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Assessment of Singapore’s Economic Outlook

Table of Contents

1.0      Introduction. 3

2.0      Assessing Singapore’s Economic Environment 4

2.1      Suitability for investing in bonds, stocks, and other financial instruments. 4

2.2      Real estate investment in Singapore. 5

2.3      Direct investment 6

3.0      Assessment of Economic Indicators in Singapore. 7

3.1      Singapore’s GDP Growth. 7

3.2      Singapore’s GDP per capita. 9

3.3      Unemployment rate. 10

3.4      Public Debt 11

3.5      Volatility of bank’s net interest rate. 12

3.6      Volatility of inflation rate. 13

3.7      Exchange rate volatility. 13

3.8      Government’s fiscal policies and monetary policies. 14

4.0      Conclusion. 15

References. 16

Assessment of Singapore’s Economic Outlook

Introduction

The economic outlook of Singapore has greatly improved since the 1960s. For the past five decades, the country has registered rapid and stable economic growth, enabling it to report extraordinary improvements in political, technological, environment, legal, and social welfare. The island country emerged from British domination in 1963 after which it experienced a lot of problems including massive unemployment, poor living conditions, and civil strife caused by neighboring countries namely Indonesia and Malaysia (Bhaskaran, 2020). The country lacked proper infrastructure, natural resources, water supply, and sanitation. With the help of far sighted economic advisors, the government opted to attract foreign investors by easing its foreign direct investment policies. This strategy created an export-oriented market. The government further supported the establishment of a strong service sector focused on expatriation of financial and banking services. The government further established strong state enterprises to monopolize the provision of public services such as water, telecommunication, electricity, gas, and port facilities. Over the years, it established a reliable public transport system and housing for its citizens as well as improving healthcare services. Compared to the country’s gross domestic product (GDP) per capita of $320 in the 1960s, Singapore had a GDP per capita of $60,000 by 2019. This figure makes the country one of the strongest economies globally.

By embracing free market capitalism pragmatic policies, education, and globalization, Singapore now stands as one of the most favorable destinations for foreign direct investors. Investors prefer Singapore because of its high labor productivity. For instance, the country’s population of 3 million produces a national GDP of $300 billion which is three quarters of the world’s GDP. It is ranked as the best places to live. In spite of the sustained development, there is the question of whether Singapore has reached its optimal growth and if it will continue to grow over the next five years. Santhi, (2020) explains that the future of Singapore’s economy faces significant challenges in the coming years. This includes demographic challenges due to ageing population, disruptions from new technologies and business models, changing dynamics of international trade and competitiveness, economic nationalism, global health crisis (COVID-19), and rising costs of operations in the domestic market. Guided by the exposition of Singapore’s history, this report assesses the country’s economic outlook in the coming five years.  To achieve this goal, the paper is divided into two main sections consisting; assessment of economic environment and evaluation of economic indicators.

Assessing Singapore’s Economic Environment

Suitability for investing in bonds, stocks, and other financial instruments

Financial instruments and derivatives involve trading stocks, bonds, commodities, currencies, and interest rates. Both the instruments and derivatives enable investors to optimize their returns on investment by exploring the changes and transformations in prices of assets. According to Bhaskaran (2020) bonds, stocks, and currencies are the most preferred investments among international and local investors in Singapore. The most profitable industries to trade in these instruments include the machinery, electronic manufacturing, tourism, and financial services. The investments are supposed to earn dividends or other any other form of capital gain for the investors. According to Trading Economics (2020), financial investments have been lucrative, however, the impact of COVID-19 has led to low investments in these sectors. The restrictions introduced across the globe and in Singapore have limited the performance of businesses thus lowering the yields from the stocks and bond markets. In addition, there is high level of uncertainty which discourages people from investing in these sectors.

Figure 1: Performance of Bonds and Stock Markets in Singapore (FRED, 2020)

Real estate investment in Singapore

Since 2019, the performance of the real estate industry in Singapore has been slowing down. The market is currently saturated and given that the government provides housing for its citizen, most of the real estate investments target commercial enterprises. As a result of the slow growth, the market has been unattractive even before the COVID-19 pandemic. The health crisis has slowed demand for commercial and residential properties thus discouraging investments in the sector. These sentiments are seconded by the residential property index generated by Urban Redevelopment Authority (URA) which notes that unlike 2018 when investments in real estate registered a 7.86% growth, it dropped in 2019 to 2.67% growth. The trend has continued to spiral downwards in 2020 because of the low demand as people close businesses and embrace work from home arrangements. Surprisingly, Delmendo (2020) reports that 29.4% of investors in commercial real estate are shifting to residential real estate. The shift is blamed partially on the slowing trade between Singapore and China which is reliant on China’s Belt and Road Initiative (Liu, Fan & Lim, 2020). The trade war between China and USA has greatly hampered the free flow of goods and services thus lowering productivity in Singapore’s commercial space. Because of the trade war, Singapore reported a 0.9% economic growth in 2019 (Huang, 2020). The slow growth translates to low demand for commercial real estate properties. Factoring the onset of COVID-19 and its negative impact on the economy, this industry is likely to perform poorly or stagnate for the coming five years. Other factors that will discourage investments in real estate include exorbitant costs resulting from high income taxes on real estate as well as strict policies on purchase of residential land.

