This article first appeared in Forum, The Edge Malaysia Weekly on December 19, 2022 - December 25, 2022

The forecasts are getting more and more dismal by the day. Fears of a severe downturn in the US and Europe have prompted expectations that the whole world economy will teeter on the brink of a recession. Highly respected agencies such as the International Monetary Fund and the World Bank have chimed in with grim reports focused on downside risks. In Singapore, the professional forecasters recently surveyed by the Monetary Authority of Singapore have cut their expectations for the city state’s growth next year to just 1.8% compared with the 2.8% they had estimated only three months ago.

This caution is understandable given the many forces that are indeed depressing the world economy. But we must not neglect other, more helpful, factors that are likely to provide a cushion for the global economy. We would argue that this is particularly the case for Singapore’s hinterland in Southeast Asia. With sufficient nimbleness in our responses, we think Singapore can hold its own, not only avoiding a recession but sustaining growth that will not be too far below our long-term potential pace in the coming year.

As one of the most open economies in the world, Singapore cannot escape harm when the global economy is buffeted by strong headwinds.

The brutal hikes in interest rates all over the world this year typically take around 12 to 18 months to impact demand, which will therefore start to cool perceptibly in 2023. Similarly, the energy price shock earlier this year will also work its way through to reduce spending. As consumers and businesses pull back, overall demand will cool and so demand for our exports will tumble. The outlook is made worse by the downturn in electronics, which dominate Singapore’s exports. The prices of commodities used in production such as thermal coal, base metals and rubber will tend to fall, hurting our neighbours’ export earnings and, by extension, the services they demand from us.

In addition, as a major global financial centre, the likely plethora of financial stresses that we expect will add to our woes. The cheap money that flooded the world since the 2008 global financial crisis is being withdrawn as central banks jack up interest rates and reduce the massive amounts of liquidity they were pumping into the system until recently. As a result, we have already seen the prices of many hyped-up assets plunge such as cryptocurrencies and some tech stocks.

Worse still, we have also seen some close calls for the global financial system. In October, the UK pension system was on the brink of a meltdown, avoided only by swift action by the central bank. It transpired that pension fund managers — usually considered to be a cautious lot — had used derivatives whose risks they had not fully appreciated. In addition, more and more cases are emerging of some of the world’s savviest fund managers making misjudgements on investments in assets such as FTX. To us, these are warning signs of more financial woes. It cannot be that the UK pension fund managers were the only investors to mess up during this long period when low rates and easy money inflated assets of all kinds. History tells us that such periods also lead to excessive speculation and all manner of distortions which only emerge into the daylight when money is tightened and economic prospects turn down.

Finally, there are geopolitical concerns that could add more travails. For example, as US-China tensions intensify, recent developments show that the US is deadly serious about constraining China’s defence capacity. The Biden administration has been expanding the restrictions first imposed by its predecessor. Just two months after applying severe export controls directed at China, the administration is expanding the list of Chinese entities covered by these harsh rules. As the controls are expanded, the US could increasingly pressure its trading partners, such as Singapore, to work with it to prevent China from finding ways around the controls. Some Singapore companies could be at risk of secondary sanctions.

In short, some of the key engines of Singa­pore’s economy — its exporters of manufactured goods, the providers of services to our regional neighbours and our large financial sector — are exposed to some serious risks in 2023.

First, it is so important to emphasise that this current economic cycle is an unusual one, which means the traditional models to project economic trends may not be so accurate.

Remember that the global economy in 2023 will be recovering from two big shocks — the pandemic and the Ukraine war. That rebound provides some resilience to the impact of tighter money and higher energy prices:

•    The pandemic saw a massive increase in household savings well in excess of what was normal. So, even as higher rates and winter heating bills eat into real incomes, spending out of this savings hoard will provide some resilience to consumer demand. Another odd feature of  the pandemic was the exit of workers from the labour force in many developed countries, which has produced tight labour markets — highly unusual for economies that are allegedly going into a recession. The relative ease of getting jobs gives consumers confidence while supporting wages.

•    Moreover, many countries in East and Southeast Asia only began exiting from pandemic restrictions in recent months. The rebound in activity is thus only starting to be felt. Tourism, for instance, remains well below pre-Covid levels and has tremendous scope to rebound. We believe China will ease limits on outbound travel in late 2023, which would unleash a wave of Chinese tourist spending in popular destinations around the region, including Singapore.

•    China has now shifted away from its zero-Covid approach. The early months of 2023 will probably see massive waves of Covid infections sweep China and so depress economic activity. But once that wave washes over, and once the authorities respond with a determined push to stimulate the economy, we should see a vigorous economic recovery from around mid-year, whose benefits will spill over into Singapore and its neighbours.

