SINGAPORE – If there were any lingering questions about Singapore’s standing
among the world’s global institutional investors, the city state’s recent moves
to take multi-billion dollar strategic stakes in top-notch Western banks and
companies hit by subprime mortgage problems has put those doubts to rest.
Last month, Singapore’s state-run Government Investment Corporation (GIC)
divvied up US$9.5 billion to purchase convertible notes in troubled Swiss
investment bank UBS. Depending on the
notes' final conversion price, the transaction is expected to give GIC a 9%
stake in the bank, making it UBS’s largest shareholder.
Days later, state investment vehicle Temasek Holdings paid US$5 billion for a
9.4% stake in Merrill Lynch, a US investment bank that like UBS has been
particularly hard hit by subprime-related problems. And earlier this week GIC
took a 3% stake in British Land, a commercial property outfit that has recently
seen its shares drastically dip in value.
The investment spree underlines Singapore’s emergence as a major global
financial force. The financial and business services industries through the
first three quarters of 2007 increased revenues 27.8% and 18.3% respectively
year on year, reflecting Singapore's efforts in recent years to promoted itself
as a regional financial services center, with private wealth management an area
of particular emphasis.
Over the past decade, Singapore has vigorously deregulated and restructured its
financial markets. Over 700 global financial institutions are now represented
in Singapore, and with that capacity in place, the city state is beginning to
develop some unique industry strengths. It is now the world's fourth-largest
foreign exchange trading hub, after London, New York and Tokyo, with a daily
trading volume of US$167 billion. It is also the world’s fifth-largest
derivatives trading center.
GIC's and Temasek’s recent purchases of stakes in UBS and Merrill Lynch appear
to be part of this broad strategy. Both state-led investment vehicles have said
these are long term investments made for their returns, and that they would
remain as passive investors despite their substantial share-holdings.
True or false, what they more readily signify is a growing trust between the
Singapore government and major Western financial institutions, many of which
have long-used Singapore as a base for their Asian operations, and come despite
some critics allegations that the city-state launders a large portion of the
region’s dirty money.
Picking winners
The government investment spree also puts a global spotlight on the growing
influence of the region’s sovereign wealth funds and to some casts in a new
salutary light Singapore’s state-led economic development model, which came
under fire from some market fundamentalists at the height of the 1997-98 Asian
financial crisis.
Ten years on, Singapore’s more diversified economy is fast-filling government
coffers and outward investment vehicles, putting the island state on a stronger
financial footing than many developed Western countries. In many ways,
Singapore’s developed economy continues to defy economic and financial logic,
with gross domestic product (GDP) expanding 7.5% last year, despite a 3%
year-on-year contraction in the fourth quarter.
The island state has long served as a shipping and aviation hub, a strength it
has maintained in recent years amid increasing competition Malaysia and
Thailand. At the same time, a concerted government effort to broaden the
economy’s base into more services is now arguably beginning to pay fast growth
dividends.
In the early 1990s, Singapore’s political leaders realized that the
trade-geared country could not indefinitely rely on the production and export
of low-end electronics for its prosperity. The dotcom bust of 2001 pushed the
state-led process of structural reform into higher gear, including
diversification into more value-added industries and services and a strategic
redirection of trade and investment flows towards developing Asian markets.
Nowadays the make-up of Singapore’s 2007's economic pie shows a significant
diversification away from low-end manufacturing towards more value-added
production. This isn’t overtly obvious glancing at the gross economic split
between manufacturing and services - manufacturing has generally remained
steady at about 25% of GDP - but comes into closer view when looking at the
clusters within broad industrial sectors.
In 1996, for example, electronics contributed 50% of Singapore’s total
manufacturing output; 10 years later, in 2006, it made up only 32%, even though
in dollar terms the industry grew by around 24% over the period. Similarly,
refined petroleum products increased by over three times in US dollar value
over the 10 years. Where these products constituted 11.4% of manufacturing
output in 1996, they made up 19.6% in 2006 and refining activities have allowed
Singapore to profit from rocketing global fuel prices.
