THE GOOD & THE BAD

One key positive is that government- policy reactions have been aggressive and relatively prompt. For instance, key central banks around the world have cut benchmark interest rates by 100 basis points or more in recent months.

In Singapore, the Government has brought forward the Budget announcement to next month. Hopefully, this will mitigate the severity and duration of the downturn.

However the far-ranging market and credit-crunch implications of the Lehman Brothers bankruptcy shows that United States policymakers may have underestimated the threat posed by the bank?s collapse to counter-party and credit risks.

THE WHAT-IFS

It is always tricky to drive policy on hindsight, but the Lehman bankruptcy could have been avoided with aid from the Federal Reserve, which may have somewhat limited the extent of the global credit crunch and economic fallout.

The willingness of the US government to bail out US carmakers suggests that they have realised that these corporations are ?too big to fail?, notwithstanding their deep-seated troubles.

THE CRYSTAL BALL

Some of the leading global indicators suggest that the US housing market will bottom out next year. They also point to a recovery or normalisation in the credit markets.

In Singapore, a lot of hopes are riding on the upcoming Budget. The market?s wishlist includes a whole gamut of things, including tax cuts or holidays, enhancements to current assistance schemes for corporations and households and, perhaps, a cut in the Goods and Services Tax.

THE KEY ISSUES IN 2009

So far, the US and Japan have announced a second round of economic stimulus packages as the crisis proved far more severe and long-lasting than initially thought.

However, in this current market environment, where liquidity and credit conditions are tighter than before, governments that have been fiscallyprudent may emerge stronger than before.

The fallout from the credit crunch has far-ranging implications for regulators and authorities as theymanage financial systems and banking regulations in the future.

For instance, the partial or complete nationalisation of some banks may significantly affect the banking model as it is currently known.

Governments have to balance accountability for taxpayer funds injected into troubled financial institutions with letting the free market function again. Meanwhile, Singapore?s small, open economy is heavily dependent on global trade in goods and even services.

Hence, as the current economic crisis is global in nature, any policy response has to be calibrated and targeted. The speed and severity of the growth downturn calls for prompt and aggressive policies.

THE BRIGHT SPOTS

Hopefully, banks and financial institutions will start with a cleaner slate next year, having already written off more than US$1 trillion (S$1.4 trillion) in losses globally while raising around US$930 billion in fresh capital.

For Singapore, the upcoming integrated resorts may provide a thin silver lining that can mitigate the unemployment that inevitably accompanies a recession.

The writer is an economist at OCBC Bank.

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