and what shape the Budget should take.

Mr Lee has also met union leaders over the past few days for the same purpose.

Apart from wanting to see SPUR ‘enhanced further in terms of coverage and flexibility’, he said that businesses were generally concerned about overall business costs, including those seen to be created by the government.

Mr Lee was glad that some of the business leaders - especially those from multinational corporations - are also looking beyond the current downturn.

‘They see in the long term there are opportunities in Asia and they think Singapore is a good place for them to be able to take this opportunity,’ he said. ‘So they want Singapore to be part of their story, so they would like us to work with them to position themselves to be able to quietly build up during this period so they would be able to do that when conditions improved.’

Mr Lee said that the Budget would have ‘many measures to deal with the immediate issues, but we would have measures to address the longer term, which would deal with growth, competitiveness, new capabilities, creating new opportunities’.

Still, he cautioned that the downturn this time is a worldwide problem. ‘It would be a lot harder to get out . . . we can’t do much to make a difference.’

Source : Business Times - 17 Jan 2009

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