By Chris Kuan
During the General Election 2015, Singapore Democratic Party’s social spending strategy was criticized by People’s Action Party candidate, Dr. Vivian Balakrishnan as “failed policies of the welfare state” and brought a dire warning that if the strategy were to be implemented, Singapore would end up like Greece.
However, that narrative has been proven to be false by 70 eminent economists in a recent policy paper published by Euro Vox. The economists explained that in the case of the Eurozone (EZ) crisis, the imbalances were extremely unoriginal – too much public and private debt borrowed from abroad. From the euro’s launch till the Crisis, there were big capital flows from EZ core nations like Germany, France, and the Netherland to EZ periphery nations like Ireland, Portugal, Spain, and Greece.
They emphasized that the EZ Crisis should not be thought of as a government debt crisis in its origin – even though it evolved into one. They pointed out that the real culprits of the crisis were the large intra-EZ capital flows that emerged in the decade before the Crisis. (read more)
The reason this was brought up is because the one thing that Singapore became like Greece is that the Singapore stock market is the worst performer among all developed stock markets with the exception of Greece.
Four factors that will slow down Singapore economy
In the last Temasek Review, Temasek Holdings reported a 19% year on year return, and this is almost entirely due to the surge in Chinese stocks on its 28% exposure to China. The current reversal of that story will mean that it is very likely that Temasek Holdings will be reporting a year on year loss exceeding 20% because Chinese stocks have now fallen even more than the gains recorded in the previous reporting year.
Compounding this dire China story, two of the biggest exposure in Temasek Holdings is Keppel and Sembcorp, both leaders in jacked-up rigs. Given the collapse in oil prices and subsequent massive global retrenchment by explorers and pumpers, both companies stocks have taken a tremendous beating. This not only affects the value of Temasek’s portfolio but in line with the sharp drop in the Straits Times Index (STI), it also has a negative outcome for endowment products purchased by Singaporeans (to buffer their retirement savings). This will curtail the already weak consumption in Singapore as Singaporeans save even more.
China and oil prices are the two biggest drivers of poor sentiments in financial markets. Locally, the end of United States (US) and United Kingdom (UK)’s quantitative easing had reduced global liquidity although in part replaced by Eurozone quantitative easing. But the net effect coupled with recent US rate hikes and the drawdown of foreign exchange reserves by China to defend the Yuan, will end any remaining hot money flowing into Singapore real estate if they weren’t already ended two years ago with the end of US quantitative easing.
This has much more to do with slumping real estate prices than the cooling measures, and there is no easy way out to be seen even if the cooling measures are lifted. A lot of Singaporeans will be sitting on negative housing equity, the complete reversal of Government’s intention of using housing as a supplement to retirement funding.
The 4th factor that needs to be cognised towards, is the big banks. They are exposed to the developing China situation through Chinese and Hong Kong subsidiaries and further exposed through subsidiaries in Indonesia and Thailand; both countries will feel the effect of the China slump.
If losses are severe enough, the banks may deem it prudent to tighten credit standards and reduce lending to shore up their balance sheets – if so this will not only result in credit contraction which again will affect the property market adversely but also other sectors as well since financing becomes scarcer and more expensive leading to defaults and bankruptcies.
These four factors will be enough to cause a further slowdown in the Singapore economy. The offsetting factor is continued US recovery. It is hard to determine how much it would offset so a full recession year for 2016 is still yet to be certain. In any case, the slowdown will reduce government revenues, not just from oil and derivatives.
The pursuit of asset enhancement without considering social and economic risks
The Singapore government has been running a slight primary budget deficit since 2000 and has become increasingly dependent on the net investment return contribution (NIRC) supplement to the budget. The long-term rate of return for GIC is expected to fall when it reports in June and that Temasek Holdings’ dividends to the government will also fall. Therefore, the NIRC will also fall.
The coming malaise in Singapore is the result of the economic policy trade-offs of aligning too closely to China, of pursuing Asset Enhancement without enacting macro-prudential measures when the wall of liquidity hit global markets from the US quantitative easing back in 2009-2010, of chasing the oil and commodity booms.
Singapore ought not to be able to grow at more than 3% pa over the long run, more than that means accepting social and economic risks that will have consequences.
Last year, Deputy Prime Minister and then-Finance Minister, Tharman Shanmugaratnam said that the new normal was 3%, but it should have been apparent 15 years ago. The consequences from the pursuit of Growth Maximisation, a culmination of elevated use of foreign labour, suppression of returns on long-term savings and the acceptance of highly cyclical economic risks, is coming to roost.