I've been asked one too many times on my opinions of the Singapore Economy and I've somewhat obliged to give my 2 cents on this fairly complicated subject. Singapore has one of the world's most dynamic and resilient economies that has thrived on a surge in productivity and technological innovation that spurred a growth renaissance ever since the 80s. We are ranked one of the top nations for expatriates seeking employment outside their home country, we have consecutively been ranked the top for business accommodation, and of course for the icing on the cake we are also one of the most expensive cities to live in globally.
Over the last 4 years post the Subprime Credit Bubble and ensuing aftermath, Singapore has never looked back in the rear view mirror. After more than a quadrennium of sustained growth, and trillions in global centrally orchestrated liquidity and pump priming, questions have started emerging as of late on the dexterity of our halcyon state. There legitimate concerns on how Singapore will brave the cyclical slowdown in the West and the restructuring in the East. The world today is riddled with boggy traps be it falling commodity and input prices, and most recently the rout in crude oil prices; as a symptom or precursor in waning demand.
In this piece I will present my thoughts and how I personally would position myself optimally. I've gathered data from various national institutions and boards in order to support my thesis that Singapore is already moderating and may be on a path of decelerating growth.
At 2.1%, Singapore boast one of the world's lowest unemployemnt rate. For reference, America's U3 unemployment currently stands at 5.7%. Working professionals in Singapore will be able to attest to the high turnover rate in the labor force; meaning it is easy to quit a job and find a different employment with relatively little downtime. The 2014 labor force participation rate stands at 67% which is health by global standards. Real wages inched higher by 0.4% YoY signaling continued sustainability in the labor market. Unemployment is usually a lagging indicator of growth and shadows the business climate and growth expectations. The ministry of Manpower (MOM) only publishes these figures quarterly instead of monthly, giving this metric less resolution compared to other more frequently reported data. Nevertheless, the labor market remains strong and there is little slack as of now.
The republic's growth has slowed substantially over the last 4 years and narrowly escaped a technically recession 6 times over the past 5 years. Gone are the days of above 10% expansions, and we should prepare to welcome a much more moderate sub-5% expansion rate for the next half a decade. At a point in 2010, we topped the world (including China) in annualized growth for 2 consecutive quarters (1Q10 - 2Q10) on the heels of a boom in manufacturing. The YTD average of the last 3 quarters stands at 3.3% YoY according to the Ministry of Trade and Industry (MTI) but they have placed a conservative estimate a 2.2% print for the final quarter. Further projections by the ministry indicates the uncertainty faced going into 2015, citing a slowdown in global growth and the tepid recovery in the Eurozone.
In short, expecting a moderation in the pace of growth and attributing this to external developments would be an accurate way of framing this picture. I would be looking out for any adverse shocks especially in the ASEAN region. There are however other cyclical and domestic concerns which are more paramount to waning global demand.
Prices remain my second foremost concern and this is not exclusive to Singapore; Europe is facing serious disinflationary (core) and deflationary (periphery) headwinds, while America never seems to be able to get its core figure above the Federal Reserve mandated 2%. There is a multitude of factors that are causing a wave of declining prices across the globe; crashing energy prices (Texas and North Sea crude oil and other petroleum cracks), falling prices of industrial metals (copper, iron ore, aluminum), a broadly strengthening US Dollar, and tepid inflation expectations (mainly in Europe, America, and Japan as indicated by their respective forward breakeven rates).
It is a chicken and egg conundrum. Are lower demand for exports and weakening consumer expenditures the result of the trepidation in growth? Or are low input and and consumer prices the cause for the deceleration in global growth? This is a question I cannot stick a definitive answer to; and so can't most other economists because prices are an extremely complex derivative of a bevy of factors. To add insult to the confusion, prices are always relative (measured against something else) and never absolute (as a standalone) so the measurement has to be precisely calibrated to suit the objective of the study in question. For instance USDSGD has surged from 1.2360 in Jul 2014 to 1.31 in Dec 2014 (a 5.98% depreciation of the SGD against the greenback in a matter of 5 short months, and remember that the SGD trades in a pegged and managed float); so despite higher import prices, Singapore still experienced declining prices, which I believe is set to continue.
