The past few years have been turbulent, to say the least. Yet, Singapore has emerged relatively unscathed from the Covid pandemic, tragic wars in Europe and the Middle East, big power frictions which brought more protectionism and inward-looking policies, an unexpected Chinese slowdown, the shock of sharp rises in global interest rates and the difficult task of coming to grips with climate change. Now, that is a long list of what went wrong, and Singapore’s ability to hold up is a testament to its resilience.
Something tells us that we may not be so fortunate in the new year and beyond. No doubt, there will be some trends in the world that will be helpful. But these may be offset by political, economic and other shocks which may be particularly challenging for the small, highly open and vulnerable city-state that Singapore is. Domestically, we retain many strengths but there are also areas of weakness that we have neglected which could impede our ability to bounce back from these shocks. This is not to say that 2024 will be a bad year but it will probably be a year that will put Singapore to the test.
Geopolitical risks: Get ready for bolts from the blue in unexpected places
There are major turning points in global politics next year which will make for a troubled year. The geopolitical hot spots that many of us focus on, such as Taiwan and the US-China frictions, will probably generate episodes of concern but we do not expect them to be so bad as to affect the rest of Asia.
In Taiwan, if the independence-leaning candidate of the ruling DPP, William Lai, wins the presidency in January, China will surely respond swiftly with threatening displays of military strength such as air intrusions into Taiwan’s air defence identification zone. But we also think China will calibrate its actions to avoid an outright confrontation. What helps is that the US and China seem inclined for now to talk rather than provoke each other — each side may hurl trade, investment and technological restrictions against each other but they will take care not to go further.
What might be more unsettling for Singapore is the American presidential elections in November next year. If former President Trump, who is currently riding high in opinion polls, returns to office, there would be an inward turn in American policies that would hurt Singapore which prizes a world where big powers balance each other and trade remains free. There appears to be more support in the US for isolationism, whereby the US would cut back on its commitments in East and Southeast Asia. Trump’s advisers are already speaking about sharp increases in tariffs and abandoning the Indo-Pacific Economic Framework, the Biden Administration’s effort to maintain economic engagement with the region. A Trump administration might also be even more hostile towards China.
It is still premature to call the outcome of next year’s presidential election. Opinion polls taken a year before the actual elections have not been very accurate in the past. All we can say is that the run-up to November next year will be a nail-biting time, marked by great uncertainty and an American administration that will be distracted and focused on domestic issues.
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The global economy: Growth outlook is not bad but there could be other challenges
The consensus among institutions such as the IMF and World Bank is that the big engines of the world economy such as the US, China, Europe and Japan may slow a bit. Our view is just a little bit more optimistic. Certainly, we accept that the first half of the coming year will see a slowdown, which will trickle down into reduced demand for Singapore’s exports. That is when tighter monetary conditions in the US and a more restrictive fiscal position there will hurt. However, as we move into the second half of 2024, we expect more positive drivers to kick in.
In China, the authorities appear poised to significantly ramp up support for the economy, which should help improve growth later in 2024. Elsewhere, the exciting innovations that promise high returns on investment such as artificial intelligence will persuade many companies to step up spending on new equipment and software as well as in research and development. That will coincide with an electronics cycle which is already showing signs of a turnaround after a year of contraction. Singapore and several of its neighbours such as Malaysia, have a high exposure to semiconductors and will benefit from these trends.
So, the prospects are that economic growth in the region will hold up reasonably well, even if there will be some volatility. But we suspect that other dimensions of the economy may be less benign.
We are most concerned about the lagged effects of tight money. Early this year, regional banks such as Silicon Valley Bank went through a crisis as their capital base was eroded when the value of bonds these banks held fell sharply due to rising interest rates. A few months before that, the gilt market in the UK almost melted down after financial markets were shocked by the then government’s radical fiscal plans. It was only swift action by central banks such as the Federal Reserve Bank that averted a full-blown crisis then.
However, those crises were probably just a warning of worse to come. Already, there are rumblings about commercial real estate in the US and signs of rising defaults in other areas. There are also early signs that investors are beginning to be uneasy about the US fiscal position where public debt is rising sharply as a share of economic output. In short, we think the global financial system will be a source of some turbulence which will be transmitted to Asian currencies and asset markets.
How will Singapore’s competitors fare?
Singapore is a global hub for commerce and finance so it competes with other global cities. In particular, Hong Kong is a rival while Dubai is emerging as a hungry and innovative challenger.
