The past year has been an eventful one for Singapore as it marked the 50th anniversary of its independence and celebrated its impressive journey as a free nation. It was also a sombre year for Singaporeans, following the demise of its founding prime minister, Lee Kuan Yew. The year was also memorable for a general election that produced a landslide victory for the ruling party. And, finally, the country suffered the worst haze conditions in decades, reminding Singaporeans of how vulnerable this tiny city state was, and how exposed it was to the vagaries of the region around it.
But, as the new year approaches, it is these vulnerabilities and the unpredictable shifts in the environment around us that we need to think about as we peer into the future. As far as the economy is concerned, there are two issues that are likely to dominate discussions in the coming year, most of them relating to the policy agenda of Singapore next year: What to do about the current weakness in the economy and how the Committee on the Future Economy under Finance Minister Heng Swee Keat will chart the long-term direction of the economy.
We must not be complacent about the risks of a cyclical slowdown
While it is important to focus on the long-term direction of the economy, the immediate priority must be to avert a sharp slowdown. With economic growth struggling just below 2% in the second and third quarters of this year, it will not take much to topple it into an outright contraction. Since the data for the third quarter’s desultory economic performance was released, further downbeat data has come out — the trade sector continues to contract and consequently, manufacturing activity is declining.
Two reasons are given to suggest that we should not worry too much about these numbers. While these arguments are not without merit, ultimately, they are not satisfactory:
First, it is said that a good recovery in G3 demand will support Singapore’s growth, thus averting a further slowdown. We agree that the US economy is poised to accelerate while the eurozone, Japan and the UK are also improving. But the data also appears to suggest that Singapore is getting less uplift from G3 demand than before, so the boost to Singapore from a G3 recovery may not be sufficient. There are several reasons for this:
- One is that it is G3 businesses’ capital spending that drives our exports more than anything else. Unfortunately, this has been the missing ingredient in the American recovery and in other major developed countries. Businesses are sitting on several trillion dollars of cash rather than spending them on expanding capacity. Worryingly, so far, the lead indicators for this factor remain poor.
- But another reason could well be that Singapore’s costs have escalated and its currency has been strong, detracting from its competitiveness. This means that when G3 demand does recover, it could be other exporters rather than Singaporean ones that benefit.
- Finally, the extreme volatility in currencies, commodity prices and financial asset prices around the world in recent days is a warning that there are many moving parts in the world economy and some could well turn nasty. There are two in particular that concern us. While the G3 economies may well recover strongly, the corollary would be a faster pace of monetary normalisation than markets had expected. That would lead to more capital outflows from emerging markets in favour of developed markets. Some of our neighbouring economies could well be vulnerable to these potential stresses and that could hurt demand for our regional hub services. Another concern is China — the data in recent days shows some stabilisation in industrial production, real estate and bank lending. However, investment continues to lose momentum and that is proving a massive drag on the economy. Singapore’s services sector would take a hit if China’s slowdown worsens, so we need to be cautious.
Second, it is also argued that part of the reason Singapore’s economy is slowing is due to unavoidable policies designed to wean it off foreign labour. While this policy weakens growth in the near term, it ensures that the economy will rebalance away from its unhealthy overdependence on labour inputs in the longer term. So, it is argued, we should accept the slowdown as a necessary price to pay for better growth over time. It is certainly the case that policies to curtail our dependence on cheap foreign labour are unavoidable. However, it should not be carried so far that nothing is done to mitigate the risks of a recession that could cause substantial damage to livelihoods and potentially result in far higher costs than expected.
Economy close to tipping over?
In fact, recent developments cause us to worry that there is a rising risk of a greater slowdown than policymakers expect.
First, businessmen involved in multiple businesses are telling us of their growing concerns over the state of demand, which they see falling. Whether it is retail, food & beverage, manufacturing or financial services, a mixture of cyclical and structural forces are hurting revenues as well as profitability. Second, the composite lead indicator is falling, down 1.5% in the third quarter over the second quarter.
Third, this cautious outlook is supported by a number of surveys of businesses.
- The surveys of purchasing managers show new orders declining.