The result of lower prices will be felt globally. Singapore is a major importer of energy and consumers will directly benefit from lower energy prices at the pump. Electricity prices are unlikely to fall because the natural gas Singapore imports (similar to that of what Japan imports) are of a different origin than the shale gas in America, and should not be affected significantly by cheaper crude oil. The energy sector and petroleum refining industry have already taken multiple blows to their top lines as volumes have fallen. Trade isn't influenced a whole lot by lower transportation costs; the Baltic Dry Index (BDI) is still mired in a downtrend after having gyrated for years on end. In my eyes, the prudent thing to do would be to wait and watch.
A fairly controlled pace of inflation is generally deemed healthy because it balanced the scale of savings, anticipating expenditures, and current expenditures. One doesn't have to look beyond Japan to appreciate the effects of a deflationary spiral; many central bankers are pinning their monetary policies to prices primarily on this fear of deflation. It will be interesting to see how cheaper oil prices filter down to the down streams, and its effect on real disposable income.
Business & Production
As stated earlier, manufacturing was a major contributor for Singapore's record breaking growth in the first half of 2010; industrial production as see here, surged an incredible 56.8% from the previous year in May 2010. It seems that period marked the zenith of production. Growth has been meager as of late, waxing and waning between contraction and expansion with no clear direction. Singapore exports alot of its production to ASEAN and East Asia, and this may well reflect a shift in consumerism in this region. Manufacturing activity is also a cause for concern; as much as we like to think Singapore is a service-based economy, manufacturing still forms a major part of our output.
As aesthetically pleasing as the above chart may seem, a reading of 51.8 is in fact a weak number. America's number came in at 54.8 in November, Britain's at 53.5, South Korea's at 49, China's official figure printed 50.3, Indonesia's was 48, and Taiwan's was at 51.4. Besides the stronger developed economies of the world, Singapore's manufacturing climate remains a bright spot in the otherwise dusky sky. Again, I believe we will continue to see expansion but at lower levels, perhaps sub 53 levels.
Besides looking at lagging and coincident economic indicators, leading indicators such as consumer sentiment and confidence can anticipate a material development in the real economy simply because sentiments eventually tend to follow through into economic decisions. In this case, the sidewards trend of business confidence reflects a protracted period of uncertainty for whatever reasons domestic or global. In such circumstances, businesses tend to shelve off investments and capital expenditures. In America, corporates have been using their excess cash and accumulating earnings to conduct massive bouts of share buybacks and distributing earnings through dividends perhaps to placate investors in an highly valuated market. The same is occurring in Singapore; instead of boosting productivity and upgrading depreciating fixed assets, larger companies are recycling their accumulated earnings to conduct repurchases in a heightened market. This kind of activity doesn't benefit the real economy but may act as a placebo to bolster higher valuations. Capital investments constitute a major part of the domestic economy; apart from consumer expenditures, corporate spending tend to dictate how the economy will trend for a few quarters. Unless we see the current clout of weak business sentiment clearing up, growth should remain benign.
Corporate bankruptcies can serve as a useful and simple indication of how well businesses are generally doing. The 164 fillings in October were mainly from small businesses but still indicates that we're seeing some volatility. Whether this increase continues is anyone's guess.
While the question remains on what spurred the kink in consumerism in July, the past 3 months of growth has been impressive to say the least. Consumer spending plays a rather major role in Singapore's domestic output but I would caveat against reading too much into the above data mainly because of its cyclical nature and the volatile sequential readings. If consumers have indeed awakened from their deep 2-year long slumber, we should continue to see positive growth in the coming months leading up to Christmas where shopping activity is expected to increase. Assuming that Singaporeans are willing to expend a larger portion of their disposal income on goods and services, this will serve well as a minor boost to cushion against declining exports and capital formation.
Another possible takeaway might be that the slowdown in output growth is not organic in nature but due to exogenous forces as I've discussed above. This however remains to be seen. I do not see consumer expenditures as being a major source of concern.
