Singapore - Balancing Growth, Inflation and Populist Concerns Report


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Singapore – world’s second most competitive economy?

Our new report ‘Singapore – Balancing Growth, Inflation and Populist Concerns’ finds that a low employment rate, shrinking labour force and restrictive immigration policy are in danger of significantly slowing the growth of Singapore’s workforce – and its economy.

Singapore is likely to remain attractive to investors due to its friendly regulatory environment, low corporate taxes, well-developed financial markets and excellent educational institutions. But the rising cost of doing business there is deterring businesses and leading some firms to examine cheaper options in other booming Asian markets. When growth rates start to slow, will the government reconsider its immigration policies?

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Singapore - Balancing Growth, Inflation and Populist Concerns Report

  1. 1. Looking inwards for growth Singapore’s economy is on the brink of transition In order to meet its annual economic growth target of 1-2% in the period to 2020, the Singaporean government’s policy emphasis has shifted to productivity, rather than immigration. The city state is battling a shrinking workforce, owing to “baby boomers” retiring and low fertility rates. However, a recent government white paper, which highlighted these challenges and suggested accommodating further immigration as a solution, was met with rare public protests in the usually politically calm country. The Singaporean public’s strong anti- immigration sentiment led to a government U-turn, with a populist, restrictive immigration policy and productivity incentives for small businesses included in the recent budget. But productivity gains may not be enough, as the government expects the Singaporean economy to grow at a slower pace than its neighbours in the future. The first cohort of baby boomers retired in 2012 and one-quarter of Singapore’s population will be over the age of 65 by 2030. The city state’s average life expectancy stood at 82 years in 2010, up from 66 years in 1972. The fertility rate has been below the notional replacement rate of 2.1 births per woman for over three decades and currently stands at 1.2. The controversial government white paper projected that Singapore’s total population would need to reach 6.9m by 2030, of which 50% would be comprised of foreigners (at present, foreigners make up 30% of the population), in order to prevent a shrinking workforce in the face of an ageing population. Until recently, the government’s immigration policy had been fairly open in welcoming foreigners, recognising them as an important part of the city state’s economic success. But this year’s protests highlight the waning popularity of the ruling People’s Action Party , which has governed Singapore uninterrupted for over 50 years, and policymakers seem to be taking note of the unrest. In the budget for fiscal year 2013/14 (April-March), the government moved to increase visa fees across all categories and introduced other restrictions on employment for foreigners. However, Singapore’s macroeconomic fundamentals are prohibitively challenging. With an unemployment rate below 2%, the social benefits of a tighter immigration policy are limited. At a recent job fair in the city state, there were 1,000 positions open to citizens and permanent residents in the retail, food and beverage segments, but despite several incentive schemes from employers, the positions reportedly attracted only 150 applicants. The Monetary Authority of Singapore (the central bank) has acknowledged that the city state’s tight labour conditions will lead to mounting wage pressures, which will filter into the consumer price index in the second half of the year. Although the government’s revised immigration policy seeks to appease the raised tempers of its citizens, the winds of protest do not bode well for overall business competitiveness in Singapore. A low unemployment rate, a shrinking labour force and a restrictive immigration policy could deter businesses and compel some firms to examine cheaper options in other booming Asian markets. However, Singapore is likely to remain attractive for investors because of its friendly regulatory environment, low corporate taxes, well-developed financial markets and its excellent educational institutions. The main caveat going forward will be the tight labour market. Sponsored by: SingaporE The Singaporean public’s strong anti- immigration sentimentled to a government U-turn, with a populist, restrictive immigration policyand productivityincentivesfor small businessesincludedin the recent budget.
