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FMG INSIGHTS

SINGAPORE’S ECONOMY,WHAT’S NEXT?

+65 6386 [email protected]: 16 August 2019

Future-Moves Group 60 Paya Lebar Road#05-02 Paya Lebar SquareSingapore 409051

AUGUST 2019

In this report we discuss the economic situation in Singapore and our perspectives on the near future forecast.

Key Summary Points

• We expect GDP to stay in the sub 1% range with the marginal possibility of negative growth in 2021 if there is no reconciliation of the US-China trade war.

• Unemployment has risen marginally and we expect it to rise further. This would especially hit the Singapore residents harder.

• A scissors crisis is already in the making because of the temporal mismatch between a steepening economic challenge and the long-term trajectory of transformation.

Devadas Krishnadas & Ho Zu Heng | August 2019

1 www.future-moves.com

SINGAPORE’S ECONOMY,WHAT’S NEXT?

The Singapore economy is commonly considered one of the success stories of rapid and stable economic development. So much so it has become a case study for good

governance and economic planning.

However, a closer look at the economic performance of the city state gives a more varied flavor to its economic history. It enjoyed stable and sustained growth from 1966 to 1996. Thereafter its economy has experienced volatility from a series of shocks ranging from the Asian Financial Crisis (1997), the Dot-Com bubble burst (2001), SARS (2003), mini US recession (2005) and the Global Financial Crisis or GFC (2008-9).

The volatility is largely explained by the fact that the Singapore economy is 75 percent trade-weighted. The overweight exposure to trade and international capital flows makes the Singapore economy very sensitive to shocks and uncertainty even as it makes it very responsive and nimble to positive developments.

Since the GFC, the island economy has enjoyed a relatively smooth, even if subdued, economic period. More recently, the impacts of the Trump administration’s policy induced shocks to global trade relations has impacted the economic health of the Singapore economy.

Trade volume has eroded, exports have shrunk and unemployment has started to creep upwards.

ROCKY RIDE

2SINGAPORE’S ECONOMY, WHAT’S NEXT?

Figure 1: Moderating Real GDP Growth

3

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*

%

World Singapore Southeast Asia** Fed Funds rate ECB Refinancing Rate* Projected GDP Growth**Southeast Asia includes Brunei Darussalam, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, Timor-Leste and Vietnam.

Source: (1) Singapore Department of Statistics(2) International Monetary Fund(3) European Central Bank(4) US Federal Reserve

US lifted steel and aluminium tariffs on Canada and Mexico

US imposed tariffs on $50billion worth of Chinese imports

US imposed tariffs on all steel and aluminium imports

US imposed tariffs on imported solar panel and washing machines

Renegotiation of NAFTA

US imposed tariffs on Canadian lumber

US withdrew from TPP

China launched BRI

Commencement of the ASEAN-India Free Trade Area and ASEAN-Australia-New Zealand Free Trade Area

China imposed tariffs on $50billion worth of US imports


GUESSING WRONG

A notable feature of economic forecasts in the recent period has been an overestimation of economic performance. The Monetary Authority of Singapore (MAS) Survey of Professional Forecasters reveals a consistent over estimation and by wide margins over the past 9 months. This is suggestive that the economic slow-down is moving far more rapidly than initially assumed.

Figure 2: Actual vs Projected Quarterly GDP Growth

*Median forecasts from MAS Survey

0.00%

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4.00%

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2018 Q1 2018 Q2 2018 Q3 2018 Q4 2019 Q1 2019 Q2

Actual GDP Growth

*Projected GDP Growth

Source: (1) Singapore Department of Statistics(2) Ministry of Finance (MAS Survey of Professional Forecasters)

The MAS itself has consistently revised its forecast every quarter through 2019. In its latest estimate in mid-August 2019, it took the conservative view that growth in 2019 would be within 0 and 1 percent. This is compared to a forecast of 2.5 to 3.5 percent at the start of the year.

This recalibration is not surprising given the slow down in final demand for both goods and services exported from Singapore. The surprise lies in the masking of the severity of the degrading of economic performance.

Actual quarterly GDP growth has fallen

short of projections in the past three

quarters.


