It has been an eventful and trying year for Singaporeans. The Covid-19 pandemic inflicted a shocking shutdown of the economy for several weeks which no one had expected. Even now, as hopes rise for an end to the pandemic, Singapore has to ask itself whether longstanding strategies, such as relying heavily on tourism and aviation as engines of growth, can be sustained. As a result, Prime Minister Lee Hsien Loong has signalled that the political succession may be delayed so that his generation of leaders have time to repair the damage and hand over a better-positioned Singapore to the next generation of leaders.
Scarred by the crisis, many of us may have grown wary about the future. However, our view is that 2021 will bring about a dramatic reversal of fortunes. We see the global economy and our regional hinterland resurging — economic growth may well surprise positively in 2021. That is good news in itself, but it also puts Singapore in a better position to address the structural challenges that it faces — as the pandemic fades away, Singapore has to take some hard decisions to prepare itself for the future.
Global environment: More ups than downs
The global environment is moving decisively in our favour.
First, while some risks remain, US President-elect Biden’s steady hand should bring a welcome dose of predictability to global politics. Yes, the US and China will continue rubbing against each other, especially in our backyard, but Biden’s more nuanced approach to China, avoiding the heated rhetoric and punitive approach seen recently, should cool risks. While the tariffs and sanctions imposed on Chinese technology firms by President Trump will not be reversed quickly, trade aggression is not likely to accelerate. A calmer and more predictable trade outlook will reduce the overhang of uncertainty that caused global corporations to cut capital spending when the trade war broke out. More capital spending will improve global demand for the components that Singapore and its neighbours manufacture.
We can also look forward to welcoming changes in the global trade regime. Severe pressure from the Trump Administration had caused the Appellate Body of the World Trade Organisation to break down, meaning that trade disputes could no longer be settled easily. The Biden team will probably adopt be more constructive which will allow the Appellate Body to resume functioning — and once again offer protection to small trading nations such as Singapore who might otherwise be bullied by bigger nations.
Second, the global economy should see a confluence of positive drivers. Singapore is often seen — and rightly so — as a “high beta” play on the world economy. When things go well at the global level, Singapore tends to perform exceedingly well. When the world economy is in a tailspin, Singapore could weaken sharply. So, just as the city-state suffered a rude shock to its economy this year, we should see a robust rebound next year as the world economy regains its composure:
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- The pandemic will fade as vaccines are rolled out, there is progress in treatments and testing capacity improves. As governments move away from lockdowns and shutting borders, the activities that Singapore thrives on — tourism, aviation and business conventions and meetings — should return in force.
- Even as the economy recovers, major central banks are likely to remain committed to easy monetary policy, further fuelling the economic recovery but also boosting capital flows and capital market activity which can benefit our financial centre.
- China’s economy is set to soar in 2021 and that will help Singapore’s exports as well as its financial and trading hubs.
- The technology cycle is also likely to be positive. The pandemic has accelerated the deployment of several information technologies, and that has led to higher capital spending on a range of technology goods. Since Singapore is a major global production centre for many critical components used in these goods, its exports will enjoy a strong recovery.
Regional hinterland: a source of strength
Singapore is inextricably linked to its hinterland of Southeast Asia and is also increasingly plugged into the Indian economy. Once the pandemic fades away, some of the positive trends that were building in the region pre-Covid-19 can reassert themselves:
- First, there are likely to be a range of synergies from regional integration. Singapore is one of the few countries that are members of both the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) as well as the Regional Comprehensive Economic Partnership (RCEP). Both these agreements will remove trade barriers and promote faster expansion of the flows of goods, services, people and capital that Singapore as a regional centre helps to manage.
- Second, even as governments in the region struggled with the horrific effects of the pandemic, several were launching supply side reforms that are game changers. In Indonesia, for example, President Joko Widodo has signed off on an omnibus bill that boldly reforms the labour market while streamlining how various levels of government regulate businesses. As the labour market becomes more flexible and the regulatory environment improves, Indonesia will find it easier to attract foreign investors. President Joko is also pushing ahead with another omnibus bill which will reform the financial sector. In India, the government has introduced reforms in the agriculture sector: if the government can overcome the spirited political opposition to these reforms, these reforms could transform that sector into a much more dynamic engine of growth. At the same time, the government has also streamlined the existing and confusing mish-mash of labour laws: the lighter regulatory burden will probably encourage businesses to invest more and help make India more competitive.
- Third, the pandemic and the trade war, among others, have opened up opportunities for Singapore in the region. Large Chinese companies are setting up some of their global operations in Singapore — its neutrality and premium business centre clearly make it highly competitive in offering these firms the means of globalising their operations. In India, policymakers finally seem inclined to privatise Air India on terms that are more acceptable to private investors. Singapore Airlines’ (SIA) partner, the Tata Group, is likely to make a bid for the airline, which could offer SIA interesting opportunities. Despite its current travails, India will remain an area of huge potential upside for Singapore.