  2. 2. Singapore is a predominantly export-dependent economy that is heavily reliant on demand from Western markets, with well-developed manufacturing and financial services sectors and excellent international linkages. But the main reason for the city state’s attractiveness to businesses lies in its openness. It is ranked first out of 185 countries in the World Bank’s Doing Business 2013 report, is consistently at the top of the Economist Intelligence Unit’s (EIU) business environment rankings and, according to the annual World Economic Forum, is the world’s second-most competitive economy. However, recent trends have led to growing concerns about the ease of doing business in Singapore. Rising prices and a tight labour market (exacerbated by the government’s focus on increasing productivity rather than expanding the workforce) are hitting the profitability of many businesses and might, over time, affect Singapore’s global position. Accelerating inflation The city state’s policymakers are currently battling faster- than-average inflation. The consumer price index (CPI) increased by 4.6% in 2012, moderating from a high of 5.3% in 2011; inflation has typically averaged under 2.1% since 1995. The steep increase in consumer prices has been led by a sharp rise in property prices and private transport costs, two of the biggest components of the CPI. The housing component of the CPI rose by 8.3% in 2011 and 7.8% in 2012, while private transport costs grew by 12% and 7% in those years. Rising property prices seem to have been little affected by seven rounds of government cooling measures and attempts to expand Singapore’s supply of housing. Residential property prices in December 2012 were 60% higher than in the second quarter of 2009 (which marked their trough following the domestic recession of 2009). Home sales have been driven largely by low interest rates and continued income growth. The latest round of policy measures to lower housing prices were introduced in January 2013 and seek to discourage speculative buying by tightening loan requirements. Specific policy adjustments include an additional buyer’s stamp duty (ABSD) of between 5% and 7% on home purchases for permanent residents who are buying their first residential property in the city state and an ABSD of 7% for Singaporeans purchasing their second home. To stem short- term speculative activity in the industrial property segment, the government has also introduced a seller’s stamp duty, which will be imposed on industrial property and land sold within three years of purchase, in addition to tightening loan-to-value limits on housing loans for individuals and companies who already have one loan outstanding. Expensive permits High demand for homes is matched by demand for vehicle ownership, which Singapore’s quota system for car permits has proved inadequate in curtailing. Additionally, by restricting supply, the quota system has had the undesired effect of pushing up inflation, prompting the government to adopt supplementary measures in recent months. The government has typically attempted to alleviate pollution and congestion by regulating the number of vehicle permits it issues every month, known as Certificates of Entitlement (which grant the buyer the right to own, register and use a car). The permits are granted through a bidding process. In the most recent round of bidding, on March 27th, premiums for B-category cars (comprising the luxury-car segment) increased by 27.2% to S$73,900 (about US$60,000) compared with the previous auction, held earlier that month, while premiums for A-category cars dipped by 14% to S$64,209. © The Economist Intelligence Unit Limited 2013 Population 5.3m Percentage of foreigners 28% GDP US$ 276.5 bn Real GDP growth 1.3% Consumer price inflation 4.6% Current-account balance 17.6% Median household income US$6,308.3 Unemployment rate 1.8% Budget surplus US$2,893.8 Macroeconomic overview 2 0 1 2 Balancing growth, inflation and populist concerns S i n g a p o r E Consumer price inflation and its components (% change) Source: Economist Intelligence Unit 2002 -10 -5 5 0 10 15 20 25 30 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 CPI Transport CPI Housing Year CPI All items Real GDP growth Source: Economist Intelligence Unit % change; real terms
  3. 3. © The Economist Intelligence Unit Limited 2013 One factor underpinning demand is that credit companies are still providing full-term loans to car buyers. Thus, in February the Monetary Authority of Singapore (the central bank) mandated that bank loans for vehicles with an open- market value of up to S$20,000 be capped at 60% of the price, while loans for those costing more than S$20,000 will face a cap of 50%. The length of car loans was capped at five years. The labour force Another likely source of mounting inflationary pressures is the tight labour market. Singapore already has a low unemployment rate, averaging 2% in 2012, and the government expects a significant slowdown in the rate of growth in both Singapore’s workforce and its population in the coming years. According to official calculations, the labour force will grow at around one-half of its current annual rate