Direct investment

Singapore has extensively invested in its human capital development and infrastructure. These two factors, together with foreign direct investment policies influence decisions by investors to set up subsidiaries and production bases in a country (Bhaskaran, 2020). These factors are particularly important to firms seeking a favorable country to set up subsidiaries for service and manufacturing activities. A report by the World Bank Human Capital Index noted that Singapore has the best practices in developing human capital. The country extensively invests in training of its citizens and provision of health coverage that enhances their productive life. In return, the country has 88% productive workforce and the most productive labor force in the world. Singapore’s growth is attributed to its favorable policies that attracts foreign investors.

Some of the incentives for setting up subsidiaries and production centers in Singapore include tax holidays, tax havens, and a promise for continuous training and education of the workforce. The training is done under the Skills Future Initiative which is a government run program to increase the knowledge and skills of the workforce. The government equally spends on activities that attract foreign investors. The budgetary allocation for attracting foreign investments is set to increase by $1 billion each year (Lee, 2020). Apart from these incentives, the government provides reliable information and communication infrastructure, finance and insurance services, health and precision engineering/ electronics to promote productivity of all firms (Lee, 2020). These factors have made Singapore attractive to investors since 1965. As much as the government is visionary, COVID-19 is threatening its continued funding of foreign investment initiatives as there are other emerging issues to prioritize in its national budget.

Assessment of Economic Indicators in Singapore

Some of the vital economic performance indicators include interest rates, inflation rate, monetary policies, fiscal policies, public debt levels, and GDP growth per capita.

Singapore’s GDP Growth

As manifested in figure 2 below, Singapore has consistently achieved a growth in GDP except for some few instances of decline. The most significant dips in the growth curve were noted at around 2000, 2008, and 2015. Most the dips are associated with unfavorable global economic environment caused by global financial crisis (Lee, 2020). In spite of these negative events, Singapore has continued to expand and grow its GDP. According to data by IMF (2020), Singapore reached its peak GDP growth in 2018. The growth slowed in 2019 and it is expected to slow further in 2020 due to the US-China trade war and COVID-19. It is certain that the adverse impacts of the economic downturn will take time to correct. This might take almost five years, thus dampening any hopes that Singapore will have a bright economic outlook.

Figure 2: Singapore GDP Growth (FRED, 2020)

Figure 3 below acknowledges that before COVID-19, the government of Singapore had planned to invest in economic growth. The government envisioned moving growing from a $372 billion economy to a $425 billion economy between 2019 and 2022. The pandemic has reduced the GDP for 2020 to $358 billion (Trading Economics, 2020). This trend undermines the government’s ability to achieve ambitious economic growth targets. The negative trend is as evident in figure 3 is an indicator of poor economic outlook in the coming 5 years.

Figure 3: Singapore’s GDP until 2020 (Trading Economics, 2020)

Singapore’s GDP per capita

GDP per capita measures a different economic outcome compared to GDP growth. For instance, whereas GDP growth is an indicator of economic growth and development, GDP per capita illustrates the average amount of capital help by each citizen. Both GDP growth curves and GDP per capita can be represented on a ling graph as shown in figure 2 and figure 4. The growth in GDP per capita in Singapore increased similarly to the GDP growth. The years with significant drop in GDP per capita range from 1995 to 2000, 2008 to 2010, and 2015. Figure 4 further evidences that Singapore had the highest per capita GDP in 2018 which was computed at $66,189. It dropped to $65,233 in 2019 and expected to drop speedily in 2020 because of the unfavorable business environment globally. A combination of these factors reduces the optimistic view initially attached to Singapore’s economy.

Figure 4: GDP per Capita (FRED, 2020)

Unemployment rate

The rate of unemployment in Singapore is depicted in figure 5. The graphical summary shows that the country reported a relatively stable unemployment rate of 9% from 2010 until 2019. During this period, there was insignificant changes in the percentage of people without active employment opportunities. A critical look at the curve shows that Singapore had the highest unemployment rate in 2009 which can be attributed to the 2008-2009 Global Economic Recession. Given reports by Lee (2020) alluding to a recession caused by the disruptive impact of COVID-19 on financial markets, it is certain that the unemployment rate will increase. This trend implies that more people will be unproductive which impacts the overall productivity of the economy and the GDP per capita. The increased rate of unemployment will slow down economic growth for at least three years resulting to a poor economic outlook.