By stacking consumer spending and private sector credit together, we can derive a rough correlation between consumer credit and consumer spending. The catalyst for the rather strong growth in consumer credit was the reduction of the price lending rate across the retail banking sector by 3bp. This marginal cheapening of borrowing was enough to send consumer credit to all time highs in October 2014. Linking marginal credit creation to the adjust consumer spending metric (accounting for the one off broadening of the basket), it is clear that Singapore consumers are in a healthy state even though both consumer spending has seen somewhat sluggish growth. The small decline 2Q14 is not a cause for concern. On the other hand, the consistent expansion of credit to the private sector is a reassuring sign of health; however, this does not preclude a cyclical slowdown.
The all important trade balance has been in a surplus since 1998 but has seen huge amounts of volatility in the past decade. This is to be expect of an economy that imports all of its energy and food, whose prices are volatile and subject to global supply chains and the relative strength of the SGD. Singapore mainly exports petroleum products, chemicals, pharmaceuticals and electronic goods. Main export partners include Malaysia, Hong Kong, China, and Indonesia; main import partners include Malaysia, China, US, and Korea. Malaysia remains Singapore's top trading partner and some concerns might be over the depreciating MYR.
Imports have steadied over the past 4 years while exports were in a slight uptrend. Zooming in to this year alone, exports have remained relatively stable while imports have gyrated a little. The trade surplus has been declining for 3 consecutive months but remains at a respectable level. Singapore isn't an export powerhouse like many wrongly assume; it is a trade powerhouse because trade volumes alone form more than 15% of 2013's GDP. It will likely remain that way. I do not foresee trade to be a major drag on domestic output although the variance in the trade balance might impact output in a minor way (less than 0.05%). Monitoring trade volumes is always a smart choice.
Government expenditure is set to increase this year due to a surge in 2Q14. Forming just over 10% of GDP, it remains an important component. While it is unclear if the government would boost fiscal spending in 2015, operational and development spending remains robust. Singapore usually runs a small budget surplus an has not ran a program of stimulus since the Asian Financial Crisis in 1998. It is unlikely that the government will increase its expenditures as a counter measure to slowing domestic demand. One this to watch for is the government's 2015 budget, which I personally feel will be smaller than 2014's because of slack in the public housing market.
When assessing the health and stability of any economy, I feel that it is imparative to have a look at the balance sheets of 2 entities; that of private banks, and that of the central bank. Loans make up the largest portion of Singapore banks' assets. Singapore is a highly "financialized" economy, meaning alot of future growth depends on how leveraged its financial institutions are. In this case, banking assets have been on a steady uptrend and show no sign of an unsustainable parabola. Without going into the intricacies of monetary finance (i.e. how money functions in an economy and amongst banks), Singapore's economy functions mainly on traditional banking (loans), juxtaposing to China where state and social financing functions a lot through shadow banking (not involving loans). As such, the 3 local banks remain on very firm capital adequacy grounds and have met both MAS and Basel regulatory requirements. In short, there is no concern of a systemic shock amongst the banks.
The MAS, unlike its commercial banking counterparts does not make loans to banks nor does it purchase government debt securities like some other major central banks do under their respective large scale asset purchase programs (LSAP) also known as quantitative easing (QE). In fact, the MAS holds almost all its assets in foreign exchange reserves accumulated from the decades of current and capital account surpluses. In this sense, the MAS is not highly leveraged because it doesn't create reserves in exchange for marketable securities or covered bonds. The MAS has had a good track record of setting the appropriate monetary policies during the immediacy of Lehman. By adjusting the tactical band within which the SGD floats against a basket of other currencies, the central bank is able to broadly direct import and export prices. All looks well here.
As stated above, Forex reserves are held and managed by the MAS. The general long-term uptrend seems to have experienced an interlude after carving a high in January this year. The decline in this measure might be due to the intentional sale of reserves to prop up the SGD against other currencies to lower import prices. If past is prologue, the uptrend should promptly resume.
