Wednesday, October 7, 2015

Singapore Economy -- Looking Ahead

Singapore economic model in layman description is like a football team with speedie wingers, creative playmakers and lethal strikers (export, tourism, manufacturing, GLCs, etc).  Upon weak opponent (good economic condition), can easily bang in dozen of goals to make the scoreline very impressive but when matches up against a tough opponent (bad economic condition), we can't score goals and our midfield and defense (SMEs, agriculture, construction & retails sectors, etc) either missing or too weak that allow opponent to over run easily leaving us with the goalie (national reserve) as the last line of defense to save us for the day.

 That is how I see in Singapore economy since 2010.  Remember in 2010 when Singapore economy rebounded from the 2008 global financial crisis and recorded an almost +15% GDP growth, I was perhaps the only one didn't cheer or feel happy about it.  Instead, doubts starting to surface about the effectiveness of the Singapore economic model to cater for the fundamental shift in the global economy (4th para).  There were also doubts that the Singapore Government is running out of ideas to grow the economy.  Till now, none of the economic data have negated my views unfortunately.  The very 2 questionable policies during these periods (the population white papers and raise in productivity) yet again failed to convince me that my views was incorrect.  Singapore economy is already one foot into technical recession, what happens to the raise the productivity policy ?

Now, election is over and the ruling party returned to power with a new cabinet of ministers.  There are 2 events which worth highlights, that is the forming of Coordinating Minister for Economic and Social Policies which is chaired by DPM Tharman (highlighting local SMEs to be at the heart of economy as Singapore restructures) and the committee on "The Future Economy" chaired by the newly appointed Finance Minister, Heng Swee Keat ("The global economic and financial situation is changing very rapidly, and in Singapore we are also restructuring our economy.", speaking at a dialogue session with entrepreneurs)

Those 2 events were not even mentioned before and during the 11th September 2015 General Election and instead the manifesto by the ruling party then was still on raising productivity to boost economic growth.  Now, if my football description of the Singapore economic model is inappropriate then why do we need these 2 events now ?  It is rather strange, puzzling and alarming that an average Joe like me can spotted the weakness in Singapore economy in 2010 and yet it took the Government filled with so many "elite" to realize and starting to take action 5 years later. 

Since the weaknesses have been spotted but don't get overly excited yet as still too early to count the chickens before they are hatched.  Identifying the weakness is only 25% job done.  Coming out policies to address those is another 25% job done.  The remaining 50% is on the quality of the Government and policies.  We are just at the 25% mark only.  Basically, policies can be classified into 3 categories.

1. Kicking the can down the road
2. Limited life span
3. Long term 

Kicking the can down the road
As the name suggested, the policies don't really resolve the weakness.   Measures often 3rd rated just pop up to temporary address the problems and the underlying issues still remain largely unresolved.  3rd rated policies still can produce acceptable result with a strong grid of all the resources like what the Singapore Government is having now.  This type of policy is like an impulse response which produces the result but when faced with strong headwinds it will loose its effectiveness.

Limited life span
This category is definitely better than the first but the draw back is its effectiveness only lasted a fixed number of years.  After effective life span, flaws and cracks started to surface.  Either the existing problem still remain or new problem surfaces.  As such, every constant period of times new policies will be needed.  This is very similar to the term cyclical.  The underlying issue might or might not be totally resolved in the long run.

Long term
This no doubt is the optimal policy that should be the way.  The policy might not produce the best output (giving a high GDP growth) instead a slower or moderate economy growth is registered but the strengthen lied in its quality, resistance to strong headwinds and sustainable in the long run.  In this case, the underlying issue is often fully resolved in the long run.

Now look at the 2 policies (population white paper and raise in productivity) and carefully analyze their respective pros and cons.  Question yourself which of the 3 categories they belong to ?

Economy and investing is strongly connected without a doubt.  Knowing the strengthen and weakness of Singapore economy will eventually allow one to sniff out good investing opportunities.  This is the main reason why the recent 2 events are worth monitored closely.  Watch out for those policies being rolled out to address the weakness in Singapore economic model, analyze which categories they will fall into and that will give an idea of how to invest for the future.

Should the policies belong to the "Kicking the can down the road" category, there isn't much to look forward to in investing as the underlying issues still largely remain unresolved.  The impulsive response might be tempting but when things settle down, all are back to square one.