- The Economic Development Board’s Business Expectations survey found that only 10% of manufacturers expect business to pick up from October 2015 to March 2016, while 26% expect business to slow.
- The SME Development Survey found that 47% of small and medium-size enterprises expect zero growth while 6% experienced outright contraction in 2015. Things will not get any better any time soon — the Monetary Authority of Singapore (MAS) observes that SMEs might face difficulties in securing finance because banks are responding to a more uncertain outlook by tightening credit terms and conditions. Indeed, recently, there have been media reports of listed companies facing difficulties in debt servicing.
- The Singapore Commercial Credit Bureau’s Business Optimism Index fell to a historic low from +0.14 percentage points in 4Q2015 to -2.93ppt 1Q2016. When compared with the same period a year ago, the BOI score was down from +1.11ppt in 1Q2015.
What should be done?
Clearly, the risks are very real and policy action is needed.
- Monetary policy has done as much as it can: MAS has shifted policy twice this year, reducing the pace at which the Singapore dollar appreciates. Barring a much greater slowdown or a change in how it perceives inflation risks, MAS will probably maintain its policy stance for the time being.
- Fiscal and other measures should take centre stage: The onus to support Singapore’s growth thus falls squarely on fiscal policy or on other actions such as an easing of macro-prudential regulations or administrative measures to restrict foreign labour inflows. Fiscal spending on budgetary measures and SG50 celebrations probably supported the economy in 2015, but more is needed next year.
What about structural challenges?
Aside from the cyclical challenge, the other focus of policy will be dealing with Singapore’s structural challenges. The longer-term challenges we face have been discussed in many forums in recent months and a number of themes are emerging. When the Committee on the Future Economy starts its deliberations, these themes are likely to be what they will focus on:
First, high business costs are a major issue. Two issues need to be addressed here. On the one hand, policymakers need to understand fully why Singapore’s costs have escalated so much in recent years so that we know how to avoid a repetition in future — a detailed study is needed. On the other hand, actions need to be taken to rectify the cost situation. As the real estate sector corrects, some of the upward pressure on costs should reverse. But government can probably do more, such as encouraging more efficiency in the provision of key inputs such as electricity, where Singapore’s costs are rather high.
Second, rightly or wrongly, local enterprises feel neglected by government policies. Whatever the merits of this complaint, there is an emerging consensus that more needs to be done to develop a core of vibrant and globally competitive Singaporean companies. It is encouraging that agencies such as SPRING Singapore and the Economic Development Board are beginning to do more in this regard. But what is needed is a more holistic approach, one that is more coordinated and targeted.
Third, it is clear that while some progress has been made on improving productivity and innovation in the economy, we are still well behind what we need to achieve if Singapore is to remain a successful and highly competitive economy as well as a premier global business hub. Much effort has been expended to promote innovation and productivity but there have not been enough successes. It looks like what is missing is the building of an eco system that encourages innovation and productivity, rather than just the provision of fiscal incentives and other one-off measures. That is a huge endeavour stretching from reforming the education system and liberalising the media to improving the incentives for young Singaporeans to choose engineering and hard sciences over the currently more attractive occupations such as finance and law.
Fourth, there is a growing debate on the appropriate role of the government in the economy. There are many complaints about the increasingly onerous burden of regulation. Others question the need for government-linked companies to be active in areas such as property development, which the private sector can do well themselves. Is a dominant role for government still appropriate in areas such as ownership of land and the management of retirement savings?
Fifth, there are growing concerns over the future of work. With artificial intelligence and robots increasingly able to replace human labour, what does it mean for employment opportunities for our future workers? The Skills Future initiative that the government has launched will help workers upgrade their skills, better preparing themselves for this new world, but that alone is insufficient. Policymakers will also need to think about the consequences of this technological revolution for income and wealth inequality as some aspects of new technologies appear to widen such inequalities.
In other words, the Committee on the Future Economy has its work cut out. It will have to make some fundamental decisions that will be crucial in determining whether Singapore is able to make the cut as a truly developed and sophisticated First World economy.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy.
This article appeared in the Corporate of Issue 709 (Dec 28) of The Edge Singapore.