Singapore; economic slowdown has not hurt trade scene - Business Outlook Abroad

Business America, Dec 8, 1986

Singapore's 20- ear high growth streak ended in 1985 when the economy contracted 1.8 percent. The slump in world demand for petroleum and shipping hit Singapore's oil refining and maritime industries hard. Singapore's other breadwinners--entrepot, tourism, finance, and business services--also suffered when international trends turned against them.

But not all the bad news came from the outside. Singapore's high-wage policy, designed to weed out low-technology industries, resulted in a loss of competitiveness with products from other Asian newly industrialized countries (NICs). There were several business scandals and the real estate bubble burst, sending the stock market into a tailspin.

Although new foreign investment declined, it continued to come in. The Singapore government also intervened with a pro-business wage and fiscal package designed to reduce costs. The new budget increased public works spending by 50 percent, and stock market regulations were tightened.

By the first quarter of 1986, business confidence had improved; some depressed sectors began to show signs of life and others less affected by the recession continued to grow. While most of the indicators six months ago were uniformly negative, they are now ambiguous--an improvement, albeit a modest one. The recession began to flatten out in mid-year 1986, and the economy may contract by only 1 percent for the year. Although 1986 probably will not see the end of the economy's problems, it could mark the start of a slow recovery.

The economy is still beset with external contraints which limit demand for Singapore exports. The most important short-term factor is the prospect of a slowdown in the United States, Singapore's most important trading partner. American growth forecasts for 1986 have been scaled back, and Japan's growth rate for 1986 should also be lower than usual, with West European growth rates remaining moderate.

It is also likely the Indonesian and Malaysian economies will contract or grow only slightly this year, primarily because of continuing low world prices for oil, tin, palm oil, and rubber. Singapore's economy will also be affected by restrictive policies of regional governments to husband scarce foreign exchange.

Internally, Singapore must contend with long-term adjustments in the maritime and petroleum industries to counter a worldwide oversupply in both sectors. The massive overhang of new buildings will take years to work off, continuing to depress new private sector construction. The related drop in property values destoryed some local businesses and damaged the credit rating of others. Banks will continue to write off boom-time property loans and may lend only to their prime domestic customers. Although Singapore's high wage policy has definitely ended, average wage costs here are still higher than in the other NICs.

Despite these very real problems, there is a mid-year perception that the economy is on the mend, although that perception is not universally shared by the business community. Bankers, for example, remain generally more pessimistic about the economy, because of the continuing glut of new construction and problems with declining values of real estate offered as collateral for loans. The feeling of optimism is strong enough, however, that the government felt it necessary to caution that a real recovery is still in the future in order to reassert the credibility of its wage restraint policies. The rate of contraction for manufacturing was slowing in mid-1986; some (refining and electronics, for example) were beginning to expand again. While the recovery will probably not be quick, the worst is probably over.

The Singapore government has helped by offering spot short-term relief, and is working to upgrade worker skills and increase R&D activities in order to develop Singapore from a trading and manufacturing economy to "an international business center proiding a comprehensive range of business services and opportunities." Singapore may be setting its sights too high given its size, traditions, foreign competition, and regional economic realities. But Sngaporeans are as familiar with challenge as they are with success, and the country's assets will continue to make it an economic actor to be reckoned with.

The environment for trade and investment in Singapore remains positive despite the economic slowdown. American firms still regard Singapore as a good place to locae sales, distribution and manufacturing operations, and the United States remains Singapore's largest single investor with an estimated $5.2 billion invested as of year-end 1984. The Singapore government has reinforced its commitment to provide foreign firms with an economic environment that is conducive to business in the region. In many ways the economic downturn has benefited firms operating in Singapore by reducing costs and by encouraging a far more pragmatic government approach to problems and concerns of the local business community. The weakening of the dollar also makes goods and services more competitive in Singapore, which has Asia's third highest per capita GDP after Japan and Brunei, against similar products from Japan or Europe.