•    Although there is no end in sight for the Ukraine war, the worst economic effects on Singapore are over. Food prices initially surged but have now returned to normal. The spike in oil prices has also partially reversed.

Second, there has been one decisive structural shift from which Singapore is a huge winner. For a number of reasons, the locus of global economic dynamism is likely to shift, beginning next year, to India and Southeast Asia. Singapore will be a huge winner from this because these are precisely the regions that its competitive business hub services:

•    India is fundamentally moving into a new phase of growth. It has overcome the drag from serious problems in its banking and non-bank financial sectors as well as from over-leveraged companies that had over-invested in the past. It is poised to benefit from the infrastructure building of the past few years. And it is set to see results flow from reforms such as the introduction of the Goods and Services Tax (GST) and the substantial improvements in financial inclusion. The start-up scene in India is one of the most vibrant in the world. Young Indians are optimistic about the future and their energies have been unleashed. The government’s efforts to woo manufacturing investment have been given a fillip as global corporations look to diversify away from China.

•    Similarly, some of the large Asean economies are primed for a surge in growth. Like India, Indonesia has been accelerating infrastructure spending. Its industrial policies to encourage resource-based manufacturing have proved successful — certainly in nickel processing, batteries and electric vehicles. Its landmark labour laws and easing of limits on foreign ownership are making it much more attractive to foreign investors as well. Vietnam is also reaping the benefits of its expansion of free trade agreements — it is gaining much from production being relocated out of China.

Third, there are domestic factors that will help promote economic prospects in Singapore.

•    The better-than-expected growth performance in 2022 will probably yield a strong increase in income tax and GST revenues this year. This budgetary windfall will be further swelled by higher revenues from property taxes as real estate booms and from the surging prices of certificates of entitlement. The hike in GST rates in January will further supplement the fiscal position. There is thus tremendous scope for the government to use the fiscal headroom to build for the future by pouring money into, say, expanding physical infrastructure, or into climate change adaptation and mitigation.

•    The flows of new money into Singapore’s wealth management centre are likely to continue. There is a large backlog of new clients in the pipeline awaiting clearance and the much expanded number of new family offices will begin to do more, adding to demand for financial services of all kinds.

Considering everything, some things are clear even in this very murky outlook:

•    One is that the coming year will be challenging but there will also be areas of opportunity. It will be sensible for Singa­pore’s policymakers and businesses to be cautious, but it is absolutely not right for us to be holding back where opportunities emerge.

•    Despite the challenging environment, this is the time for Singapore to think up bold initiatives that can build the foundations for future success. With the regional hinterland having the best chance since the Asian financial crisis to once again become the pre-eminent destination for foreign investment, this is the time for Singapore to offer win-win proposals to its neighbours for further economic integration. There are many possibilities, such as revival of the Singa­pore-Johor-Riau growth triangle or of the high-speed rail link with Kuala Lumpur.

•    Another is that the world is changing and sometimes in highly unpredictable ways: Geopolitical shifts are producing second-round effects such as a sharp rise in defence spending and supply chain reconfiguration. The competitiveness of different regions is changing — look at India and Southeast Asia relative to others. Advances in technology can rapidly change business dynamics. And clearly, the impact of climate change is faster than expected — more extreme weather patterns but also big changes in corporate strategy to adapt to climate change and to meet the increasing regulatory demands pertaining to climate. Singapore must be alert to these changes and be nimble enough to adapt to them more quickly than its competitors.

•    Finally, if we undertake the right strategies to strengthen our internal resilience, we need not be fearful of the dangers that are lurking around us — whether it is the intensifying frictions between the US and China or the dislocations that new technologies may bring. Singapore is already moving ahead with initiatives such as Skills Future, which will help us adjust to the new world. But more is needed in two areas. The first is to improve our growth potential — by boosting productivity growth, strengthening our small and medium enterprises, reducing business costs and accelerating home-grown innovation rather than hoping that innovators and start-ups from elsewhere will keep moving to Singapore.

A second area is to bolster our internal resilience to external shocks. We need to address areas such as retirement adequacy and come up with better ideas to address the potential falling value of ageing HDB homes as the leases decay. A lot more can be done to strengthen social cohesion by providing more help to those who have lagged behind such as the elderly poor and children of broken families.

In short, the coming year may well be full of unexpected twists and turns. But with the right strategies, Singapore can still prosper.

Manu Bhaskaran is CEO of Centennial Asia Advisors

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