Figure 5: Unemployment Rate (FRED, 2020)

Public Debt

Singapore has an interesting public debt curve. Figure 6 presents a detailed graphical representation of the country’s public debt trend. World Development Indicators data from the World Bank, as published by FRED (2020) shows that as of 2016 Singapore had reaches the highest level of borrowing estimated at 109% of its GDP. Özyeşil (2020) notes that the public debt in Singapore has averaged 92% since 1993. It reached its peak of 126% of GDP in 2019. With the pandemic continuously reducing revenues while forcing the government to invest in fiscal and monetary policy reforms, it is expected that the country might increase its debt ratio to GDP further. The outcome will increase the tax burden thus subjecting Singapore to higher interest debts which are more expensive. Most of the government revenue will be allocated to paying public debts than supporting economic stimulation and growth.

Figure 6: Singapore’s Public Debt Levels (FRED, 2020)

Volatility of bank’s net interest rate

As shown in figure 7 below, Singapore’s interest rate has been rising since 2017. It is possible that the interest rate will continue to rise into 2020 and in the coming five years (FRED, 2020). A high interest rate is undesirable since it increases the cost of borrowing money from banks. Reduced borrowing translates to reduced investments which slows economic growth.

Figure 7: Interest Rates (FRED, 2020)

Volatility of inflation rate

Figure 8 summarizes the inflation rate for Singapore over the past years. The inflation rate has been unstable and shaky over the past years. However, it has been relatively stable between 2017 and 2019. According to FRED (2020), during this period, the inflation rate moved from 0.6% to 0.4% then 0.6% in fiscal 2019. The most favorable rate of inflation should be maintained at 1%. In the case of Singapore, a figure slightly below or 1% is favorable. However, the current events around the world and in Singapore could lead to interest rates more than 1%. Such rates are unfavorable as it makes basic goods unaffordable.

Figure 8: Inflation Rate in Singapore (FRED, 2020)

Exchange rate volatility

The figure below assesses Singapore’s exchange rate since the last quarter of 2019 up to date. The data shows that just when the exchange rate was picking in Mid-March, changes in the external environment led to a sudden and sustained drop in exchange rate. This is the same time that COVID-19 was declared a public health concern globally by the World Health Organization (WHO). The public health measures introduced during this period discouraged investors and traders which affected trading activities and subsequently, lowering exchange rates (Leow, 2020). Dysfunctional stock markets will continue affecting Singapore for the coming two to three years which will translate to a poor economic outlook.

Figure 9: Spot Exchange Rate (Trading Economics, 2020)

Government’s fiscal policies and monetary policies

As much as the government of Singapore has been proactive in setting policies that stimulate economic growth, the COVID-19 pandemic came as a surprise thus disrupting its current economic plans and goals. In response to COVID-19, the government through the Monetary Authority of Singapore (MAS) was forced to ease both fiscal and monetary policies (Leow, 2020). Part of the monetary policies included abandoning its initial targets seeking currency appreciation. Instead, it targeted an annual appreciation rate of zero percent. The intention of this policy change was to realize a medium-term stability in prices of goods and services. These measures have compromised the targeted economic growth rate by the government.  Apart from easing monetary policies, the government was forced to inject more than $100 billion in response to the health crisis in the country (IMF, 2020). This includes making cash payments to low income households and to the unemployed persons. Businesses have been offered subsidies to promote recovery post-COVID (Tan et al., 2020). Most of the funding has been allocated to sensitive sectors such as construction, tourism, and aviation which continue to report losses.

Conclusion

This report, presented into two parts assesses the economic environment in Singapore and evaluates the future economic outlook of the country based on a number of economic indicators. In the first section, the paper notes that the bonds and stocks markets have been affected by the COVID-19 health crisis. Investors have fled the markets which has led to low returns on stocks and bonds and other financial instruments. The real estate industry is under strain because of the reduced demand for commercial properties in the major cities. The rate of direct investments has equally dropped in spite of the governments input in attracting foreign and local investors. Considering the economic indicators, the GDP growth has stagnated and dropped in 2020. The GDP per capita is expected to plunge as the pandemic continues to cause mass unemployment in Singapore. The country might be forced to depending on a deficit budget to finance its growing expenditure as the government tries to cushion key sectors against collapse. The interest rate is expected to increase which might trigger higher inflation rates. The exchange rate has plummeted in 2020. The government has reacted to these unfavorable events by altering its monetary and fiscal policies. This assessment of Singapore shows that the country will have a poor economic outlook in the coming five years.

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