Economic Affairs

Uncertain year looms for Singapore

Buoyed by nascent growth in the United States but brought down by a slowing Chinese economy, the Republic will have to ride the waves caused by turbulence in the world economy

Instead of a Capricorn effect, where stock markets enjoy a bounce at the start of the year, or a rousing pre-Chinese New Year rally, investors could well be in for one of those more terrifying white-knuckle rides.

Monday's drop in China's stock market, followed by those in Asia, Europe and around the world, sent a stiff warning to investors that they should not let down their guard.

The turmoil in the stock markets came amid news that Singapore's economy, on the basis of advance estimates, had turned in a creditable performance of 2.1 per cent last year, although lagging behind the 2.9 per cent seen in 2014.

Singapore's very open economy this year will have to ride the uncertain waves caused by the United States and Chinese economies.

There should be benefits from a US economy that is on the mend, but a slowing Chinese economy and a depreciating yuan which curbs domestic demand will muddy the waters.


The first rate hike in nearly a decade by the US Federal Reserve signalled that the world's largest economy has turned the corner, given a steady decline in unemployment numbers.

Singapore, which counts the US as one of its top trading partners, is likely to benefit. Growth means more demand for goods and services. Higher interest rates mean that the US currency will strengthen, making exports from Singapore to the US cheaper and therefore more attractive.

As for the negative impact of a rate hike, such as higher borrowing costs, the move has been widely anticipated for some time now and Singapore should be well able to weather the rise.

According to Bank of America Merrill Lynch (BOAML), some Asean countries, including Singapore, run a large current account surplus, benefit from lower oil prices and are less dependent on foreign capital.

Therefore, the currencies of these countries are less likely to weaken from outflows.

There has also been structural reform even during the boom years. In Singapore, measures taken by the Monetary Authority of Singapore on loan limits ensure that individuals and companies do not take up too much debt.

The effects of a US Fed rate hike after nearly a decade of easy money probably would have been manageable, given the long lead time.

But this comes as the rest of the global economy is slowing, at a time when the global economy is intertwined as never before.

While the US economy may be on the mend, cheap money remains the policymakers' tool of choice in the European Union as well as Japan, where growth is anaemic.

In China, which is now a much more important part of the global economy than previously, the Caixin Purchasing Managers' Index for last month was disappointing, making it the fifth straight month of contraction.

The Chinese stock market took the news badly but the sharp drop of around 7 per cent by the end of the day in the Shanghai Composite Index was also likely exacerbated by the newly implemented market circuit breaker, introduced after the stock market crash last year.

And as author Joe Zhang points out in the Financial Times, even after Monday's sharp fall, the Shanghai stock market index is more than 40 per cent higher than it was for two years before prices began to take off in late 2014.


But the Chinese economy and the weaker yuan is cause for concern for Singapore and the rest of the world which depends on it, ranging from Hong Kong and Taiwan to Brazil.

The yuan is likely to depreciate further as China makes a transition from a manufacturing economy to one more based on domestic consumption and services. The weaker yuan will have knock-on effects on all the economies.

A weaker yuan spells bad news for all the export-oriented economies, such as Singapore, Hong Kong and Taiwan, as their exports will be more expensive to Chinese buyers. Their exports may become more expensive vis-a-vis Chinese exports.

A slowing Chinese economy has ramifications all round the world from Brazil to Australia, which have seen demand for their commodities plunge sharply.

On the positive side, for Singapore companies, it is possible that the shift towards services consumption by China can benefit certain sectors here such as healthcare and financial services, says BOAML.


Even as the world grapples with China's slowdown, the US Fed rate hike has an impact on companies which have taken on higher levels of debt because interest rates were low.

In a recent report, the Monetary Authority of Singapore did caution that some commodity- and property-related firms that have significantly high levels of debt "could be vulnerable if interest rates rise or earnings weaken further".

As the Malaysian currency or Indonesian rupiah weakens - from the US Fed rate hike resulting in capital outflows - this could also hurt Singapore firms. For example, a firm that incurs costs in Singdollars but earns revenues in these weaker currencies would also see weaker corporate profits.

All this would contribute to negative sentiment and a reluctance among companies to expand.

Eventually, all this could also affect the quality of the loan assets of banks.

A slowing economy will mean retailers and companies putting the brakes on their expansion plans. OCBC analyst Andy Wong wrote in a recent report that "growing caution over the global economy has delayed decision-making over the renewal of leases and take-up of new space". He added that factors, including the expected increase in supply, will continue to make this a tenants' market, with landlords having to be more flexible in their rental negotiations.

For investors in real estate investment trusts or Reits, if rents fall, then Reits will have less to pay out and distributions could shrink. With many retirees relying on Reit payouts as part of their retirement income, the risk is that they may have to redo their sums.

While the US economy's performance will provide a lift, the question is whether it would be sufficient to outweigh the dampening impact of China's slowing economy. Throw in weak oil prices, consumers turning cautious, and the picture isn't pretty.

The linkages between economies around the world are nowadays too close for any one country to be untouched.

What many analysts have stressed is that investors and companies will have to brace themselves for volatility, from stock markets, from currencies and from commodities.

With the lack of a major growth driver that could provide a fillip, 2016 can only best be described as a challenging year.

A version of this article appeared in the print edition of The Straits Times on January 06, 2016, with the headline 'Uncertain year looms for Singapore'. Print Edition | Subscribe