Chemicals, which made up only 4.7% of manufacturing output in 1996, contributed
12.5% 10 years later, a sector that grew nearly 400% in US dollar terms over
the decade. Just as dramatic has been the growth in pharmaceuticals, which in
1996 contributed a mere 1.4% of GDP, but by 2006 was up to 9.1% and represented
the country’s third-largest industry cluster.
Singapore’s comparatively strong intellectual property rights protection regime
has lured top-flight multinational manufacturers, many of which are wary of
locating state-of-the-art production facilities in the region’s cheaper but
uncertain legal environments.
Supporting these industries is a massive state-led investment in bioscience
research and development, including groundbreaking stem cell research
initiatives. A science park in the Buona Vista suburb is going up and top
scientists from around the world are being recruited to fill the labs. There
are also nascent efforts underway to move into hard science industries such as
marine and aerospace engineering.
Related to the recent boom in financial and business services is the steady
influx of foreign talent into the city-state, where total population grew 4.4%
from June 2006 to June 2007 with the increase from immigration twice as fast as
population growth among citizens and permanent residents. That helped to send
rents and property prices soaring to record levels and sparked a construction
boom, with building activity through the third quarter of 2007 up 15% in
Singapore dollar terms compared with the same period in 2006.
Downside risks
Despite such robust growth and certain analysts’ assertions that Singapore
represents a counter-cyclical safe haven to financial problems in the US, there
are still significant risks ahead. Most notably, the Singapore economy
contracted 3% in the fourth quarter of last year, coinciding with, though not
necessarily causally related to, slack US demand for the island state’s
exports.
Although only 9.9% of Singapore's 2006 exports went directly to the US, many of
Singapore's other trading partners, including mainland China (9.7% of
Singapore's exports) and Hong Kong (10.0%) are also dependent on the American
consumer for their revenues.
Another potential source of turbulence is inflation, which hit a 25-year high
of 4.2% in November 2007 compared with November 2006 and is forecast to stay
within a 4% – 5% range for at least the first half of 2008. The central bank
has warned that prices this year could rise at twice the 2007 rate and
inflationary pressures are already causing consumer and producer grumbles.
As a trade-geared, open economy, much of Singapore's inflation is imported
through rising global food and fuel costs. But local factors, including housing
and building material scarcities, have contributed significantly and could
adversely impact on growth in 2008. Local prices rises were also exacerbated by
a 2-percentage point increase in the goods and services tax in July last year.
There is also a risk of wages being pushed up in the context of inflationary
expectations and a tight employment market - the unemployment rate hit a
10-year low of 1.7% at year-end 2007. Responding to the expected inflationary
pressures, the central bank announced recently that it would allow the
Singapore dollar, whose value is normally determined by a managed float, to
appreciate at a slightly faster rate this year. Financial analysts predict that
the Singapore dollar will trade at around S$1.38, up from the S$1.43 it hit at
the end of 2007.
Prime Minister Lee Hsien Loong identified in his New Year’s speech three
priority areas this year for government investment: education, transport and
healthcare. All three sectors are crucial to maintaining economic
competitiveness. The aim now is for every child to get post-secondary
education, while Lee has committed his government to build more rail lines and
improving the public transport system. He has also signaled an overhaul of the
healthcare system this year, to help the city, with its aging population, ease
waiting times.
While most Singaporeans remain guardedly optimistic about the island state’s
economic prospects, with a softening US economy the population is as always
gripped by a sense of urgency.
Even with the recent economic gains and strategic foreign investments,
Singapore will likely need to reinvent itself once again as the global economy
reconfigures with a weakening US dollar, as China climbs ever higher up the
value-added chain and new technologies come to the fore. Whether or not
government planners can keep pace with the next phase of global economic change
represents the next big test for Singapore’s state-led economy.
Alex Au is an independent social and political commentator, freelance
writer and blogger based in Singapore. He often speaks at public forums on
politics, culture and gay issues.
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