Singapore’s dismal economy points to policy shifts

Singapore: Dismal growth and unsuccessful restructuring suggest policy shift 2015

Virtually every economic indicator has been weak in recent months. Consumer spending is desultory while investment has been contracting since 2013. Exports and industrial production are languishing despite global demand growth, suggesting a possible loss of competitiveness. The restructuring of the economy has yet to produce any of the gain in productivity that the economy needs.
Indeed, without rising productivity, unit labour costs have increased 4.4% year-on-year, as the tighter restrictions on foreign labour inflows caused wages to rise.
Singapore’s economic performance is expected to be muted in 2015, assuming a gradual global recovery and continued headwinds from domestic restructuring.
We think that policy change is on the cards. First, monetary policy is likely to be eased by April next year, with the trading band of the SGD trade-weighted exchange rate being re-based lower and shifting to a flatter gradient of appreciation. Second, a more fundamental rethink of the economic restructuring is needed, given the lack of success so far. Some of the restrictive measures affecting property and lending may be partially reversed.

The Week That Was: Key Drivers Affecting Asia

Driver	Development/Assessment
Oil prices: plunged to new 4-year lows	OPEC maintained production quotas despite oversupply OPEC forecasts that non-OPEC supply will rise more than demand next year, putting further pressure on prices going forward The big losers are Iran, Venezuela, Nigeria and Russia which face severe fiscal constraints. In Asia, the big winners will be India, Indonesia, South Korea and Thailand. Malaysia as a net exporter may lose out in terms of fiscal revenues but the boost to global growth and demand for Malaysian manufactured goods will more than offset that small loss. The fall in oil prices is now making production of higher-cost oil such as shale oil in certain areas unprofitable. Over time, this will reduce supply and help stabilize the oil price, perhaps even allowing a rebound.
US economy: growing faster than expected	Third quarter GDP beats forecast Second estimate of 3Q14 GDP growth revised up to 3.9% annualized, after revisions to business/consumer spending. Financial markets continue to under-estimate the strength of the US economy – the 10-year bond yield fell to 2.16% despite the stronger than expected data, setting markets up for a more abrupt re-calibration of the trajectory of Federal Reserve rate hikes.
Eurozone policy turning more aggressive	European Commission unveils investment push to jumpstart economy The European Fund for Strategic Investment (EFSI) would have EUR21bn at its disposal which through leverage could be raised to EUR380bn. Analysts dismissed the stimulus as a re-hash of old plans and unlikely to provide a sufficient boost to the Eurozone. However, the move signals a realization that fiscal policy should be easier. Eurozone economic data improving German unemployment rate reached a record low. Eurozone investor confidence index jumped to record high 141.9 in Nov 14
China: policy turning more dovish	PBOC eases policy by scrapping repo sales PBOC refrained from selling repurchase agreements for the first time since July, in effect loosening monetary policy. This followed its earlier move to cut the benchmark one-year loan rate by 0.4 percentage point to 5.6%.
Indian economic growth weakened	Pressure builds on RBI to cut rates (see below) GDP growth in 3Q14 eased to 5.3% from 5.7% in 2Q14. While Finance Minister Arun Jaitley has urged RBI to lower interest rates, he has emphasized that the final decision should be the RBI’s to make. We believe that RBI should stick to its rigorous monetary policy: the economy is already recovering, the greater need is for inflation to be reduced to be in line with India’s trading partners’ inflation.
Indonesian politics – major opposition party split strengthens Jokowi	GOLKAR squabble could lead to defections to President’s coalition Growing opposition towards Golkar chairman Aburizal Bakrie whose alliance with Jokowi rival Prabowo has kept GOLKAR out of a ruling coalition, suggests that major factions in the party are keen to join the Jokowi coalition. Bakrie has controversially brought forward the GOLKAR leadership congress, infuriating other senior leaders. There is thus a growing chance that GOLKAR will join Jokowi’s coalition, giving him the parliamentary majority he needs.
Indonesia economy	Jokowi’s activist presidency a positive sign Jokowi has been travelling around Indonesia since his inauguration, showing that his style will differ markedly from his two predecessors. In Riau Province, he pushed for new efforts to curb the haze crisis that stems from peatland fires which have caused havoc in Indonesia, Malaysia and Singapore.
Taiwan – local election rout for ruling party	KMT’s drubbing suggests anti-China DPP will win 2016 elections Premier Jiang Yi-huah resigned to take responsibility for the ruling KMT party’s defeat in local elections where it lost the major cities of Taipei (normally a KMT stronghold) and Taichung. The shift in voter sentiments reflects the slow growth of household incomes and unease with increasing integration with China especially after the pro-democracy protests in Hong Kong. President Ma Ying-jeou’s strategy of getting closer to China is becoming more unpopular. Given these fundamental voter sentiments, it is difficult to see the ruling KMT retaining power in the January 2016 presidential and parliamentary elections. If the anti-China DPP were to win power, relations with China would almost certainly worsen, despite efforts by DPP politicians to shift to a less provocative stance on China.
Malaysian politics – liberalization reversed	PM Najib shored up his position within his own UMNO party Responding to pressures from his party hardliners, Najib reversed his earlier political liberalization by deciding to retain and in fact strengthen the Sedition Act. UMNO leaders continued to use pledges of support for the majority Malay community to rally support, with senior leaders warning the non-Malays to never again dispute the special rights of the Malays.