of expansion of 3.3% in the period to 2020, and will then slow to about 1% a year in the decade to 2030 (these projections are subject to fertility trends, life- expectancy ratios and socioeconomic requirements, namely the need for more workers). In addition to the decelerating rate of growth in Singapore’s workforce, immigration laws have been tightened, making it harder for employers to hire foreign workers. The low unemployment rate, shrinking population, contracting workforce and tight labour market conditions will exert upward pressures on wages, pushing up inflation further. Balancing act The city state’s policymakers face the challenging task of ensuring that the business environment remains conducive for companies as well as protecting Singapore’s reputation as one of the world’s most open economies. However, there are several obstacles to meeting these goals. Public discontent with rising prices has led to a more restrictive immigration policy, but, ironically, a tighter labour market, which leads to wage growth, will only increase inflationary pressures. The tight labour market, together with rising costs, could deter businesses from investing further in Singapore at a time when many of its neighbours are increasingly competitive and hungry for foreign investment. The government recognises the impact of these obstacles and has forecast a slower rate of real GDP growth in 2020-30, of 2-3% a year on average, well below the average annual rate of 6.3% recorded in the past decade. A dip in growth has already been seen. The economy expanded by 1.3% in 2012, compared with growth of 5.5% in 2011 and 14.5% in 2010. Singapore’s GDP growth is largely driven by exports because it has developed stronger trade linkages with the member countries of the Association of The government expects a significant slowdown in the rate of growth in both Singapore’s workforce and its population in the coming years. South-East Asian Nations (ASEAN), and in particular with neighbouring Malaysia. The city state is, therefore, less dependent on the West for its export-led growth. Last year’s weaker pace of economic growth in Singapore may be partly owing to lower government consumption, which fell by 3.6% in 2012, the first contraction in public expenditure since 1994. However, the Economist Intelligence Unit expects government consumption to return to growth in 2013 as several infrastructure enhancement and expansion plans have been announced in recent months. Exports of goods and services, which grew by just 0.3% in 2012, are expected slowly to recover in 2013 as well. Exports and Imports Source: Economist Intelligence Unit Merchandise Imports, Y/Y % change Merchandise Exports, Y/Y % change Nominal GDP Shares Source: Economist Intelligence Unit 2000 2012 Industry 35% Industry 27% Services 65% Services 73%
  4. 4. About Aberdeen Asset Management Aberdeen Asset Management PLC is a global investment group, managing assets for both retail and institutional clients from offices around the world. The group’s headquarters is in Aberdeen but we prefer to locate our fund managers near the companies and markets in which they invest. Aberdeen is one of the UK’s largest investment trust managers and manages or advises 17 UK investment companies with assets in excess of £5.5 billion. The majority of Aberdeen-managed investment trusts and companies are on offer through the Aberdeen Investment Trust ISA or Share Plan, available at the award winning Aberdeen Investment Trust Centre: Established in 1992, Aberdeen Asset Management Asia (Aberdeen Asia) is a wholly owned subsidiary of Aberdeen Asset Management PLC. Aberdeen Asia manages funds which have a value of £26.4 billion across Asia (as at 31 Mar 2013). The Aberdeen group has been investing in Asia since 1985. Aberdeen Asia is today regarded as a market leader in the management of Asian assets. Find out more at Issued by Aberdeen Asset Managers Limited, 10 Queens Terrace, Aberdeen, AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. The information in this report is accurate as of June 2013. About the Economist Intelligence Unit The Economist Intelligence Unit (EIU) is the world's leading resource for economic and business research, forecasting and analysis. It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946. EIU products include its flagship Country Reports service, providing political and economic analysis for 195 countries, and a portfolio of subscription-based data and forecasting services. The company also undertakes bespoke research and analysis projects on individual markets and business sectors. More information is available at or follow us on Whilst every effort has been taken to verify the accuracy of this information, neither The Economist Intelligence Unit Ltd. nor the sponsor of this report can accept any responsibility or liability for reliance by any person on this report or any of the information, opinions or conclusions set out in the report.