MONTREAL - Hopes that surging share prices in Singapore over the past three
months point to an early recovery may be short-lived. A decline in exports, the
city's life-blood, is picking up pace even after 13 months of falls, and stock
declines this week may herald a longer pull back.
Singapore's gross domestic product (GDP) fell 10.1% in the first quarter this
year from the same period in 2008. This represents a decline of 14.6%
quarter-on-quarter following a 16.4% fall in the fourth quarter of 2008. All
sectors experienced further quarter-on-quarter declines, with the exception of
construction and financial services. The broad weakness was especially marked
in electronics, biomedical manufacturing, precision engineering, chemicals and
manufacturing.
Exports have fallen for 13 months straight and, at least for the
time being, the decline in exports is accelerating: down 19% in April from the
year previous after a 17% year-on-year decline in March. Singapore's
exports-to-GDP ratio is over 1.8, meaning that capital expenditure cannot be
expected to recover significantly anytime soon either. This notwithstanding,
the country's Purchasing Managers' Index climbed to a nine-month high in May,
just above the 50 level, meaning that manufacturing is expanding, despite
earlier expectations that manufacturing output would contract throughout 2009.
While there is some month-on-month improvement, however, levels remain far
below the equivalent period from 2008. Increased unemployment throughout 2009,
resulting from decreased global demand, will mean that domestic consumption
will also lead to further production declines in goods intended for domestic
consumption.
The corporate sector will therefore continue to be under enormous stress while
access to credit will remain tight as well. Small and medium enterprises are
faring marginally better than the large corporations thanks to relaxation of
conditions of their access to credit under the stimulus package adopted earlier
this year.
Despite the improvement, therefore, the country's national bank maintains its
forecast of a 9% decline in GDP during 2009, around which level the consensus
forecasts also falls. This follows a deceleration to 1.1% growth in 2008 after
a 7.7% rate in 2007. Insofar as recent growth had been led by the banking
sector and by exports, the country's central bank projects a slow recovery
dependent on the recovery of export markets.
According to many observers, all this means that no meaningful economic
recovery will come in Singapore by at least the end of 2009. Citigroup, for
example, expects GDP to recover to pre-recession levels only by the end of
2010. Given the continuing weakness in the economic systems of developed
industrial countries (negative economic growth, still fragile financial and
banking institutions, rising unemployment, restrained consumer spending), it is
surprising that such analysts are so relatively optimistic.
The journalistic commentary has lately begun, in order to avoid discussing the
"L" shaped depression (or worse), to adumbrate a "W" shaped recovery now that
the "V" won't happen and the "U" seems unlikely. The "green shoots" theme
recently in vogue has passed out of currency, and while the US situation
ameliorated slightly before showing its continued further weakness, neither
Japan nor Europe has shown even the slightest improvement.
The consensus inflation forecast for 2009 is slightly negative (about 1%), with
deflationary pressures greater than inflationary ones due to the falling
currency abetted by foreign exchange and monetary intervention by the central
bank. Countervailing, inflationary pressures are likely to come from such
sources as increased transportation prices for imports due to such factors as
the recent rise in the price of oil.
Meanwhile, PetroChina has bid US$2.2 billion to buy half a refinery in
Singapore, as part of a long-standing Chinese strategy for its parastatal
companies to become more influential in global energy markets. Since most of
Asia's oil prices are determined in the Singapore trading hub, the move
provides not only a significant source of supply but also a still greater
presence where the markets are made.
PetroChina has doubled its fuel trading volumes in Singapore over the past four
years, participating more and more deeply in the price-setting mechanism
itself. In the end, this will especially increase its leverage on spot prices
in Singapore. According to Reuters, it will also give PetroChina a more equal
ground with Sinopec in matters of trading expertise and market influence as
well as a more dispersed economic geography of refining.
The country's equity market benchmark Straits Times Index (STI), which closed
as low as 1,457 on March 9, has risen over 60% from that level to the high
2,300s in less than three months, is now set to retrace some of those gains,
perhaps back as low as the low 2,100s. Indeed, the Singapore market has already
begun this process in the past two days.
Generalized risk aversion in world equity markets has also hurt Singapore's
stock markets as capital outflows have increased, raising long-term pressure on
the Singapore dollar. This comes as Asian markets in general also prepare for a
generalized correction of their recent run-up.
Dr Robert M Cutler (http://www.robertcutler.org), educated at the
Massachusetts Institute of Technology and The University of Michigan, has
researched and taught at universities in the United States, Canada, France,
Switzerland, and Russia. Now senior research fellow in the Institute of
European, Russian and Eurasian Studies, Carleton University, Canada, he also
consults privately in a variety of fields.
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