Singapore: steady drumbeat of downbeat data – central bank easing in April more likely

GDP for the third quarter of 2014 has accelerated from 2.4% y/y in 2Q14 to a still-uninspiring 2.8% y/y in 3Q14. The downbeat data reflects the very tangible squeeze felt by businesses due to the ongoing restructuring efforts, pointing to a gloomy short-term outlook for Singapore unless there is a much stronger revival of global demand.

Virtually every data point in recent weeks has been dismal:

Private consumption expenditure (PCE) remained lethargic, with declining tourist spending and the negative wealth effect from property price corrections possibly hurting. Interestingly, overall growth of median household incomes in real terms has decelerated sharply in 2014 compared to 2013 according figures released by the Ministry of Manpower, which is puzzling since wages are rising due to the tight labour market and labour force participation rates are rising.
Gross fixed capital formation (GFCF) continued to languish, contracting for the fourth consecutive quarter. Private investment has collapsed; it is down by 5.9% y/y in the third quarter while public sector GFCF rose 9.9% y/y. Private businesses do not seem to have confidence in the future – despite substantial need for investment to boost productivity.

Industrial production barely growing, up by just 0.2% y/y in October, with the key electronics and transport engineering sectors contracting. Only a 22.5% rise in the volatile biomedical sector kept output rising. Excluding biomedical output, industrial production would have declined 4.3%. Economic restructuring efforts and strict rules on foreign workers have hit the manufacturing sector hard.
Exports continued their downtrend: Singapore’s exports increased by 1.1% y/y in October 2014; Non-oil domestic exports (NODX) which reflect the underlying trend in manufactured exports fell 1.5% y/y while non-oil re-exports (NORX), a measure of activity in the entrepot sector, contracted by 5.4% y/y. The fall in NORX was due to slower re-export flows to Hong Kong, Indonesia and Malaysia.

Inflation at perilously low levels: CPI inflation is close to the brink of deflation, coming in at 0.1% y/y in October 2014 while the core inflation measure preferred by the Monetary Authority of Singapore (MAS) which strips out housing and private transport, stood at 1.7% y/y. Our measure of core inflation which measures the prices of non-traded goods and services in the economy has collapsed to zero, suggesting that there are few domestic supply-demand imbalances in the economy.
But unit labour costs have spiked due to tighter restrictions on importing foreign labour which have pushed up wage costs while having no visible impact on increasing productivity levels. This will no doubt erode the competitiveness and attractiveness of Singapore as a destination for business and investment.
Domestic debt a pertinent concern for MAS: Corporate debt-to-GDP ratio reached 78% in 2Q14, up significantly from 52% in 2Q08. Also, the household debt-to-income ratio has hit 2.3 times in 2013, edging up from 1.9 times in 2008. The MAS warned that a rise in global interest rates would filter through to Singapore rates, and cause some financially distressed firms and households to buckle under. However, their stress tests suggests that the number of such distressed groups is likely to remain low and pose no systemic threat to the banking sector.
Productivity growth continues to languish across virtually all industries despite the government’s efforts to boost productivity levels through incentive schemes. In the meantime, wages are steadily climbing due to direct and indirect effects of government policies. There have been nationwide schemes to boost the wages of low-wage workers, such as cleaners and security guards while encouraging them to upgrade their skills and match these wage increments with increases in productivity. While rising wages bode well for workers, without the corresponding increase in productivity, unit business costs will increase undermining corporate profitability and competitiveness of the economy.

Assessment: Central bank set to ease monetary policy, curtailing the appreciating of SGD

Growth will be muted for the rest of 2014 and early part of 2015: Labour-intensive sectors such as construction, retail and food & beverages will continue to be weighed down by greater cost pressures stemming from labour constraints. Furthermore, the pick-up in external demand will be patchy, given that the Eurozone, China and Japan are also floundering economically. With the US Federal Reserve due to raise interest rates by mid-2015, higher costs of funding will add to the pressures on the Singapore economy.
The upside for the Singapore economy is that the US is gradually recovering from its funk and will play an important role in supporting the external demand of export-oriented economies such as Singapore. Also, with celebrations for 50 years of nationhood kicking into full swing next year, a slight fillip can be expected from expected increase in fiscal spending. Finally, the tight labour market means that unemployment remains low – a positive for social stability.
Still, policy makers’ views of economy turning more cautious: The Monetary Authority of Singapore (MAS) and the Ministry of Trade and Industry (MTI) conveyed a more solemn tone in recent communications. Our view is that MAS has to loosen monetary policy – there is virtually no inflation risk but there is a growing risk to economic growth. If anything, the risk is of disinflation as export competitiveness is gradually eroded by the tight labour market and rules on employing cheaper foreign workers. We think that an impending policy change is on the cards, with MAS lowering and re-basing the trading band of the SGD and shifting to a flatter gradient.
Further policy changes, near term: Over the coming months, we are likely to see some easing of the restrictive measures on the real estate sector combined with more help for small and medium enterprises. The budget to be announced in February 2015 is likely to be an expansionary one, especially given that 2015 marks the 50th anniversary of Singapore’s independence.
A broader and more fundamental re-think of policy might be in the offing: Policy makers must be aware that the economic restructuring is not unfolding according to plan. Despite huge incentives for productivity-enhancing investment, investment is actually declining and productivity growth is anaemic. It is surprising that there does not appear to be data or metrics that give us a measure of the most important trend in the economy, the restructuring towards higher productivity.

PROPERTY LAUNCHES & INVESTMENTS

Property Launches & Investments

Singapore’s dismal economy points to policy shifts

The Week That Was: Key Drivers Affecting Asia

Singapore: steady drumbeat of downbeat data – central bank easing in April more likely

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