Figure 3: Slowing Merchandise Export

Merchandise exports: Refer to all goods taken out of Singapore. It comprises domestic exports and re-exports.Non-oil domestic exports: Refer to non-oil exports of Singapore origin.

Source: Singapore Department of Statistics

A comparison of the export performance of Total Merchandise Export (TME) and Non-Oil Domestic Export (NODX) reveals a concerning truth that the step down from peak for the NODX was 6 months earlier than for TME and much steeper at negative 19.1 percent as compared to 11.9 percent decline. Thus, local companies producing goods for export have been impacted earlier and much more intensely than the aggregative figures suggest.


0

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-11.9%Oct 2018

Jul 2019

-19.1%May 2018Jul 2019

Non-oil domestic export

Total merchandise export

HITTING HOME HARD

The Future-Moves Group estimates that the Singapore economy will be in a technical recession (determined as contractions over two consecutive quarters) by the end of Q3 2019. However, we take the view that the total annual performance will escape being recessionary.

We conducted a stress test against the benchmark of the impact of the Global Financial Crisis on the Singapore economy. Unsurprisingly, financial services showed the most dramatic impact in both directions. It is typically the most sensitive and fastest to transmit shocks.

Figure 4: Impact of Great Financial Crisis


9.2%7.2%

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-4.5%-3.3%

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YoY Change in Real GDP

Services (incl Finance & Services) Finance & Insurance Total GDP

2008 1Q 2008 2Q 2008 3Q

2008 4Q 2009 1Q 2009 2Q

2009 3Q 2009 4Q


Figure 5: Stress-testing

Impact on Services GDP

Impact on Total GDP

What this illustrates is that any further systemic shock to global markets, especially global trade and investment, will have an exaggerated effect on the Singapore economy as compared to the GFC. This is because, the growth entry point into such a shock, given the already slowing trade and investment climate will be lower than in 2007.

1/10thGFC

1/5thGFC

-0.8%

1/2ndGFC

-1.6% -3.9%

-0.5% -0.9% -2.3%


PROJECTIONS

Our central scenario for 2019, a forecast for the year at 0.0-0.8% growth is within the range of the latest guidance by the MAS. However, our sharper topline reflects the expectation of momentum effects of successive contractions on the supply chain dynamics and investor sentiment.

Absent of any dramatic systemic shocks, we anticipate staying in the sub 1% range with the marginal possibility of negative growth in 2021, if there is no reconciliation of the US-China trade war.

However, the prospect of such a shock or a combination of shocks cannot be discounted given the unpredictability of the Trump administration and the volatile atmosphere of American domestic politics in a General Election cycle. Of even greater concern, is the diminished basis for policy communication and coordination necessary for effective crisis response. The utter destruction of US political capital and lack of interest and faith in international frameworks augurs poorly for a well organised global response mitigating shocks.

Worse scenario [40%]

Singapore 2019 GDP0% - 0.4%

• Escalation in the US-China Trade War

• Escalation in the US-EU Trade Tensions

• Hard Brexit and Chaotic UK Post-Brexit Management

• Maintained Federal Reserve Rate

• Rising Geo-Political Uncertainty

• Belated Singapore 2020 off-budget stimulus

Central scenario [50%]

Singapore 2019 GDP0.5% - 0.8%

• Sustained US-China Trade War

• Sustained US-EU Trade Tensions

• Hard Brexit and muddled UK Post-Brexit Management

• Maintained Federal Reserve Rate

• Geo-Political Uncertainty• Pre-Emptive and Substantial

Singapore 2019 Off-Budget and Budget 2020 Fiscal Stimulus

Better scenario [10%]

Singapore 2019 GDP0.9% - 1.5%

• Truce in US-China Trade War

• Moderation in US-EU Trade Tensions

• ‘Better than’ Hard Brexit and Clear UK Post-Brexit Management

• Further Federal Reserve Rate

• Moderating Geo-Political Uncertainty

• Indication of Singapore Budget 2020 Fiscal Stimulus

Figure 6: GDP Projections


Figure 7: Expansionary Fiscal Impulse

*FMG’s projectionsSource: Ministry of Finance

We expect the Singapore government to pursue a policy of fiscal expansion into 2020 and 2021. This would be consistent with its historical policy of counter-cyclical intervention. This expansion should progressively step up to attempt to counteract falls in demand.


