Singapore celebrates its National Day basically in good shape but somewhat bruised by several mishaps. The economy is slowing, weighed down by cyclical headwinds and inflationary pressures. Singaporeans have also been a tad rattled to see their system, once seen as whiter than white, being buffeted by questions over the ethical practices of some senior leaders and the possibility that a minister might even be charged in court with corruption.
The broader issue is that Singapore is facing several turning points. As Prime Minister Lee Hsien Loong is planning to retire, it will soon undergo a political succession. In addition, there is a presidential election that is approaching and then a general election that has to be held by 2025. Moreover, it is also becoming apparent that, over the longer term, Singapore will have to find ways around a more awkward geopolitical setting while recalibrating its economy so that it can better adapt to a more challenging global environment.
In short, the agenda is full for the city-state. There is little doubt that Singapore will put the near-term slowdown behind it fairly quickly. So, the real challenge lies in managing the structural challenges the nation faces. We believe that imaginative ways are needed to prepare Singapore for the future.
The economic cycle will run its course and the economy will rebound
After expanding by 3.6% in 2022, the economy is currently barely growing. Second quarter growth of 0.7% followed the first quarter’s meagre 0.4% increase. The government’s lead indicator points to continued weakness in the economy in the coming months. Businesses are circumspect over hiring and capital spending because they are uncertain about how the economy will perform over the next few months given China’s struggles and when the all-important tech sector will turn around. The release of pent-up demand from the depressed pandemic period is reaching an end, so there are fewer forces to offset the drags on growth in the months ahead.
Nevertheless, we are still confident that the tech sector can turn around before the end of the year. Regional demand should also pick up once China’s policymakers implement further stimulus measures as we expect. There is still some way more to go for the tourism/travel sector to benefit from improving tourism. In addition, the construction sector is now getting the foreign workers it needs and should be able to sustain its recovery. The large pipeline of investment commitments secured last year should also translate into factories starting operations in the coming months and so, adding to production and employment. We have also observed a surprising degree of resilience in capital spending in the US. If we are right and the Biden Administration’s industrial and infrastructure-building policies continue to spur investment spending, our manufacturing sector is likely to benefit.
See also: Analysts maintain positive outlook on manufacturing sector in 2024 despite slowdown in IP
All in all, the cyclical downturn seems manageable to us. In addition, inflationary pressures are likely to ease as well as the year progresses so we should end 2023 in better shape.
Is Singapore’s value proposition sufficient for the future?
Before the recent cyclical weakness, Singapore was on a roll. Its calibrated approach to the pandemic allowed it to outshine Hong Kong as a premier global business and financial hub. It attracted record levels of foreign direct investment in 2022 and its wealth management centre has been attracting enormous new funds as ultra-high-net-worth individuals seek out a safe base in Singapore amid their growing concerns over their countries’ domestic predicaments and geopolitical tensions.
But the big uplift from this success is now over and Singapore has to think hard about its fundamentals to work out how to generate the next wave of growth.
Singapore has prospered in the past 20 years by offering itself as a premium place to locate high-value manufacturing and the provision of increasingly more sophisticated services in areas as diverse as trade, wealth management, logistics and business services. This is a premium in the sense that locating here offered a higher return on capital as well as a better risk profile.
As a result, the top-ranked firms in a broad swathe of activities have placed significant operations here and highly-talented individuals have also moved here. They have not been happy about the high costs of living and conducting business in Singapore but they still came because the overall value proposition Singapore offered was appealing. This was rooted in the critical mass of clients, competent service providers, financiers and collaborators that are concentrated in Singapore. That in turn depended on Singapore’s offer of stability and safety, predictable and business-friendly regulation and taxation, the web of free trade agreements that offered access to markets, an extremely efficient port and airport that allowed extraordinary levels of connectivity, and the supply of highly skilled workers.
There are now some warning signs that Singapore may not be as well-positioned as we think in offering that “premium” proposition.
First, costs may be escalating to a point where Singapore may lose activities we want to keep. The Singaporean-German Chamber of Industry and Commerce’s business sentiment survey earlier this year found that 43% of the companies surveyed would consider relocating some functions out of Singapore to places such as Malaysia, Vietnam and Thailand. This was not only because of increasing costs but the difficulty in recruiting talent also concerned the companies. Around 37% of the companies found it more difficult to obtain Employment Passes for their foreign employees during the past 12 months in Singapore. And 65% of them struggled to secure qualified talent in fields such as engineering and information technology as well as for regional or leadership and management roles. Another survey, this time by the European Chamber of Commerce, revealed that seven out of 10 businesses were prepared to relocate staff out of Singapore unless there was some relief soon from rising rental costs.