In the past few years, Hong Kong suffered a series of dislocations which led to activity being relocated to places such as Singapore. The political disturbances of 2019 were followed by extreme measures to combat the Covid pandemic, and more recently, there have been political changes such as the national security law which worried many foreign companies and expatriates. Hong Kong’s Chief Executive John Lee appears determined to introduce the long-awaited Article 23 of its Basic Law on national security next year. That is likely to reinforce the fears about Hong Kong losing its special character. As it does so, we suspect that the US will also begin to treat Hong Kong more and more like another Chinese city, with the possibility that Congress might introduce legislation that downgrades how the US treats Hong Kong. All this can only mean that more global corporations and financial institutions will move to Singapore.
But, at the same time, Singapore will face new challenges. Dubai has worked hard at strengthening its value proposition to high-net-worth individuals which has proven to be of particular appeal to rich Indians, some of whom have relocated from Singapore to Dubai. At the same time, Dubai’s parent, the United Arab Emirates, has been heavily investing in new technologies. These investments are yielding results in renewable energy and, most impressively, in artificial intelligence.
How will Singapore respond to a more difficult world?
The coming year will be a highly consequential one for Singapore, as a transfer of political power opens the way for new policy directions and new ways of engaging voters. Prime Minister Lee Hsien Loong will step down after 19 years in power, and hand power to Deputy Prime Minister Lawrence Wong. It is quite likely that the new prime minister will then call a general election to gain a direct mandate for himself from voters. Singapore has managed two political successions smoothly and there is every reason to believe that this third one will also proceed without problems.
In terms of the policy direction, Wong has set out his team’s preferred direction for Singapore in the Forward Singapore report that was released earlier in the year, so there will be few surprises. There will be continuity but also some change as the new leader puts his imprimatur on policies. Wong has indicated, for instance, that some form of support for unemployed workers will be tried, a departure from the previous leaders’ opposition to unemployment benefits.
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With the political fundamentals in place, the government will need to address several internal challenges that have emerged over the years. The first is the sharp rise in business and living costs. The prices of things that upwardly mobile young Singaporeans aspire to such as private housing and cars have surged while median wages have not kept pace with inflation in the past year. If there is a further flow of wealth and people into Singapore as activity relocates out of Hong Kong, then these cost pressures could worsen.
This surge in costs raises a vital question: is Singapore trying to do too much within its limited land area? Frequent visitors to Singapore would notice one trend — the increasing densification of activity, with more and more stuff being squeezed into its tiny 734 sq km. Empty spaces have given way to built-up ones, small buildings have been replaced by very tall ones, and we have gone underground in a big way, which is much more expensive. Something has got to give when we do this — costs rise and the quality of living could eventually deteriorate. In short, we need to take a pause and question whether the economic model we are pursuing continues to be optimal.
We have to contemplate a world that is likely to deliver shocks every now and then, a world where big structural shifts will occur as a result of game-changing new technologies, disruptive geopolitics and accelerating climate change. That means we also have to question whether Singapore has the wherewithal to successfully adapt to these shifts. We believe that the future will belong to countries that combine both top-down policy-making excellence as well as the bottom-up vibrancy that comes from a dynamic indigenously owned corporate sector, especially private enterprise. We have had the benefit of wise and effective government but it would be a stretch for Singapore to claim that it has developed a vibrant homegrown corporate sector.
Within this, Singaporeans really need to ask deep questions about where many large government-linked companies are heading. If equity prices are any guide, some of them seem to be heading to a not-very-nice-place, one reason why Singapore’s equity market has become a little bit of an also-ran in global markets.
Innovation will be the key driver of Singapore’s economy in the coming years. After pouring billions of dollars into research and development since 2000, there have been some successes but one wonders whether those advances are in proportion to those billions of dollars that have been spent. If the UAE can achieve impressive progress in renewables and artificial intelligence, why has not Singapore something similar to show for all of its efforts?
Conclusion
Many of these internal weaknesses have been raised before – our cost structure, the lack of dynamism in the corporate sector and the need for greater innovation. It does not appear that enough is being done to address these areas. Ultimately, societies thrive when they develop the capacity for rigorous and critical self-examination because that is the first and most vital step in the overall ability to self-correct. Can we really say, hand on heart, that we have this ability?
Singapore has much going for it and it would be wrong to be downbeat about its prospects in the next few years. But if we are serious about being among the winners in the coming period of great global change, Singapore might need to put more effort into securing this ability for self-examination and self-correction.
Manu Bhaskaran is CEO at Centennial Asia Advisors
