Down, not out

Meanwhile, the International Monetary Fund (IMF) has cut its full-year growth forecast for the local economy to 2%, from 2.3% previously.

“I thought the numbers would be bad, but this is ugly,” says Chua Hak Bin, senior economist at Maybank Kim Eng.

With exports accounting for 176.4% of Singapore’s GDP in 2018, according to data from the World Bank, the sector has been integral to propelling the city state’s economy. At the same time, manufacturing has accounted for roughly 20% of GDP, a proportion that government planners seem keen to maintain.

Yet, these are the very two sectors that are now in the doldrums. While the trade war appears to be the most obvious cause of Singapore’s poor economic performance, observers The Edge Singapore spoke to believe there are other structural and fiscal issues inhibiting the growth of the domestic economy. And the way forward seems to be to move away from a heavy dependence on exports to growing a stronger domestic sector with thriving small and medium-sized enterprises (SMEs).

Indicators of weakness

The cracks in Singapore’s current game plan are emerging, as seen from the key economic indicators in recent months.

Non-oil domestic exports (NODX) have fallen for four straight months, in double-digit declines (see Chart 1). In June, exports to Singapore’s main markets of Hong Kong, China and Europe fell 38.2%, 15.8% and 22.1% respectively from the year before. Exports to emerging markets — defined by Enterprise Singapore as miscellaneous markets ranging from the Caribbean to Eastern and Southern Europe, Latin America, Middle East and South Asia as well as Cambodia, Laos, Myanmar and Vietnam — fell 17% y-o-y. Exports to the US, meanwhile, registered a 1.5% growth.

Total exports plunged 17.3% y-o-y, dragged down by a 31.9% decline in electronic exports. This follows the 16.3% y-o-y decline recorded in May. Exports of non-electronics were also down, falling 12.4% y-o-y amid lower demand for non-monetary gold, petrochemicals and pharmaceuticals.

At the same time, Singapore’s manufacturing activity has also been on a downward trend (see Chart 2). The Purchasing Managers’ Index fell to 49.6 in June, from 49.9 in May, itself a drop from 50.3 in April and 50.8 in March. June’s PMI, the most recent available, was the lowest since August 2016’s 49.8. A reading below 50 indicates a contraction in factory output and production.

Domestic consumption is also weak. Retail sales in May fell 2.1% y-o-y, a fourth consecutive month of decline (see Chart 3). Sales of major retail products and services from department stores, motor vehicles, and computers and telecommunications saw significant declines of 4.7%, 7.5% and 7% respectively. Total sales amounted to $3.7 billion, of which 5.3% were online sales.

On the whole, the economy expanded only 0.1% y-o-y in 2Q2019, according to advance estimates by the government (see Chart 4). The manufacturing sector shrank 3.8% from the year before, although construction grew 2.2% and the services sector was up 1.2%. The 2Q GDP growth is the slowest since the depths of the last global financial crisis. In 2Q2009, GDP shrank 1.2% y-o-y.

Economists such as Maybank Kim Eng’s Chua expect Singapore to fall into a technical recession if the current poor performance persists.

Overall, with the IMF’s downgrade of global GDP growth to 3.3% in April, from the 3.7% it forecast last October, all countries are facing a possible economic downturn. For Singapore and its policymakers, a poor global outlook and weak domestic sentiment portend a difficult period ahead. Even as trade talks between US President Donald Trump and Chinese President Xi Jinping have resumed, tensions are unlikely to let up. Adding to that is the slowing of China’s economic growth to 6.2% in 2Q2019 — the weakest in 27 years — an indication that it will take some time for the Chinese economy to recover and bounce back with stronger growth. Till then, it will take a long time for global supply chains to be rectified and the effects of the trade war to be overcome.

The deep-seated differences between the US and China transcend trade, so Kelvin Tay, regional chief investment officer at UBS wealth management, says “we should actually expect this [global economic] weakness to continue for quite some time, unfortunately”.

Structural challenges

Even so, Tay notes that because of the maturity of the Singapore economy “even without the trade war, the Monetary Authority of Singapore [MAS] was looking at 1.5% to 2.5% growth”.

According to Maybank Kim Eng’s Chua, the Singapore government’s tightening measures — on property, monetary policy and foreign worker quota — as well as the indirect impact of the US Federal Reserve interest rate hikes — have had adverse implications on the economy. “This has impacted the economy as a whole, including the domestic-oriented sectors, multiplying the woes from the trade shock,” he says.

The steps taken to rein in speculation in private property — such as tighter loan-to-value (LTV) limits and additional buyer’s stamp duties (ABSD) — have certainly had an effect. Chua points out that price gains have been curbed and transaction volume in the market is down significantly.

Fewer property sales have broader implications for economic activity. “When one buys a house, it doesn’t stop there. They go on to engage professionals such as bankers, real estate agents, lawyers and interior designers. Then, they proceed to furnish their homes, increasing consumption. [All of this will increase the flows of money, and thereby boost the economy in a multiplier effect],” says UBS’s Tay.