-14% -16%

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FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019* FY 2020* FY 2021*

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% Job Market Condition in Singapore

Retrenchment Total Unemployment Rate Resident Unemployment Rate Job Vacancy Rate (%)

Source: Ministry of Manpower

Figure 8: Unemployment To Inch Up

Notwithstanding the fiscal expansion, we anticipate rising unemployment through 2019 and continuing into 2021. Resident unemployment is expected to be higher than total unemployment. This is the result of three factors.

FMG’s ProjectionsTotal Unemployment Rate (Jun 2019 = 2.2%)2.8% (2019)3.0% (2020)3.3% (2021)

Resident Unemployment Rate(Jun 2019 = 3.1%):3.3% (2019)3.5% (2020)3.8% (2021)


Figure 9: SMEs & Non-SMEs Contribution to Nominal GDP & Total Employment

48%52%

Contribution to Nominal GDP (2018)

SMEs Non SMEs

71%

29%

Total Employment (2018)

SMEs Non SMEs

First, that greater proportion of Resident workers are employed in Small and Medium Enterprises or SMEs. These are likely to be the hardest hit and have the weakest resilience to the effects of the slow-down. 71 percent of total employment is in SMEs but there is likely an even higher concentration of Resident workers.



Figure 10: Proportion of PMET (%) in Total Employed Residents

62.0%

63.2%

66.4%

66.9%

69.5%70.4%

69.2%70.0% 69.7%

70.4% 70.1%

71.4% 71.6%

56.0%

58.0%

60.0%

62.0%

64.0%

66.0%

68.0%

70.0%

72.0%

74.0%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Ministry of Manpower

Second, the proportion of Resident workers described as Professionals, Managers, Engineers and Technicians or PMETs has steadily risen over the past decade from just over 60 percent in 2006 to nearly 72 percent in 2018. PMETs being middle-income earners are at higher risk of retrenchment and typically face more difficulty reentering into or redeploying within the workforce. The upshot is that the number of Long-Term Employment (LTE) may also rise and create a sizable population of structurally unemployed.


Services (excl Finance & Insurance)

Finance & Insurance9.5% 9.6% 9.7% 9.6% 9.7% 9.8% 11.0% 11.6% 11.8% 11.5% 11.8% 12.1%

52.9% 54.4% 54.1% 52.9% 53.2% 53.7% 53.7% 53.3% 53.9% 53.6% 52.8% 52.3%

37.6% 35.9% 36.1% 37.5% 37.1% 36.5% 35.3% 35.1% 34.3% 34.9% 35.4% 35.6%

0%

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2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Services sector’s share of GDP

Non-Services

62.4%63.5% 64.4%

Figure 11: Growing Significance of Services Sector


Third, the share of services in the make-up of GDP has grown. Services in total now represent over 64 percent of GDP. Financial Services has been the fastest and largest growing contributing component, rising from 9.5 to just over 12 percent of GDP.

As financial services specifically, and services more broadly, are acutely sensitive to trade and investment shocks, their employment bases are likely to experience downsizing under sustained low growth or contractionary conditions.


THE BITTER AFTERTASTE: A SERVICES BASED ECONOMY UNDER STRESSFigure 12: Growing Significance of Services Sector

There is a micro-economic significance to the shift from a manufacturing to a services centered economic structure. It generally makes the economy less not more resilient to periods of protracted stress. This is because the skill base and barriers to entry into occupations are higher in services than in manufacturing. This makes retraining and redeployment more difficult.

At the same time, employment in services is more globally competitive and less sticky than manufacturing. Hence, workers may find themselves substituted by labour sourced elsewhere when the economy picks up again.

• Cost base is more flexible• High ratio of foreign workforce• Easier to scale down

production in the event of crisis

Manufacturing sector

• Cost base is less flexible and heavily weighted towards labour

• Difficult to cut labourcost in the event of crisis

Services sector


A further complication is that a growing number of layers of ‘cognitive labour’ are under threat of substitution by Artificial Intelligence.

