At a glance
Singapore is well placed geographically and has enjoyed steady growth over the last five decades.
Trade wars, an ageing population and lower productivity threaten the island state’s future economic growth.
Stronger, closer relationships with India and China, as well as participation in new free trade agreements could help shore up Singapore’s position.
The country is also focusing on reskilling its population to increase digital literacy, and ensuring that all citizens benefit from Singapore’s success.
Singapore has long been touted as a shining example of Asian success. Stable. Prosperous. Disciplined. Industrious. Smart. Add the fact that the island state is perfectly located to ride on the coat tails of the economic growth of neighbours such as China and India, and it is easy to see why Singapore has prospered in sectors such as manufacturing, finance, and logistics and transport.
A raft of international, economic and social challenges is now buffeting Singapore, however, and the headwinds demand a response from government and business if momentum is to be maintained. Economic growth came in below expectations at 1.3 per cent in the first quarter of 2019, with manufacturing among the sectors experiencing a dip.
Manu Bhaskaran, CEO of consultancy group Centennial Asia Advisors and author of a Lowy Institute report on Singapore, acknowledges the threats facing the nation, but remains upbeat about its long-term economic prospects.
“Singapore should be able to sustain growth of about 2.5 per cent plus or minus for the next few years, so long as there is no global recession and so long as we can avoid a major surge of protectionism,” he says, referring to the rise of trade barriers and economic nationalism in jurisdictions such as the US and Europe.
Changes will be required, though.
Location, location, location
On the doorstep of Malaysia, Indonesia and Vietnam and enjoying ties with juggernauts China and India, Singaporean businesses have geographic advantages.
Selena Ling, head of treasury research and strategy at OCBC Bank, nevertheless advocates building even closer partnerships with neighbouring countries. There is also the chance to ramp up participation in existing or mooted free trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP) and the Association of Southeast Asian Nations (ASEAN), plus China’s Belt and Road Initiative.
“[We should also be] promoting the Smart Nation push [to harness new technologies] and start-ups, embarking on digital transformation, as well as encouraging bilateral economic cooperation in strategic areas like high-speed railways and education,” Ling says.
The Lowy Institute report, titled Getting Singapore in Shape: Economic Challenges and How to Meet Them, opines that disruptions stemming from new technologies, the changing structure of international competitiveness and growing economic nationalism could pose a threat to Singapore’s future economic potential.
Bhaskaran draws comfort from Singapore’s location and long-term business and infrastructure advantages that have enabled it to act as a regional hub. He warns, however, that Hong Kong and Bangkok are trying to challenge that standing. Hong Kong excels in areas such as equity finance because of the immense scale of opportunities offered by China, while Bangkok is emerging as the de facto capital city of the Greater Mekong Subregion.
“Our regional hub – port, airport, financial centre, business headquarters – remains competitive due to the critical mass we have attracted. Plus, we have massive savings that can be used to bolster the economy when needed and that provide a source of recurring income, enabling us to step up spending on social safety nets without large increases in taxes.” Bhaskaran adds that Singapore has a regulatory environment that “companies all over the world find attractive, along with a reputation for safety and security”.
Economic success story
The transformation of Singapore’s economy during the past five decades has driven rapid economic growth and significant social welfare gains. This highly developed economy benefits from a number of power sources: manufacturing clusters that tap into East Asian value chains, thriving financial and business services centres, an impressive maritime and air transport presence, and its status as the regional headquarters for more than 7000 multinationals.
Chng Lay Chew FCPA, CFO of the Singapore Exchange, notes that Singapore is now Asia’s largest foreign exchange (FX) centre by trading volume, and is behind only London and New York globally. FX futures volume on the Singapore Exchange hit US$914 billion notional in the 2018 calendar year: more than double 2017 figures.
Chng puts the growth down to the continued migration towards exchange traded FX products from the over-the-counter market. “Another key reason is Singapore’s ascendancy as a leading global centre for FX trading. The country’s advanced trading infrastructure, and adoption of technology and electronic platforms in the underlying cash markets, enables investors to easily hedge their positions across over-the-counter and listed derivatives.”
The Monetary Authority of Singapore has also recently discussed plans to speed up the routing of trades via other FX centres by encouraging major foreign exchange participants to build their systems in Singapore. For now, though, the broader economic outlook for Singapore is unclear. Ling says near-term GDP growth prospects “look somewhat subdued”, in part because of a slowdown in global growth, the ongoing US-China trade war, moderation in the IT demand cycle and China’s economic deceleration.
One immediate concern for Singapore is a skills decline, with the OECD suggesting recently that efforts to retool the nation’s labour force skills should be a priority.
In its report, called Economic Outlook for Southeast Asia, China and India 2019, Towards Smart Urban Transportation, the OECD suggests that, with an ageing population, Singapore could consider merging schools with declining enrolment and redirect resources towards supporting lifelong learning. “Retraining programs can help to prepare workers with digital and other needed skills,” the OECD states.
Ling believes a tripartite partnership between government, industry and tertiary institutions is the key to the skills rethink. She cites schemes such as the Professional Conversion Programme, the Career Support Programme and the SkillsFuture initiatives.
“This will help with this transition process,” Ling suggests.