The "Limited life span" category type of policies can offer a slight opportunity IF AND ONLY IF entry and exit are perfectly timed.  Alternatively, investing only in quality companies with a record of sustainable dividend policy could still be working as in the long run, the dividend collected should contribute significantly to the investment return.

The best scenario obviously is when the policies belong to the "Long term" category.  With the underlying issues resolve, companies will have little resistance in moving along the growth trajectory and isn't that what investment is about ?

Among the weaknesses in the Singapore economy, 2 of them should be urgently needed to resolve, namely, Small and Medium-sized Enterprises (SMEs) and Retail Sector.

Small and Medium-sized Enterprises (SMEs)
SMEs should be the backbone of Singapore business activity but majority of Singapore workforce is in civil sector and Government-linked Corporations (GLCs).  That is not a good sign for the nation economy in the long run.  One might argue the situation with SMEs now is much better than 20 years ago but those improvements are merely playing catch up, local SMEs still very much underdeveloped and a lot needed to be done to help the SMEs keeping pace with the present fast changing economy.  The latest measure in helping SMEs to raise productivity through automation due to tightening of importing cheap labors have yet to bear any fruits.  Like the effort to boost fertility rate when the baby bonus scheme is never the answer to it, raising productivity is not all about using automation, working long hours or having larger pool of workforce.  The heart, the sense of belonging and the pride to work in a SME is the correct resolution to raise the productivity.  A large part of the factor that contribute to the weakness in SME which the Government failed to realize is the existing education system.  Singapore is renowned being a paper qualification society.  Emphasis is being placed on getting that paper qualification in order to succeed in life.  Instead of having an education system which encourages the people to equip with the knowledge to be an entrepreneur, the system is seen by many as a stepping stone to be top civil servant or minister or future leader.  At the age of 12, students are already been screened off to either the "elite" or "non-elite" track.  On the "elite" track, graduating with all the As, getting a scholarship, entering the civil sector, rising to the rank to become either a high earner top civil servant or million dollar salary minster is deemed to be very successful in life.  On the other hand, working your bloods and sweats out to be an entrepreneur when success is not assured is never deem attractive in this society.  Who has the motivation to venture into entrepreneurship then ? With this, how can the SMEs flourish in Singapore ?  Another concern is the excessive MNCs and GLCs that suffocate the development of the SMEs.  From investment perspective, gem is always found among the SMEs which potentially could bring you the multi-fold return.  It will be even more difficult to spot a gem when the SMEs situation in Singapore is really lack the quality.

Retail Sector
Retail sector is all about consumer spending, the very basis of economy activity.  It is also consumer spending that keeps the economy engine running even in the event of a recession due to external factors (like the 1997 Asian financial crisis or the 2008 global financial crisis).  Without any doubt a weak retail sector will provide virtually little or nil cushion to external shocks.  To address the weakness of the retail sector, just have to look at the 2 basic components -- Demand and Supply.  One needs the money to create the demand and get the demand-supply loop running then the retail sector is sustainable in the long run.  Presently, Singaporeans are facing a high cost of living (namely from housing, transportation, health care, education and foods) and without a minimum wage structure, after putting aside expenses and saving for retirement, nothing much left could be used for consumer spending.  The situation will get even worse during recession when pay cut even further reduce consumer spending.  The area of income level being able to keep up with the pace of rising cost of living should be priority to look into.  As retail sector is often seen as recession-proof, strengthening the retail sector will open up lot more of investing opportunities for investors, be it as a constant income generating stock or a growth stock.

There are 3 mega events happened or happening this year that serve as positive catalyst for Singapore economy.  The Asian Infrastructure Investment Bank (AIIB), the Trans-Pacific Partnership (TPP) and the ASEAN Economic Community (AEC).  Singapore is involved in all of them but have some reservation on it.  Should the Singapore Government using those as a parameter to address the weakness in the Singapore economic model (top-down approach) and there runs a risk that should those fail to meet expectation then the underlying issue is not resolved at all and we are back to square one.  On the other hand, if the Singapore Government does a head on tackle (bottom-up approach) to address the weakness in Singapore economic model, the 3 mega events will be like an added bonus to Singapore economy in the long run.  Which method the Singapore Government choose will determine the future of Singapore economy.  In football analogy, "if you can't attack, you must at least know how to defense".

穷则变,变则通,通则久。This is what needed to be done for the future of Singapore economy.

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