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Singapore: the perfect storm?


The economic landscape in Singapore has been less than assured over the past year, and the near-term outlook ahead is not looking too promising either. Harry Tan (Head of Research, Asia-Pacific) investigates the headwinds which are multi-fold.

Sluggish and uneven global demand has dampened merchandise export growth, which at around 250% of the economy, also poses significant drag on industrial output and employment. Singapore is not alone – across most emerging Asian economies, the deterioration in growth prospects reflects not only generally soft global demand, but more specifically, the outsized impact China has had on regional markets over the past two decades. Taking the case of Australia, for example, exports to China grew at more than 20% p.a. since 2000, from around 5% back then to 32% of total exports last year. A similar trend can be observed in many other regional economies, in step with China’s current standing as the world’s second-largest economy in PPP terms. The managed slowdown in China will thus continue to overhang on regional trade and growth prospects for some time.

Recent volatility in Singapore’s trade-weighted currency - partly from the two rounds of RMB devaluation since late last year - will also continue to blunt export competitiveness, induce price cuts and drive down business margins. It is not surprising then, that Singapore’s non-oil domestic exports fell 15.6% from March 2015, the sharpest drop since the 31% decline back in February 2013.

This all carries downside risks to the already vulnerable domestic economy facing weakening employment prospects and low productivity, on top of the policy-induced housing downturn. Domestic demand weakness has in turn translated directly into falling prices: the headline consumer price inflation fell -1.0% in March 2016 for the 17th consecutive monthly decline (the longest stretch on record). Disinflationary pressure will persist, as the lacklustre financial and business services sectors - about 28% of GDP - will likely continue to suffer from poor investment sentiment and capital outflow pressure on rising interbank financing costs. That being said, in the first-quarter advance GDP estimate, growth was flat on an annualised basis, from 6.2% in the last quarter of 2015. This downbeat near-term outlook led the Monetary Authority of Singapore to adopt a neutral policy stance for the Singapore dollar NEER in March 2016, from a modest and gradual appreciation previously. At risk of a technical recession, a move to re-centre the policy band lower is also likely to go forward (note that Singapore employs the SGD as a monetary policy tool to normalise growth conditions).

Just difficult, not a perfect storm
Singapore is stuck between a rock and a hard place at present. However, it is still projected to grow at 2.0% during 2016 (unchanged from 2015) before accelerating to 2.4% in 2017 according to Oxford Economics, but economic conditions are best characterised as difficult. There is no perfect storm like in 2008, as policymakers still have fiscal and monetary policy tools to support growth even while domestic economic restructuring plays out before bearing fruit. Singapore remains a highly competitive economy, with a pragmatic and flexible socio-economic policy programme, underpinned by a capable and efficient government, and the medium-term outlook remains positive. What then does this period of consolidation mean for investors?

Across all sectors of the property market, fundamentals have mostly weakened. Luxury housing rents have fallen by nearly 20% since the peak in late-2013/early-2014, from over-building in the core central region amid a generally more restrictive labour policy on expatriates. Prices have also fallen in tandem, but with relatively low borrowing costs and leverage, and strong holding power (Singapore has had a few years of robust growth prior to the current downturn), the correction has been quite moderate at around -10% from the peak. Amidst a weakening economy, rising rates and substantial incoming supply, the risks for the housing market remains on the downside with further downward rental and price adjustments to come over the next year or so. The same is expected for the office and retail sectors, due to weakening business and consumer demand. Investor appetite for office assets has retreated in recent months, judging by lacklustre interests in some prominent offerings in the CBD area. Substantial incoming Grade A supply, against the soft economic backdrop, suggests that the income justification for sub-4% net yield does not match up to expected core target returns over a five-year investment timeframe. In the retail sector, falling tourism flow, and rising unemployment and underemployment risks (job vacancies fell to 2.4% of total employment in the last quarter of 2015, from 3.2% in Q3 2014; the lowest level since 2013) will continue to drive retail rents lower, particularly in the luxury space.

We believe now is the time to take a step back, from a cyclical perspective, but not step away. The longer-term appeal of Singapore remains intact. A wider window of opportunity may start to open up over the next two years, as the cyclical correction deepens and the value proposition reappears.

Singapore: A highly competitive global city

Source: TH Real Estate, 2015 


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