The Lee Government has been looking to the country’s seniors to build a technologically literate workforce, with Singapore Minister for Manpower Josephine Teo championing re-employment and career mobility for older workers.
Ling welcomes such moves, noting that ageing demographics can be a pressing resource constraint if left unchecked. “The Singapore Government, through the budget and other manpower policies, has encouraged businesses and workers to upgrade their business models and skill sets through capex investments and lifelong training, so as to facilitate higher productivity and higher value-add.”
Singapore is engaged in a huge effort, through Smart Nation and other programs, to embrace various digital technologies and the use of big data.
Singapore Deputy Prime Minister Heng Swee Keat has called on the nation to build its position as a “Global-Asia node of technology, innovation and enterprise”. His view is that Singapore’s businesses and workers can be big winners as a result of the Fourth Industrial Revolution.
Already, Singapore is leading the way in raising capital and increasing market penetration in the fintech sector, while more generally Heng wants Singapore to continue to build its role in what it has done best while developing new market strengths.
Chng says as the economies of countries grow, so too does the need to raise capital to fund infrastructure growth and for companies to develop and expand. Singapore's businesses and workers can be big winners as a result of the fourth industrial revolution.
“At the Singapore Exchange, we operate a securities market that facilitates companies from many countries to come and raise equity or debt capital and for investors to deploy their capital.”
Chng has witnessed a trend for companies to use the Singapore Exchange derivatives platform and products to manage their risks in asset classes such as commodities and currencies. He says the Singapore Exchange will continue to support the growth of Asian businesses, particularly in terms of financing.
“The types of companies needing financing now come from across the corporate lifecycle, from startups to big corporates, and Singapore will introduce new financing capabilities to meet these needs.”
Singapore has also highlighted sustainable finance as an area of potential growth. “The Singapore Exchange itself is part of this,” Chng says. “We have made sustainability reporting mandatory for all our listed companies. Efforts are accelerating to grow products that support sustainable goals and sustainability such as the issuance of green bonds.”
Watch this space
As Singapore prepares for a financially secure future, it will also be important that the disadvantaged and the poor are not forgotten. To that end, a new Long-Term Care Support Fund worth S$5.1 billion is being set up for all Singaporeans to help with insurance premiums for severe disability and provide other health-related support.
More generally, the Lowy Institute report argues that steps must be taken to address social inequality, with the benefits of economic growth remaining skewed.
In the business sector, there are high hopes following the rollout of Industry Transformation Maps, which are essentially industry-based programs for upgrading selected sectors of the economy.
Such moves are all part of an all-encompassing plan to keep Singapore on a path to prosperity.
Ling takes heart from her nation’s proven strengths – clean government, first-class infrastructure, good governance and the rule of law, plus the nation’s status as a financial and transportation hub.
“The Singapore policymakers are always forward-looking and reinventing the economy".
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Headwinds to navigate
The list of threats Singapore must address is daunting. Chief among them are an ageing and slowing population, rising costs, modest innovation capacity and declining productivity growth. The Lowy Institute argues that the keys to dealing with such challenges are “top-down policy interventions” from government, and spontaneous “bottom-up adjustments” from the corporate sector.
Specific issues that must be addressed include:
Population stagnation: the fertility rate has been falling for decades, diminishing the workforce and hindering economic growth.
Competitiveness: while ranking well in international competitiveness surveys, the high cost of living and business imposts compared with peer countries could be deterring more Chinese and Indian firms from placing their international operations there.
External forces: Singapore is well placed as a global manufacturing and logistics hub to benefit from the rise of artificial intelligence, robotics and advanced manufacturing, but there is rising competition in many market sectors from countries such as China, India and Mexico.
Innovation: The nation has struggled in areas such as innovation capacity, the quality of scientific research institutions, company spending on research and development, and a tendency for senior civil servants, while highly qualified, to engage in “group think”.
How will Singapore respond? Without bold responses, the Lowy Institute believes Singapore’s economic model may not be able to overcome its domestic and external challenges. Manu Bhaskaran argues that tackling productivity is at the heart of a number of issues. For example, a boost to productivity could help offset the impact of an ageing population.
“The key is to determine why productivity has been disappointing,” Bhaskaran says. “The causes are not clear, but I suspect it is partly linked to the previous period of very large-scale inward flows of cheap foreign labour. It could be that this inflow kept wages growth lower than it should have been and so disincentivised companies from investing in productivity enhancing capital equipment.”
Productivity aside, the Lowy Institute report recommends that companies target high-growth sectors in Singapore such as finance, hub services, logistics, urban solutions, health care, the digital economy and advanced manufacturing. There is an onus on government to adopt a more active role to support growth and innovation.
A shift away from Singapore’s long-favoured, export-oriented manufacturing approach could help, too. Rather than merely providing supporting industry infrastructure to multinationals, there could be a case for Singapore to copy the manufacturing models in Japan and South Korea, for example, where globally competitive local enterprises such as the keiretsu in Japan and the chaebols in South Korea have become world leaders.
Bhaskaran adds that Singapore must also build greater resilience into the economy, while also building capacity for “flexible adjustment”, whereby the economy can more quickly respond to international market forces.