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Singapore adjusts to slower growth

Mon 20 Mar 2017 by Steve Matthews

Singapore adjusts to slower growth
Singapore's economy is adjusting

Indications of a slow-down in Singapore’s economy are apparent, with slower GDP and employment growth. But new opportunities are emerging such as those arising from China’s One Belt One Road initiative

The recent slower economic growth in Singapore partly reflects slowing growth in China and its trade, which impacts on wider Asian economies, including Singapore.

Singapore’s Government is implementing measures to support its economy and, where possible to stimulate investment and new business. This includes the wider maritime sector which accounts for about 7 per cent of Singapore’s GDP. However, higher costs are causing some maritime companies to move or consider moving to lower cost locations such as in Malaysia.

Singapore maritime companies see opportunities in Indonesia but its protectionist policies, in particular cabotage rules, which are now being more strictly enforced, higher regulation, and business and political risks pose challenges for companies considering investing there. There are also investment opportunities for Singapore maritime companies in other growing Asian economies such as India.

Singapore could be among the places that benefits from banks and other financial institutions relocating some of their activities from London, following the UK’s decision to leave the European Union. In the shipping sector completion of the acquisition by Singapore Exchange of the London-based Baltic Exchange is a further boost to Singapore’s efforts to establish itself as a leading global maritime finance and business hub.

The Government also sees opportunities in Singapore from Chinese investments as part of its One Belt One Road policy, including the Maritime Silk Road. Singapore deputy prime minister Teo Chee Hean said: “Singapore has also been working closely with Chinese and Singapore banks to syndicate financing to Belt and Road projects, particularly in Southeast Asia.” International Enterprise Singapore has signed agreements with major Chinese banks to provide S$90 billion of trade financing for Singapore and Chinese companies in Belt and Road projects.

Speaking in November 2016 Jacqueline Loh, deputy managing director at Singapore’s central bank, the Monetary Authority of Singapore (MAS), commented that China and Singapore have developed a strong bilateral relationship, and have robust and strong trade and economic ties. In 2015 Singapore was China’s largest foreign investor, while Singapore was China’s fifth largest investment destination, and Singapore was China’s 10th largest trading partner.

Ms Loh said: “China’s Belt and Road initiative offers another important area of collaboration. Shanghai could tap into Singapore’s role as a regional infrastructure-financing hub in ASEAN [Association of Southeast Asian Nations] to jointly access infrastructure opportunities in the region. Key financial institutions in China are already working closely with Singapore on this front. They have significantly scaled up their Belt and Road initiative-related activities in Singapore over the past two years.”

According to statistics from MAS, Singapore’s economy gave mixed signals in the second half of 2016, contracting by 2 per cent in the third quarter compared with the second quarter, following modest growth in the first half of 2016. MAS said that this decline was caused mainly by a pull-back in trade-related sectors.

However, in the fourth quarter of 2016 Singapore recorded a 1.8 per cent year on year growth in GDP, which was above earlier expectations and fuelled by a surprise jump in manufacturing. There are hopes that this turn-around in manufacturing could persist through 2017. This helped boost the overall 2016 economic growth also to 1.8 per cent, above the previously forecast 1.5 per cent.

Average growth in wages persisted at between 3 and 4 per cent year on year, even though overall core inflation in Singapore remained low at about 1 per cent in 2016, demonstrating the increasing employment costs being felt by Singapore-based companies. There is also concern that wage growth is pushing ahead of productivity growth, damaging Singapore’s competitiveness.

MAS’s official forecast expects that Singapore’s economic growth will remain modest in 2017 with GDP projected to expand by between 1 and 3 per cent in 2017. The consensus of Singapore-based analysts forecast that 2017 will see further modest year on year economic growth of about 1.5 per cent, with a further decline in non-oil exports, continuing a downward trend since 2011, while services exports will continue to grow and take a bigger share of Singapore’s economic activity.

MAS highlighted bright spots in electronics manufacturing, ICT and essential domestic services, which will help to anchor economic activity. But it warned that “hesitant external demand conditions dampen prospects for other trade-related activities”. Inflation is expected to pick up slightly in 2017 mainly reflecting increases in road transport costs.

Industrial production also contracted sharply in the second half of 2016, largely due to retraction in the transport engineering sector. MAS said: “The transport engineering cluster was impacted by a further deterioration in the marine and offshore engineering segment, which continued to flounder amid rising project deferments.” This slowdown is resulting in several marine shipbuilding and engineering companies reducing their workforces in 2016, with little sign of a pick-up in 2017. Companies are trying to retain staff with essential skills, but some foreign workers are being discarded.

Singapore’s population grew by 1.3 per cent in the year to June 2016, reaching 5.6 million. Of these, 3.4 million are Singapore citizens. According to the Ministry of Manpower, growth in foreign employment in Singapore has fallen in recent years, from a high of 77,000 in 2012 to 27,000 in the year to June 2016, though the trend appears to have flattened in the last two years.

Volumes of oil cargoes handled in Singapore decreased due to an oversupply of refined fuels, and an easing of stockpiling in China.  This affected the contribution of water transport to Singapore’s economy during the second half of the year.

Continuing uncertainty in the global economy and trade means that “external demand conditions facing the Singapore economy are unlikely to see a significant step up in the near term,” MAS commented. “Growth of Singapore’s trade-related sectors is likely to be constrained.” It said that this is contributing to the general poor business sentiment in Singapore.

The decision by new US President Donald Trump to pull the US out of the Trans-Pacific Partnership agreement, to which Singapore has signed up, adds to the uncertainty over maritime trade prospects in the region. The US is Singapore’s third biggest trading partner, after China and the European Union. The importance of international trade to Singapore means that more protectionist trade policies would have a negative impact.

In a speech in January 2017, MAS managing director Ravi Menon commented: “The Singapore economy is expected to continue at its modest pace of expansion this year. Modern services, including finance, business, and ICT, will be supported by continued growth in the region and our growing status as a hub. Our trade oriented industries should benefit from the mild upturn in global and regional electronics. The strong showing in the last quarter of 2016 indicates that the Singapore economy retains its capacity to ride on cyclical upswings in demand for our exports.

“That is not to say that all is well. Economic restructuring remains work in progress and we need to do more to raise productivity growth. Singapore will not be immune to the global tightening of financial conditions, volatility in capital flows, and potential stresses in the regional corporate sector. But our macro fundamentals are sound and we will weather these storms. And as we continue to invest in the future – in skills, in technology, and in infrastructure – we will emerge a stronger and more dynamic economy.”

Singapore ranked as the most trade enabling country in the world in 2016, according to the World Economic Forum. Its Global Enabling Trade Report 2016 found that 99.7 per cent of goods enter Singapore duty-free, with border clearance processes coming top for efficiency, predictability and transparency.

Looking further ahead, Singapore’s prime minister Lee Hsieng Loong commented in January 2017 that Singapore will have done well if it continues to grow by 2 to 3 per cent every year for the next 10 years, pointing out that Singapore’s economy is in a different phase than a few years ago when it was growing at an annual 5 to 6 per cent.

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