Beyond the bottom
10 August 2001
The latest economic projections for Singapore show a significant lack of consensus on the direction of the Singapore economy, especially for next year.
The Econometric Studies Unit (ESU) of the National University of Singapore (NUS) is forecasting a 0.5 percent decline in the Singapore economy this year, but expects the economy to show positive growth from the first quarter of 2002. Growth for the whole of next year is expected to fall between 4 and 7.2 percent, depending on the extent of the recovery in global electronics demand.
The NUS predictions come close to that of their counterparts in the Nanyang Technological University. Late last month, economists from the NTU had predicted a 0.98 percent decline in the economy this year and 6.5 percent growth next year.
In its latest Asia-Pacific Economic Quarterly, Goldman Sachs predicts that Singapore's GDP will slip 0.3 per cent this year and recover to grow 2.4 percent in 2002. Next year's projection is significantly less optimistic than that of the two local universities.
Goldman Sachs says that the similarities between the 2001 and 1985 recessions look stronger than the differences. It suggests that the Singapore economy faces a deterioration in its terms of trade. Therefore, just as in the 1985 recession -- and contrary to the Singapore government's belief -- the current economic problem is a matter of competitiveness rather than a cyclical issue. This means that a lower exchange rate for the Singapore dollar would provide a fix.
However, there is an important difference in the current situation as compared to the 1980s. Back in the early 1980s, the government had artificially raised labour costs in Singapore through a series of wage adjustments between 1982 and 1984. So the government then had to take responsibility for the resulting loss of competitiveness. This time around, the loss of competitiveness has arisen mainly because of the rise of China as a competitor. Therefore, the government's response has been specifically directed at this threat.
In fact, the Singapore government has been encouraging a flexible, market-oriented system whereby each company and industry responds to its own particular economic circumstances. That seems to be the correct policy. Instead, in encouraging a lower exchange rate for the Singapore dollar, Goldman Sachs seems to be promoting a broad-brush type of economic policy, much like in the United States, where the main instrument of economic policy has been the Federal Reserve interest rate mechanism. But as a result of its single-track attack, the Federal Reserve has been relatively impotent in the face of a slowdown brought about by over-investment, which needs a more precise, or possibly a multi-faceted, economic policy.
In a similarly pessimistic vein, ING-Barings recently issued a report suggesting that Singapore faced lacklustre returns from local investments. It suggests that Singaporeans invest overseas to achieve higher rates of return on their investments to fund their retirement. It also states that the local economy is in the midst of a structural transition, with a shift in some operations overseas. This will lead to greater risks, including a weaker Singapore dollar and a depressed stock market.
ING-Barings warns especially of the threat from China's emergence as a competitor in the high-end electronics segment. China's lower costs are expected by ING-Barings to force competitive devaluations on regional currencies, including the Singapore dollar.
The premises on which ING-Barings bases its recommendations -- low returns on local investments, structural transition of the Singapore economy, and the emergence of China as a competitor -- are all valid and well-known. But there are nevertheless caveats to bear in mind when evaluating its investment recommendations.
First of all, precisely because many of these premises are already well known, they have probably been taken into account in the valuation of the local stock market. Indeed, the Singapore stock market is not much changed from its level in the early 1990s. In contrast, the US stock market has doubled (or more, depending on the measure used) over the same period.
Secondly, the low returns in Singapore are to a large extent the result of a large savings-investment gap, as noted by ING-Barings. This gap has led to low interest rates in Singapore. If this persists, local investors seeking higher returns than obtainable from their bank deposits would first turn to the local stock market, raising valuations. The net effect on valuations would be that low expected returns would tend to be offset by a low discount rate. For valuations to stay down, the discount rate -- and hence, interest rates -- must rise, which in turn means that the savings-investment gap must close. But that negates the basis for low returns in Singapore in the first place. The idea that an economy can have a persistently large savings-investment gap, low interest rates and relatively high market valuation at the same time is one that often confounds analysts because it is a phenomenon that is relatively unique to Singapore.
To be fair, ING-Barings does suggest that once local companies' overseas diversification strategies pay off, possibly some time in 2002 or early 2003, it might be worthwhile considering investing in them again. However, considering that the ING-Barings report is directed mainly at the investor aiming to fund his retirement, trying to time an investment strategy to within one or two years seems somewhat ambitious, especially when the Singapore stock market -- not to mention the Singapore dollar -- are already near multi-year lows.
Disclaimer: The commentaries posted here represent the opinions of the author at the time of posting and should not be taken as investment advice. Readers who wish to take any investment action based on information obtained from this site should seek appropriate advice from a qualified financial adviser.