Talent in the upper tiers of a diverse services economy tends to be professionally mobile and the best are unlikely to wait upon opportunities but will seek them out globally.

For service firms, their wage cost structures are unable to work flexibly without a negative trade off on their service delivery. Hence, those firms, especially SMEs, who choose to respond to the slow-down with downsizing, may find it difficult if not impossible to successfully recapitalise their talent base in synchrony with the economic cycle. Many promising smaller businesses may find that both their financial and human capital reserves will struggle to cope with a protracted period of slow-down in demand. Their demise on a scale basis will ill-equip the economy for the eventual rebound.


RUNNING WITH SCISSORS: THE TWIST IN TRANSFORMATIONThe Singapore Government, most notably the so-called ‘4G’ leadership, has embarked on a much trumpeted ‘Industry Transformation’. This has taken the form of 23 Industry Transformation Maps or ITMs which stress the application of digitilisation and adoption of frontier technology intended to kick-start the economy onto a higher growth trajectory.

Figure 13: Spending on Economic Transformation (Budget 2019)

S$ 4.6 billion To be spent over the next 3

years on economic capability-building measures

Supporting workers' skills transformationBuilding deep enterprise capabilities

S$3.6 billion

S$1 billion

Source: Ministry of Finance


In 2019 alone, 4.6 billion Singapore Dollars were committed to economic transformation. Over a period of the coming decade, this number can be expected to increase tenfold.

While there have been early results in various sectors, most notably in Fintech, the contributions to GDP and to employment of transformation has been insignificant to date. Transformation, particularly of the human capital base, takes a long time. It is Singapore’s misfortune that the impetus for transformation has coincided with changing geo-political and trade conditions that both make it more imperative to transform but which also create headwinds for that transformation to take effect organically.

Figure 14: Scissors Crisis

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2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

GDP Growth

• Secular Slow-Down is already

entrenched

• Volatility will be higher due to

uncertainty and irrational leadership

from the US (Exec and the Fed)

• Structural trade war

• Structural cost uncompetitiveness

• Transformation pay-offs are

long-term

• High barriers to entry

• Uncertainty in the details

• Easy to compete


The net result of this temporal mismatch between a steepening economic challenge and the long-term trajectory of transformation constitutes a scissors crisis that must be addressed by policy action.

This presents the Singapore government with a type of challenge it has hitherto not confronted. It has a demonstrated adroitness in dealing with sharp, sudden but short crisis. It has no experience in dealing with protracted crisis which is volatile but within a low band of growth. This represents the perfect storm of uncertainty and marginal performance which is particularly unhealthy for a small, open and natural resource absent economy with high entrenched operating costs structures, particularly in terms of rental and wages.


WHAT NEXT?The Singapore Government is likely scrambling behind the scenes to gain a better understanding of the challenge and deploying its best minds to anticipate future trends and conditions to factor into planning and policy.

The following are FMG’s expectations of near-term decisions from the Singapore government.

Sooner not Later

The ruling People’s Action Party (PAP) must call a General Election by mid-April 2020.The probability is rising that it will decide to call the election in the last quarter of 2019, to win for the 4G team a strong electoral mandate before it puts into effect strong counter-cyclical measures. This will not only be on the practical grounds that the new team requires a democratic mandate to take confident policy action. It is also on the expectation that the effectiveness of any intervention can be credited as an early ‘win’ for the new generation of leaders rather than attributed to the legacy team if the slow-down accelerates ahead of the political timeline.


More not Less

The fiscal impulse is likely to be expansionary and more aggressively so. The interventions are likely to be concentrated into already committed initiatives. Hence, existing channels – notably subsidies for training, technological adoption and restructuring – will be expanded significantly. However, this well-meaning magnification of supply will distort prices and frustrate organic competitiveness, leading to supply induced price rises and the proliferation of more ‘zombie’ companies kept afloat with loosely issued government grants and subsidies.

