Since 1965, Singapore has transformed from a third world nation with limited capital to a first world nation boosting a global shipping hub, an information- led economy and a stable and ideal economy for long term foreign investments. Considering Singapore is only 51 this year, its economy has improved tremendously and at such a fast pace as compared to other economies in South East Asia. Singapore is constantly evaluating long term economic strategies to adapt to the current economy and this not only increases foreign investments, but also maintains and/or reduces unemployment rates and inflation.
There were two events this year affecting Singapore’s economy and the crucial event that made a huge impact on Singapore as well as the majority of South East Asia is China’s economic slowdown.
China is Singapore’s largest import export country, and when China’s import took a dive due to the weak yuan, it naturally had an impact on Singapore’s growth. A crucial driver of global growth, China’s economy is made up of numerous billion and trillion dollar subeconomies, each declining or booming globally based on investments, exports as well as manufacturing. The first quarter of 2016 saw a slowdown in GDP at 6.7% as compared to 7.3% in 2014.
A partial reason for the slowdown is due to the gradual shift towards a consumer driven economy and as China’s performance saw a decline, so have other economies in Asia. Macau, Taiwan and Hong Kong bear the first brunt of the slowdown as they saw the world’s second largest economy clearly slowing down in pace. China is going through a ‘political revolution’ and crackdown on corruptions in mainland China has been one of the reasons why macau is declining in gaming revenue since September 2014 . Taiwan is not spared either due to the slowdown in export markets in China. Commodity exports account for 60-70 percent of the country’s GDP with 40 percent accounting for the chinese market. Taiwan’s main exports on machinery and palstics saw a plunge in the past 11 months and the decline is expected to continue given its high dependence on China.
Singapore relies heavily on investments and trading with China and since there is no solid domestic market to cushion the blow, Singapore is one of the countries to be hit the hardest. This is comparable to the global financial crisis in 2009 where China’s economy slowed to 6.2 percent which lead to Singapore’s growth falling 8.8 percent the following year. Comprising one fifth of Singapore’s economy, the manufacturing sector was striked the hardest, a decline of 5 percent as compared to 2014’s increase of 2.7 percent. Forecast for electronics, transport engineering, private sectors, financial services and retail have took a turn for the worst this year. Economists are gearing up for a spillover to the service sector once the full impact of the slowdown hits. China’s economy affected overall import and export volume and Singapore as a trans shipping hub is naturally affected when volumes of cargo going through Singapore decreases. Export growth in 2015 stood at 2.1 percent, the slowest in 6 years the effects of China’s slowdown.
Malaysia is one of the many South East Asia economies impacted with a decline in demand for commodity exports to China. Concurrently, the ringgit plunged by more than 15 percent, the lowest in 17 years against the US dollar. Adding on, allegations on fianancial mismanagement of 1MDB investment fund circulated the country causing a widespread investigation into Malaysian Prime Minister Najib Razak.
Indonesia is another economy impacted by the slowdown, a decline in raw materials exports to China due to low demand which lead to lower prices of natural reseources. In the second quarter of 2015 economic growth slowed to 4.6 percent, the lowest since 2009. Overall economy is facing employement issues and saw a decline in foreign investments. Indonesia’s finance minister Sri Mulyani Indrawati believes this slowdown of economic growth will continue for a longer period due to the uncertainty especially with the addition of the Brexit issue.
In June 2016, the Brexit Referendum resulting in the United Kingdom leaving Europe surprised and shook the global market. Brexit naturally lead to the decline in pound and caused a ripple effect which in turn strengthened the US dollar and yen and weakened the Singdollar against the US dollar. Overall, little impact is expected to hit Singapore as well as other economies in South East Asia. Economists are however, closely monitoring the transition of the UK leaving the EU. Should there be material impact on economies in the EU or leading to a further slowdown in gloalization Asia will ultimately be affected. Britian is only the 22nd on Singapore’s list of trading countries and import and exports between Singapore and Britian adds up to no more than 3 percent in overall trading. Even so, there is concern about British companies withdrawing investments in Singapore market due to the weaker pound. On the contrary, companies importing goods from the UK will be benefiting from the drop in pound. Since the EU is a key partner for FDI in Singapore with an inflow of 31 percent, there is concern regarding a positive outlook of Free trade agreement between Singapore and the EU. Complications involving Trans Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP) might be challenged and since the UK is no longer under the EU’s agreements, a new trade deal might be negotiated.
Overall South East Asia is impacted more from the slowdown of China’s economy as compared to Britian leaving the European Union. Many economies in South East Asia rely heavily on trading and exports with China. Especially Vietnam, recording a 29 percent of imports and 10 percent of exports to and from China. By gradually diversifying its markets, Vietnam will be less reliant on China and in turn reduces the risks in the event China halts trading with Vietnam.
However, China has seen a rise in labour costs as much as 10-22 percent in the past couple years. 16 of 30 provinces saw a rise in labour cost since the five year plan was implemented in 2011. Economists are predicting more companies in the tech manufacturing and producers for lower value goods will ultimately shift productions to other lower cost economies in Myannmar, Cambodia or Vietnam since labour cost are 30-50 percent lesser than the mainland.
Factoring in the two major economic events, small and medium enterprises in Singapore have been showing indications of struggle in terms of low profit expectations. Industries all around have seen tumbles in profit in the past months, and naturally impacted Singapore’s employment rate. Unemployment rate in Singapore rose from 1.9 percent to 2.1 percent overall this year. Retrenchment and layoffs continue to rise with a record of 4,710 workers for first quarter layoffs. The index measuring the outlook of SMEs for the next six months til the first quarter of 2017 has shown lowest profit expectations in seven years. Its no surprise considering this year’s turbulent global economy causing a shakeup in the financial markets. Despite this, the government announced a 53 Billion funding supporting and aiding Small and Medium business enterprises and start ups in terms or tax rebates innovation and skills fundings. Futhermore, Singapore’s government is pushing for more companies to attempt overseas expansions where growth of at least 5 percent is expected to be seen over the next couple of years especially within ASEAN.