Singapore Government Bonds trade on the secondary market and its yield serves as good indication as demand for safety rise gradually. The 10 year SGS has been trading mostly in a range for 2014 but yields are around 25bp lower than where they started the year at. We saw prices fall substantially in 2013 (higher yields) but subsequently leveled out at the 2.5% region by trading through that level multiple times. The yield on SGS could be much lower than where they currently stand, if the sub 1.5% rates in 2012 were any clue. I think the reason why SGS have not seen much follow through is simply because of the lack of monetary accommodation by the MAS (the MAS isn't monetizing SGS) and the demand for safety remains lukewarm at best. Remember that SIBOR is at very low levels, and usually SGS should similarly be sticky at their low yields but prices of the latter are more a function of risk aversion than pure liquidity in the interbank market. What the 10 year SGS is hinting is that market participants still have their hands on the poker table and haven't yet withdrawn their chips. When that actually happens we shold see 10 year yields fall very quickly in another fight to safety episode.
SIBOR is a reference rate based on the interest rates at which banks offer to lend unsecured funds to each other in the Singapore interbank market. As is apparent, there was immense volatility in this money rate during the Great Financial Crisis with crazy swings in borrowing costs as liquidity and trust was scarce amongst banks. Volatility was tamed down in 2009 and onwards and hit a patch of quiet in 2011. Since then we haven't seen too much of a flare. SIBOR is important to track because it is a good measure of interbank liquidity on the shortest term loans (unsecured overnight). SIBOR is still higher than its counterparts across the Pacific (LIBOR and EURIBOR) because of the absence of monetary accommodation by the MAS.
The 3-month interbank rate is the rate of interest charged on short term loans made between banks and tracks the more widely followed SIBOR. Both measures of the costs of borrowing are tied to the exchange rate band set by the MAS, although the central bank does not explicitly set a fixed rate like most other central banks do. Like many other central banks, the MAS slashed its reference rate post 2007 to reduce the risk of a liquidity crunch which might unnecessarily impair the financial health of local banks when they cannot borrow enough to meet daily obligations. Interestingly enough, the MAS has not raised this interest rate band from its historical lows, much like the federal reserve, Bank of Japan , and Bank of England et al haven't. So far there haven't been any adverse effects or unintended consequence of this loose monetary policy (like the debasement of a currency); this provides a safety net should there be rush to liquidity during a mass liquidation or default, since the MAS doesn't have to act to lower rates in reaction to that negative event. My feeling is that rates will remain low for a long time to come, which blesses borrows and is a curse to savers (negative real rates).
M1 is a measure of money that includes currency in circulation, traveler's checks, demand and other checking deposits. M2 includes savings and time deposits in addition to M1. M3 includes larger time and institutional deposits, cash-duration repos, and larger liquid assets in addition to M2 and is the broadest definition of money in Singapore.
As stated in the section on banks' balance sheets, the quantity of money in an economy commensurate to the development and the penetration of financial services of Singapore's economy is crucial. Money acts as a lubricant in the real economy and is the basis for transactions to occur. It encapsulates the gross size of our financial economy. A steady growth in both narrow and broad money over the medium to longer term is a healthy sign that the economy is functioning properly. We are seeing this in Singapore as M3 creeps to all time highs together with national output. What is not favorable would be a steep increase in the volume of money; that would mean there is monetary inflation that is grossly outpacing output growth and this eventually leads to currency debasement, even in a safe haven economy like Singapore is.
The current trend we are experiencing is a healthy one. Across all the money and financial metrics we have gone through, most are pointing green. I believe Singapore has bot found fiscal and monetary policies, and this is reflected on the ground as we've just seen: appropriate leverage, cheap but sustainable interbank credit, healthy trend in the expansion of money supply. The only slightly darker spot would be Singapore Forex reserves, because I cannot tell for sure why we saw a decline in 2014 and if it will continue (however unlikely).
In The Next Episode...
I shall continue from where I left off, and will translate whatever we've gathered in this piece into practical advice and determine how worried or not worried should you be.