Singapore’s growth: stronger than expected
These global and regional factors will help propel Singapore’s growth next year by providing a strong uplift to net exports of goods and services. The domestic factors are mostly positive as well:
Consumer spending will revive in 2021, though the speed of the recovery may be hurt by continuing weakness in the labour market.
Investment spending should further boost growth, particularly from the second half of 2021. The large pipeline of fixed investment commitments that the Economic Development Board has successfully courted will drive up private investment. Construction investment should also grow strongly, off a low base.
Government spending is also likely to continue supporting growth next year. PM Lee recently emphasised the need to avoid a “negative fiscal impulse” next year. That statement points to additional fiscal measures that are likely to be announced in coming months.
Thus, after a difficult year, we should see Singapore’s economic growth perk up, reaching somewhere close to 7%.
Reforming Singapore
The real question is, what happens after next year? Can Singapore sustain decent growth that creates meaningful jobs for its citizens and which allows entrepreneurial Singaporeans the chance to develop vibrant businesses? Can we reconfigure our policies so that we can overcome widening inequality while also addressing the very real challenges of climate change? Once growth revives, policy makers, stalwarts of business and thought leaders need to put their collective energies to address these issues.
In essence, what Singapore needs is a new socio-economic model to enable us to move away from input-driven growth to one driven by innovation and productivity; where indigenous firms are able to play a bigger role; and where there is more social justice — a more equal society where all Singaporeans can live fulfilling lives no matter who they are born to or what misfortunes they may encounter.
There are some issues that Singapore has to tackle, if it is to get on the right track. Here are some of them:
Immigration policy: Singaporeans must not forget that a global city prospers only if it is open to talent. There is a risk that, in correcting for the excessively liberal inflows in previous times, policies now go to the other extreme and deter talent from coming. The intake of low-cost foreign workers will also need to be further reduced — this is not popular with the business sector, but it is unavoidable.
Education policy: Rightfully, Singapore pats itself on the back for having top-ranked universities and for its top scores in tests of academic ability for secondary school students. But if this were the entire picture, then why are businesses that are competing globally, whether in finance or other cutting edge sectors, often prefer to hire foreign talent? There may be some discriminatory hiring practices, but we suspect that these are not the core issue. The truth may well be that Singaporeans are not equipped with the critical thinking, interpersonal skills, intellectual curiosity and creative urges that are what really make professional workers competitive in this new world. Of course, our educational institutions are making efforts to address these problems, but one suspects that they are not going far enough.
SEE: Beyond 2020
Innovation and productivity: These are what Singapore needs in its next stage. We have separately pointed out how Singapore has been good at mobilising resources for innovation but relatively less accomplished in extracting good outputs from these efforts. We have also pointed out in our other analyses our poor productivity performance. However, it has not been easy to craft effective policy responses to these absolutely critical issues.
Industry structure: One reason for weak innovation and productivity could be the skewed structure of corporate Singapore, with a highly profitable and globally competitive multinational company sector, a government-linked company sector that dominates certain sectors in a near-oligopolistic manner and a mass of private companies, many of which are struggling. Going down the list of our largest companies and assessing their performance is a pretty depressing exercise. How many have reinvented themselves to adapt to the risks and exploit the opportunities presented by technological and other changes? We need to examine why this is happening and urgently devise new strategies to develop the indigenous corporate sector here.
Engaging with the regional hinterland: Given the growing risks of protectionism and secular stagnation in the developed economies and the inward turn being taken by large emerging economies such as China and India, Singapore has to step up its engagement with its immediate hinterland. This is certainly challenging for all kinds of historical and political reasons but that must not stop us from trying.
Translating economic growth into high standards of living: At the end of the day, the whole point of economic development is for the average citizen to enjoy a good life. By and large, Singapore has done well, but challenges are emerging in the shape of rising inequality, ageing and climate change. On climate change, a strategy seems to be emerging but Singapore needs to improve its approach in a few other areas. First, there are problems with retirement adequacy that require us to rethink a system which is overly dependent on the CPF. Second, social safety nets have to be expanded, given the growing economic insecurity in a world that is subject to frequent shocks — Singapore lacks a framework for helping the unemployed, for example. The government has focused on skills retraining which is commendable but is not sufficient. Third, the issue of the decaying leases of the housing stock built by the HDB needs to be forthrightly addressed, because it affects retirement adequacy, among other things.
In the coming year, Singapore will put the travails of Covid-19 behind us. Economic growth will revive, uncertainty will diminish and jobs will come back. We must then dedicate our energies to tackle the unfinished business of reform and restructuring so that Singapore is placed firmly on a sustainable trajectory of progress in all its dimensions.
Manu Bhaskaran is CEO at Centennial Asia Advisors