According to Chua, the property market and wider economy could use a boost through a reduction in the ABSD or relaxation of the LTV ratio, for instance.

Indeed, in its recent report on the Singapore economy, IMF noted that the property sector — and its stability — is very much tied to the broader economy. That has resulted in macroeconomic policies being centred on the property market. In that context, the global body welcomed the government’s macroprudential and other property-related measures, but recommended that market conditions be continuously monitored and the macroprudential measures be adjusted accordingly. In fact, IMF has suggested “eliminating residency-based differentiation for the ABSD, and then phasing out the measure once systemic risks dissipate”.

Secondly, the central bank’s move to strengthen the Singapore dollar against the US dollar through a slight increase of the slope of the Singapore dollar’s nominal effective exchange rate (S$NEER) policy band in October last year was, in Chua’s words, “not a great move”. The intended effect was to raise the value of exports, as the economy was expanding at a steady, albeit slow, pace, amid rising trade tensions. However, it seems to have backfired, as exports have since fallen. Also at stake now is Singapore’s price competitiveness. “The stronger exchange rate in fact has probably aggravated the pain [on] exports,” Chua notes.

MAS is now widely expected to flatten the slope of this band. Chua argues that a weaker Singapore dollar against the US dollar may be a more appropriate policy for now. Apart from boosting trade, it could also encourage inbound tourists. He observes that visitor arrivals for April grew 3.39% y-o-y, but slowed to an increase of just 0.9% y-o-y for May. A weaker dollar will attract more tourists and thereby improve occupancy rates for hotels, as well as support other services such as retail and F&B, says Chua. Domestically, it (the Singapore dollar) will encourage more consumption of more domestic services through the higher price points of imported goods.

UBS’s Tay says “there are no two ways about [the cut]”. He expects the Singapore dollar to weaken in the short term, following a rate cut by the Fed later this month before weakening further towards year-end after a possible easing by MAS.

Lastly, the tightening of the foreign worker dependency ratio ceiling, from 40% to 38% starting in 2020, and to 35% in 2021, is slowly increasing the cost of doing business. With companies facing mounting pressures from the bleak economic outlook and weak consumer sentiment, the move has crimped their earnings.

Developing new growth drivers

Introducing fiscal incentives, such as increased government spending or giving handouts, may have little impact, economists say. “With every $1 spent, 60 cents gets leaked out because of Singapore’s dependence on foreign labour and [substantial] imports,” Tay says.

A key driver of growth should be local enterprise. Developing a deeper start-up sector and helping SMEs thrive would make the Singapore economy more resilient. To begin with, robust local enterprises will strengthen the domestic economy and are likely to be a boon for the local labour force. Chua suggests a tax cut or other benefits be given to companies to help them cope with the intense cost pressures they are facing, such as foreign exchange losses, wages and competition.

At the same time, Singapore must be able to capitalise on its regional partners’ growth. Southeast Asia is the world’s sixth-largest economy; its GDP more than quadrupled over the last two decades to US$2.55 trillion in 2016, from just US$577 billion in 1999. Yet, currently, only 20% to 25% of the total trade of Asean member states is with each other. By contrast, trade among EU members account for just below half of the bloc’s total value of trading activity, which indicates tighter economic ties. More regional trade will also unite and strengthen Asean, helping it withstand the shocks brought about by the uncertainties in the global economy.

For a while, countries in the region seemed to be beneficiaries of the trade war between the US and China. Vietnam was one of the biggest winners, with exports to the US growing about 30% in 2018 from the year before. However, its gains were short-lived, as it has now been slapped with a 400% duty on its exports produced with materials originating from Taiwan and South Korea. Vietnam is also now on the US Treasury Department’s list of possible currency manipulators. There is now concern that other countries in Southeast Asia, particularly the export-oriented ones, would be similarly scrutinised and penalised.

Whatever the case, the countries in the region need to work together to get through this difficult period. For now, Singapore Deputy Prime Minister Heng Swee Keat says he does not expect the city state to fall into a recession, not even a technical one, which is defined as two consecutive quarters of economic contraction. Heng, who is also the finance minister, says on Facebook the GDP flash figures reflect heightened uncertainties and risks in the global economy, but Singapore is prepared for the cyclical events. He adds that the government is monitoring the circumstances and working with employers and unions “to prepare for all scenarios”, which some have taken to mean adjustments to wages, similar to what took place in previous downturns.

Heng also reiterates that policy will be focused on challenges in the medium and longer terms. “The Future Economy Council will continue with our industry transformation plans, build stronger enterprise capabilities and make the most of the opportunities around us,” he says. Heng also chairs the council, which is tasked with charting and driving the transformation of Singapore’s economy.

For now, though, growth forecasts are being cut. Local banks have downgraded their full-year GDP forecasts, with Maybank expecting 1.1% growth, DBS lowering its forecast to 0.7% and OCBC cutting it to 0% to 1%. MTI had, after 1Q2019, cut its full-year forecast to between 1.5% and 2%, from 3.5% previously. While these adjustments to growth expectations have a sobering effect on the broader sentiment, they must also be the impetus to develop new drivers of growth for Singapore.