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Economic and Political Review of Selected Asian Countries

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COUNTRY REPORT - SINGAPORE
Prepared for "Asia and Pacific Review 2001"

Political developments
Political movement in Singapore tends to be glacial at best. The Peoples Action Party has been the governing party since independence and there is no prospect of change. Given the prosperity it has delivered it is perhaps hardly surprising. Nevertheless, the party has to face the electorate every five years or so and the PAP measures its own acceptability not by whether it wins - that is given - but by the percentage of the vote it receives.

After an extremely strong economic performance in 2000 but facing a regional slowdown in 2001, the Government may be tempted to hold an early election in 2001. To that possible end, it has prepared a stimulative tax-cutting budget - indeed, for Singapore, almost populist - designed to appeal to both consumer and corporate interests.

Prime Minister Mr. Goh Chok Tong is virtually certain to remain in office through the next election. In fact, political speculation indicates he may remain until the election after the forthcoming one; i.e., until about 2005. His likely eventual successor remains the Deputy Prime Minister Lee Hsien Loong, known as BG Lee, who appears have made a full recovery from his cancer scare of a few years ago. He is, of course, the son of Senior Minister Mr. Lee Kwan Yew, the only other Prime Minster the country has ever known. The Senior Minister remains a globally respected figure for his political and strategic insights that helped make Singapore the stunning success it is today.

There is little or no real political liberalisation. In a peculiar token gesture last year, the Government allowed a Speakers Corner to be established for opposition ideas to be aired. It was far from its London forebear however; spontaneity was not allowed since a licence was required in order to speak.

However, whilst almost irrelevant tokenism, it does reflect the recognition that as Singapore develops and becomes more and more a knowledge economy, ideas and creativity will be at a premium and, at some point, relaxation of the control mindset will be essential and inevitable. But the Government probably hopes to delay that day until BG Lee - who is younger and known to be more liberal - becomes Prime Minister.

International relations
Singapore is state limited by its geography and perched nervously between two large Muslim states. These states are both agents of Singapore's prosperity and causes of its insecurity. Malaysia is closer and stable. However, it still has to make the transition to a post-Mahatir state. That transition should in no way be comparable to Indonesia's trauma but until it occurs there will always be questions. And there have been minor problems between the two Governments in recent years, including problems with defence co-operation in 1998 and with water and pension rights in 1999.

Indonesia is a problem of a completely different magnitude. Whilst Singapore's important banking centre profits greatly from Indonesian capital flight, increased turmoil in the archipelago would most likely bring security problems and a flow of refugees, legal and illegal.

With its Mandarin speaking Chinese majority, the country has long eyed the opportunities presented by the development of China and invested substantially, although not too successfully, there. But it is also uncomfortable with China's expansionary goals, particularly with respect to the South China Sea.

For these reasons, Singapore is the most enthusiastic ASEAN member in keeping the United States engaged and provides refuelling and repair facilities for US forces.

The country has also been keen to build it trading ties with free trade deals. Frustrated by the inertia of APEC and backtracking by AFTA the country's objective is overwhelmingly economic. However, building closer ties a good citizen of the global community is a secondary objective. Free trade deals have been agreed with New Zealand, Chile and are being discussed with the United States.

An interesting new player has entered the equation in the last year: India. Singapore has a significant Indian minority and the new outward looking India means new opportunities trade and investment both for it and Singapore. Both are set to grow with interest in the telecommunications, IT, entertainment and tourism sectors. Defence co-operation is possible as relations develop. The Indian Navy has announced its intentions to extend its arena of operations to the South China Sea.

Economic developments

The economy in 2000
The Singapore economy grew by 10 percent in 2000 up from 1999's level of 5.4 percent. This is really a performance unmatched anywhere in the world, particularly in an economy with a GDP per capita of USD 25,000, which places it in the upper reaches of the OECD.

As a trading centre, Singapore benefited from the strength in the global economy; the regional recovery and the electronics boom in the first half of the year. Investment and personal consumption all grew strongly. Exports grew at a 22 percent rate whilst imports grew by 24 percent.

