Since 1965, Singapore has transformed from a third world nation with limited capital to a first world nation boasting a global shipping hub, an information-led economy as well as 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 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, it also maintains and/or reduces unemployment rates and inflation.
There were two events this year affecting Singapore’s economy. The crucial event that has 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 and 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 sub-economies that each decline or boom globally based on investments, exports, and manufacturing. The first quarter of 2016 saw a slowdown in China’s GDP to 6.7% compared with 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 sees a decline, so too have other economies in Asia. Macau, Taiwan and Hong Kong bear the first brunt of the slowdown as they see the world’s second largest economy clearly slow down in pace. China is going through a ‘political revolution’ and a crackdown on corruptions in the mainland which has been one of the reasons why Macau is seeing a decline in gaming revenue since September 2014 . Taiwan is not spared either due to the slowdown in exports to China. Commodity exports account for 60-70 percent of the country’s GDP with 40 percent going to the Chinese market. Taiwan’s main exports of machinery and plastics 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, since there is no solid domestic market to cushion the blow, Singapore is one of the countries being 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 stricken the hardest, a decline of 5 percent compared to 2014’s increase of 2.7 percent. Forecast for electronics, transport engineering, private sectors, financial services, and retail have also taken 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 is felt. China’s economy affected overall import and export volume and since Singapore is a trans shipping hub, they were naturally affected when volumes of cargo going through Singapore decreased. Export growth in 2015 stood at 2.1 percent, the slowest in 6 years, demonstrates the effect of China’s slowdown.
Malaysia is one of the many South East Asia economies impacted by a decline in demand for commodity exports to China. Concurrently, the ringgit plunged by more than 15 percent against the US dollar, the lowest in 17 years. In addition, allegations of financial mismanagement of the 1MDB investment fund circulated the country and caused widespread investigation into Malaysian Prime Minister Najib Razak.
Indonesia is another economy impacted by the slowdown, a decline in raw material exports to China due to low demand which has lead to lower prices of natural resources. In the second quarter of 2015 economic growth slowed to 4.6 percent, the lowest since 2009. Overall, the economy is facing employment issues and seeing 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 uncertainty and especially with the addition of the Brexit issue.
In June 2016, the Brexit Referendum resulted in the United Kingdom deciding to leave Europe surprised and shook the global market. Brexit naturally lead to a decline in the value of the pound and caused a ripple effect which in turn strengthened the US dollar and Japanese yen while weakening 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 a material impact on economies in the EU or a lead to further slowdown in globalization, Asia will ultimately be affected. Britain is only 22nd on Singapore’s list of trading countries by size of import and exports and trade between the two amounts to no more than 3 percent in overall trading. Despite this, there is concern over British companies withdrawing investments from the Singaporean market due to the weaker pound. Conversely, companies importing goods from the UK will be benefiting from the drop in the pound. Since the EU is a key partner for FDI in Singapore with an inflow of 31 percent, there is concern over a positive outlook on free trade agreements 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 have to be negotiated.
Overall, South East Asia is impacted more from the slowdown of China’s economy compared to Britain leaving the European Union. Many economies in South East Asia rely heavily on trading with China. Especially Vietnam, which records 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 reduce risks associated to China halting trade with Vietnam.
Additionally, China has seen a rise in labor costs to as much as 10-22 percent in the past couple years, 16 of 30 provinces saw a rise in labor cost since the last five year plan was implemented in 2011. Economists are predicting more companies in tech manufacturing and production for lower value goods will ultimately shift production to other lower cost economies in Myanmar, Cambodia or Vietnam since labor costs there are 30-50 percent less than in the mainland.
Factoring in the two major economic events, Small to Medium Enterprises (SMEs) in Singapore have been showing indications of struggle in terms of low profit expectations. Industries from all around have seen tumbles in profit in the past months, and this has 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 laid off in the first quarter alone. The index measuring the outlook of SMEs for the next six months until the first quarter of 2017 has shown the lowest profit expectations in seven years. It is no surprise considering this year’s turbulent global economy and consequent shakeup of the financial markets. Despite this, the government has announced a 53 Billion fund supporting and aiding SMEs and start ups in terms or tax rebates, innovation and skills funding. Furthermore, Singapore’s government is pushing for more companies to attempt overseas expansion where growth of at least 5 percent is expected to be seen over the next couple of years, especially within the ASEAN region.