The Monday Edition- Singapore a) Govt.’s Public Policies & Investments, b) Economy, c) Main Risks.

By Yaser Anwar, CSC of Equity Investment Ideas

This week I talk about Singapore’s: a) Govt.’s Policies & Investments (pro-business growth), b) Economy (6-year unemployment low, bankruptcies falling and growth drivers) and c) Main Risks (severe slowdown in US IT imports).

• Singapore, Asia’s second richest country after Japan with a GDP per capita of about $27K, has witnessed stellar performance in it’s equity capital markets thanks to robust economic growth (7.9% in 06 and 5-6.5% expected in 07). The reason(s): Singapore’s pro-business growth stance through tax cuts and infrastructure investments. We’re seeing a significant shift in government policies which will result in further economic development.
• A corporate tax rate of 18% closes the gap with Hong Kong and will lift foreign investment (Corporate tax rate: 24.5% in 02 to 18% 07-08). While Consumers may be hit by the 2% GST hike, the government has hinted that personal tax rates could be cut further in the future to maintain competitiveness and attract foreign talent (Personal tax rates: 26% in 02 to 20% in 07-08).
• Recently, Singapore’s unemployment rate, 2.7%, fell to a six-year low in the first quarter (strong growth especially in construction, up 7%). The government allocated US$ 264 million to ‘The Workfare Income Supplement plan’ and plans to allocate about US$ 5.5 bn in total to strengthen the social security system.
• Furthermore, the government is focused on higher-education, R&D spending alongside Housing & Development Board upgrading. The government has made the workfare plan permanent, acknowledging the need for more automatic help for the lower-income group. The measures have paid of as the latest numbers indicating new bankruptcies have dropped for the second month in a row to 6.4% YoY basis.
  
• The government unveiled aggressive infrastructure investment and development expenditure plans (expected to increase by 16.5% in 07 following two consecutive years of cuts). To enhance the living environment and cater to a larger long-term population target, 6.5 vs. 5 million previously, the government will spend a total of US$ 13.17 bn over the next 10 years to enhance its land transport infrastructure.
• Besides Electronic exports, growth drivers are: Real Estate, Oil Rigs (Singapore is home to the world’s number one and two oil-rig builders, whose business has boomed as rising oil prices led oil firms to boost exploration efforts. The two together have over US$ 10 bn worth of orders) Transport and Financial services, have cushioned the impact and reduced its vulnerability to the tech cycle.
• So far the Monetary Authority of Singapore is maintaining its Singapore dollar policy stance but intervening heavily to stem the Singapore dollar’s strength on the back of strong capital inflows. The government is raising civil service pay to reduce staff turnover and retain talent.
• The MAS issued a warning pertaining to deferred payment schemes, which may increase risks to property developers and banks. The Singapore yield curve could further flatten as more investors accept the reality of a structural down shift in the interest rate environment and renewed flattening bias in the US curve.
• In the most recent Economic Development Board (EDB) survey: Electronics firms (Singapore’s main export) were the most upbeat with a net weighted 38% expressing confidence the business environment will be better on expectations of a pick-up in demand.
• A net weighted 22% of firms in the services sector project better business conditions in the six months to September, up from the 18% recorded in the last poll, which was for the period January-June 07.
• Singapore’s property sector is undergoing a boom, fueled by demand from wealthy foreigners and high-income professionals for luxury units. The property sector was the most upbeat in the services industry, with a net weighted balance of 61% confident business will get better.

Main risks

• a) Since a good portion of Singapore’s exports are electronics/IT, a severe slowdown in US could hurt the economy. b) So far MAS has kept an accommodative policy towards interest rates, but an excessive tightening or rhetoric could result in an extreme pull back given the run of the stock market.

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