As a result, the current account surplus narrowed to 22 percent of GDP in 2000. The overall balance of payments surplus improved slightly as there was a smaller outflow on the capital and financial accounts. Official foreign reserves rose modestly to S$ 135.9 (approximately USD 78 billion) from S$ 128.5 recorded in the previous year.

With the strong economy, employment also grew, particularly in the manufacturing and service sectors, bringing unemployment back to around 3.5 percent compared with a peak of 4.3 percent. These figures, however, mask changes in the pattern of employment and unemployment. Whilst higher skilled jobs are being created in the new economy, hollowing-out means that older workers in the sunset industries are facing structural long-term unemployment. If sustained this will have social consequences.

But with unemployment low, wages rebounded from crisis levels and unit costs rose slightly. However, with deregulation holding utility and financial services prices down, inflation was contained to a fairly modest 1.4 percent despite the surge in oil prices. The Monetary Authority of Singapore allowed the local dollar to depreciate slightly against the strong USD dollar but it more than maintained its strength against a trade weighted basket of currencies.

Construction remained the worst-performing sector because of the glut, which caused the Government to curb releases of new land for development. Nevertheless, residential property prices began to recover in the first half of the year. However, caution was still the watch-word because of the uncertainty in world markets and the increasing oil price dampening enthusiasm and prices dipped in the third quarter. The commercial property overhang was substantially eroded by the strong demand from start-up companies in the IT sector whilst the electronics sector increased the demand for specialist industrial park space.

The outlook for 2001
There is an obvious lack of certainty for Singapore in 2001 with uncertainties over the average price of oil, the extent of the US slowdown and the spill-over effects on Asia and Europe, further compounded by the effect of possible disturbances in Indonesia.

Nevertheless, Singapore has a resilient broad-based economy not unduly dependent on any one sector. Even its electronics industries are diversified between, semiconductors, personal computers, information technology and telecommunications equipment. Whilst Singapore has no oil of its own, it is not an oil-intensive economy and, in fact, its oil processing industries are very profitable. The Government has taken pre-emptive action against the expected slowdown in growth with a supply side expansionary business. The central forecast for growth in 2001 is 6.5 percent with some risks that this turns out to be optimistic.

The budget for 2001
The Singapore Government announced its budget for 2001/2 in February 2001 at the time the world had clearly entered an economic slowdown. On the back of economic growth of 9.9 percent in 2000, the government found itself with a higher than planned surplus of 2.25 percent of GDP. With this, and a possible early election in mind, the new budget is deliberately stimulative with generous tax cuts whilst still aiming for a 2.6 percent GDP surplus.

Consumers profit by receiving 10 percent rebates on last year's taxes along with rebates for utilities and rents. More importantly, marginal income tax rates are reduced from 2-5 percentage points with the maximum income tax rate now 24.5 percent. Middle class taxpayers with incomes of SGD 75,000 - 100,000 (approximately USD 40 -60,000) will receive the biggest marginal rate reductions of 5 percent.

The corporate tax rate is also reduced to a maximum of 24.5 percent, the second lowest in the region after Hong Kong. Small and medium industries with incomes of up to SGD 100,000 are the biggest beneficiaries with their rates cut in half to a maximum of 12 percent.

Maintaining Singapore's competitiveness
Maintaining the competitiveness of the economy in the face of growing affluence remains an obsession of the Government that continually fears its population will retreat to what its sees as Western indolence and welfareism.

It aims to maintain competitiveness through a multi-pronged approach involving the provision of first rate physical infrastructure, a well trained work force and an attractive locale for high quality FDI. In addition, it plans for a carefully phased liberalisation of the regulatory environment to improve the city's attractiveness for sunrise knowledge-intensive industries. The tax changes also clearly increase competitiveness.

The quality of the physical infrastructure has long been world class. However, liberalisation of the telecoms industry has been underway for some years and Singapore Telecoms has been a beneficiary of the increased competition and is now an important regional player.

The city is preparing to open its electricity and gas markets to competition and, to that end, has created a new regulatory authority the Energy Market Authority of Singapore. Liberalisation for large consumers is expected in 2001 and for the mass retail market in 2002.