Build and Build Some More

Over the past decade, the Singapore Government has already committed and commenced several multi-billion dollar capital projects in transportation, health, housing and industry sectors. This has served as a form of ‘silent’ multi-year stimulus. However, it will bring forward planned projects and ‘create’ new demand for projects as a form of fiscal expansion to energise the economy and to create internal demand.

Maximal

The Singapore government will likely pursue a maximal strategy of finding as many channels to introduce fiscal stimulus and across as many domains, not only economic, as possible. The motivation for such plurality will come from an appreciation of the need to cushion social and civic impacts in addition to business impacts from a protracted and volatile economic slow-down. It will have taken onboard a hard lesson from the 2011 General Election which followed in the wake of the GFC as well as studied the domestic unrest in other economies as their populations felt economically and socially alienated by globalisation, but also ignored by political elites who prioritised the interests of international business and well-equipped professionals over communities and the common citizen.

More Bucks than Bangs

In any other economy, the aforementioned interventions and approaches are likely to be frustrated by a lack of capital or hazarded by the need to borrow to spend. In the unique case of Singapore, the government coffers are overflowing in surpluses, the majority of which must be spent by the end of the term of government. The projected accumulated


Skills and Thrills

It can be expected that government strategy will reinforce an emphasis on skills development for the workforce. Subsidies will become more generous. A ‘quick fix’ may be to increase the dollar allocation to the skills future grant. It would also work with Institutes of Higher Learning (IHLSs) and with the private sector to generate more training courses. However, the trade-off may be that there is a large deadweight to much of the ‘training’ unless there is a proven correlation to boosting employability.

During the doldrum years of the early 2000s, the government contradicted a long held moral stand against gambling by issuing two gambling concessions. Gross Gaming Revenues have been above 4 billion Singapore Dollars in recent years and a significant source of additional taxation income. The government may elect to issue additional gambling concessions or expand the existing concessions. While gambling has been a demonstrable source of income for the State, the trade-offs in social impacts are real and should not be ignored.

surplus over the current term of government till end of FY 2019 (March 2020) was estimated by the Ministry of Finance to be almost 20 billion Singapore Dollars.


Table 1: Overall Budget Surplus for the Singapore Government

*Estimated surplus for FY 2019 = -S$ 3.48 billionSource: Ministry of Finance

This ‘fiscal ammunition dump’ is not the whole stockpile. In May 2019, the MAS transferred 45 billion Singapore Dollars to the Government Investment Corporation (GIC). While it represents a transfer for the purposes of long-term investment and not near-term expenditure, it does expand the earning base of the GIC from which up to 50% of long-term investment returns can be tapped to support fiscal policy.

In short, the Singapore Government is not short of fiscal supply. Rather than place the accumulated surpluses into Past Reserves at the end of this term of government or alternatively spend it all quickly, it can choose to create purpose-specified funds which can continue to be a source of capital beyond the term of government.

Mind Over Matter

The most important value to safeguard over a protracted period of economic stress is a sense of optimism over the economic and national future. It is not only the prerogative of the government to ensure a positive long-term outlook. It must be both a shared conviction beyond government and across all citizens, communities and institutions and it be an inspiration to action to prepare and to prevail despite daunting challenges.



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Zu Heng is a senior associate consultant at FMG where he contributes to strategy development and background research of consulting projects. Zu Heng has experience in conducting qualitative research and analysing reporting trends in different industries. He has advised multiple listed companies on best practice reporting standards and communication strategies across different sectors in the region. Zu Heng graduated from the National University of Singapore with a Bachelor of Business Administration (Hons).

Research Support by:Ho Zu Heng, Senior Associate Consultant

Devadas KrishnadasChief Executive Office

Devadas has extensive experience in both the public and private sector and is an expert on strategy, foresight, public policy and economic policy. During his time in the Singapore public service, he successfully led efforts in long-term planning, Whole-of-Government budget coordination at the Ministry of Finance where he was the Deputy Director of Fiscal Policy, Strategic Planning and Lead Foresight Strategist.

ABOUT THE AUTHORS

Future-Moves Group

+65 6386 [email protected]: 16 August 2019

Future-Moves Group 60 Paya Lebar Road#05-02 Paya Lebar SquareSingapore 409051

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