Companies are prepared to locate themselves in high-cost centres such as Manhattan or London when they are confident of earning a return on capital that is still at a premium over competing locations. What the surveys reveal is that the point is approaching where many businesses located here may be reaching the point where the premium Singapore offers is disappearing. Policymakers must not be complacent about this threat.
Second, Singapore’s competitors are not standing still. Hong Kong may have suffered some setbacks but it should not be underestimated. Its leaders are working hard to make a strong comeback — being hungrier and under pressure to deliver a turnaround, they will be imaginative in rolling out policies to out-compete Singapore. This was seen in, for example, its offer of incentives to family offices, a big area of growth in Singapore. We expect more vigorous efforts by Hong Kong officials in future. As China recovers and the Chinese authorities step up development of the Greater Bay Area which encompasses Hong Kong and provides the latter with economies of scale and scope that Singapore can only dream of, it is possible that Hong Kong will begin to draw away some activity from Singapore.
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Similarly, Dubai and other Middle Eastern cities are also keen to expand in areas where Singapore is positioned such as business headquarters, wealth management, aviation and other hub services. They, too, seem hungrier than Singapore and prepared to break old taboos to make themselves more competitive in attracting global hub activities. Just look at their willingness to liberalise immigration policies, for example, while we in Singapore have gone in the other direction. Armed with fresh funds from the oil price windfall, they are thinking big and acting boldly — see how Saudi Arabia has made such a radical transformation and is now going to spend big time establishing a new airline that will compete with the big boys including Singapore Airlines.
The way forward, think big: how about ‘two countries, one economy’?
To stay ahead, Singapore has to beef up its value proposition by addressing concerns about costs and offering new ideas that capture the imagination of businesses. Ways must be found to curtail costs and open up exciting new possibilities.
Some policy options that could help. One that achieves both these objectives and moves the needle is increased integration with Singapore’s immediate hinterland which is essentially the southern Malaysian state of Johor and the Riau Islands of Indonesia which are just 20–30km away from Singapore. Benefits will flow to Singapore and its neighbours if we can pull this off. Currently, the opportunity to do something big with Malaysia seems greater. Senior Malaysian leaders are reviving the idea of the high-speed rail link between Kuala Lumpur and Singapore while another leader even suggested a special economic zone linking Singapore and Johor. The stars may be coming into alignment for a transformational change in the relationship with Malaysia.
As a start, changes can be made to improve the seamlessness of travel between Singapore and Johor. With that, more Singapore residents could relocate to cheap housing in Johor which is in plentiful supply because of gross over-building by developers from China. Many residents are already doing so but not on a scale sufficient to temper rising costs in Singapore. The obstacle is the long commute time taken by immigration, customs and security checks, which are particularly rigorous at the Singapore end. Increased integration will need more access routes between the two territories beyond the Johor Bahru–Singapore Rapid Transit System that is already under construction.
Over the longer term, however, much bolder ideas can be considered to effect a stronger cross-border flow of people, goods, services and capital between the two countries. For example, both countries could agree to replicate some features from the period between August 1965 and July 1967 when despite Singapore becoming independent, companies in one country continued to operate freely in the other and there was a free flow of labour between the two countries — truly a “two countries, one economy” model. It will not be possible to return to the 1960s but we can go part of the way. For instance, the need to obtain licences and other regulatory approvals could be waived for companies registered in either country. Preference could also be given for granting employment visas to citizens of either country subject to certain quotas and limits.
Just think. Adding Malaysia’s GDP to Singapore’s produces a combined economy that would be around US$860 billion ($1.15 trillion) in size, the 21st largest economy in the world and larger than Turkey or Taiwan. There would be immense synergies to be gained and all kinds of new opportunities would emerge from such a scale of market size. For example, one reason why costs in Singapore are high is the small size of our market which limits economies of scale. Being part of a much bigger market would probably see unit costs coming down and consumers enjoying lower prices in many areas.
In conclusion, do we have the gumption for bold moves? The question is not whether there are political and other obstacles to such a proposal. Of course, there are. The real question is whether leaders on both sides have the political will and the imagination to overcome such obstacles. If they can do so, the upside for both countries could be immense.
Manu Bhaskaran is CEO at Centennial Asia Advisors