Higher education continues to improve with growing linkages at the tertiary and post- graduate level between Singapore institutions and top level universities in the U.S. and the U.K. The budget substantially increases assistance to technology and higher education with increased spending for Research and Development and an Economic Development Assistance Scheme for companies that want to move up the value chain and into sunrise industries.

The quality of the country's human resources is critical to its competitiveness. To this end, it aims to raise the share of its population with post-secondary education from 35 percent at present to 65 percent in 10 years time. Visa restrictions for qualified personnel continue to ease. Developing capacity in the life sciences and IT sectors are particular priorities of the Government. Government sponsored venture capital funds for SGD 2 billion have been established and a pharmaceutical park and life sciences facility are being established.

Competitiveness has another aspect. For the new industries to be world class it will be necessary not only to attract but also to maintain foreign professional executives. They, in turn, demand a more stimulating intellectual environment and access to information. But the Government still supervises internet service providers and controls the media. This issue is far from resolved.

Singapore as a financial centre
Singapore continues to see its future as a regional financial centre. To that end, the Government has moved to liberalise the banking sector since 1997. The city's well-capitalised banks have been encouraged to expand regionally and use the opportunity of the regional crisis to expand their operations. DBS and UOB have expanded into Thailand and the Philippines. The limits on foreign ownership of local banks have been removed and they have also to import foreign talent for their international expansion.

Singapore has been rated to have the best corporate governance of any emerging market in Asia, Latin America, Eastern Europe or Africa by CLSA, a leading regional stockbroker in an extensive report issued in October 2000. The same applies to its banking and capital market regulation, which is deemed world class.

The country continues to have ambitions to take over from Hong Kong as the leading regional centre for asset management. Singapore has advantages in terms of cost but its regulatory hand, whilst improving, is still heavier than its rival's. As times goes on and the climate in Hong Kong becomes increasingly China-centric, Singapore may be come the favoured locale for non-China related asset management, particularly that oriented towards the Indian subcontinent.

One of the last hurdles to financial liberalisation and the growth of Singapore as a financial centre has been the slow progress in internationalising the Singapore dollar for overseas transactions. In March 2001 the Monetary Authority of Singapore announced that it would allow non-residents and foreign financial firms based in Singapore to borrow in Singapore dollars for both local and overseas investment.

The announcements are significant. Non-residents will be able to borrow up to SGD 5 million to invest in Singapore equities, bonds and commercial or industrial real estate. They will also be able to borrow up to SGD 5 million to invest abroad, so long as the loan proceeds are immediately converted to foreign assets. This is to avoid allowing hedge fund managers to short the currency as happened with the Thai currency during the Asian crisis.

These measures will provide new outlets to Singapore banks, which are presently massively overcapitalised. It should eventually lead to a substantial expansion of the fund management and treasury industry. With SGD borrowing rates some 270-350 basis points lower than USD rates considerable-borrowing activity could be generated.

The outlook for financial markets
Despite the underlying fundamentals the Singapore stock market entered a bear market in 2000. The main Straits Times index hit a post-Asian crisis low in late 1998 at 800 and the index then rallied to 2,583 in January 2000, at which point it was challenging its all times highs set in the 1994-96 period. The market spent the rest of 2000 consolidating the massive 1998-2000 rise, closing the year at 1,900 declining a little over 20 percent for the year. In relative terms, this was the strongest performance of any South East Asian market and one of the better ones in Asia generally.

The fear that gripped world markets in early 2001 dragged the market down below the lows of the previous year with a full-scale correction of the 1998-2000 rise. However, despite slower growth, with its expansionary budget Singapore is expected to avoid a recession. The CLSA study mentioned earlier not only rated Singapore corporate governance generally the highest in emerging markets but rated several of its companies, including DBS Bank, Singapore Press Holdings and Singapore Airlines, among the best managed companies in the world. Coupled with its sound currency, its leading companies should attract international institutional funds back to the market in due course. The risks are lower and the values better than elsewhere in the region. At and index level of 1,700, the market is selling at roughly two-thirds of its all-time high in 1994 although the economy has grown almost 70 percent in the interim.

Country Risk
Political:Excellent
Economic:Excellent
Regional:Weak
Stock Market:Good relative value

William R. Thomson                               10 March 2001
Wt@momentum-asia.com.hk
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