A port in the storm

September 7, 2009
Singapore Democrats

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Neel Chowdhury


The condition of Singapore’s economy can often be judged from the emerald waters surrounding it. A tiny 268-sq.-mi. (697 sq km) island city-state with the busiest port in the world, Singapore began in 1819 in founder Stamford Raffles’ words as an “emporium of goods” and has never forgotten the importance of maritime trade. Today the value of Singapore’s annual exports is 2.5 times larger than its entire GDP when all goods passing through the port are counted.

So when idle container vessels, their hulls so empty they bobbed atop the sea like bath toys, began to gather in the Singapore Strait in late 2008, local leaders feared the worst: that a synchronized collapse in global trade would crush the tiny trade-dependent island. The government’s economic forecasts were revised downward three times in less than six months. By mid-April the Ministry of Trade and Industry was predicting a record-breaking contraction of up to 9% for 2009. By that point Singapore’s benchmark Straits Times stock index had plummeted 60% below its 2007 peak. Property prices tanked 25%. The situation appeared worrying enough for the government to create a 25-member Economic Strategies Committee to assess the basic soundness of Singapore’s economic model.

Almost five months later, such alarm appears overdone. GDP in the second quarter soared 20.7% compared with figures for the first three months of 2009. Citigroup economist Kit Wei Zheng now expects at worst a 2.7% contraction for Singapore for 2009. “If you look at the headline economic numbers, like the fall in exports or GDP, this recession seemed severe,” says Kit. “But closer to the ground [it has] been quite mild.” Singapore’s stock market is up more than 70% from its April lows.

The vigor and speed of Singapore’s rebound underscore two important facts about its economy. Like others in Asia, Singapore is turning increasingly to trade with China and India to fill the hole left by the collapse in demand from Western consumers. And Singapore, perhaps more adroitly than other Asian countries, is promoting domestic consumption by its cash-rich citizens to help balance an economy that had become dangerously reliant upon external demand for growth.

Not that the city-state is turning its back on globalization — it has just shifted its gaze. China is now Singapore’s third largest trading partner after Malaysia and the E.U. More important, an increasing chunk of Singapore’s exports to the mainland are directly linked to Chinese domestic consumption instead of to components that are merely re-exported to the West. Citigroup estimates that exports directly linked to Chinese domestic demand account for around 3.9% of Singapore’s GDP. “What a crisis like this forces you to do is to broaden your base,” says Gautam Banerjee, executive chairman of PricewaterhouseCoopers in Singapore and one of the members of the government’s Economic Strategies Committee. “We’ve stepped up our engagement with China and that will continue.”

Singapore has been cozying up to India as well. Bilateral trade between India and Singapore in 2008 amounted to $19.2 billion, a fifth more than the previous year’s amount. More astonishingly, that same year Singapore was the second largest foreign direct investor in India, pouring in $3.76 billion. At the same time, Singapore has become a magnet for a new breed of entrepreneurial Indian company, thousands of which are now being welcomed to the city’s shores.

One of these is the Professional Couriers, an Indian parcel service that has made Singapore its Southeast Asia logistics hub. A blue chip it isn’t. But what the company lacks in gravitas it makes up for in entrepreneurial energy. “More Indian companies want to develop a global footprint and it’s much easier to do that from Singapore,” says Pradeep Menon, chief executive of the Singapore Indian Chamber of Commerce, citing the island’s superior air and telecommunications links to the rest of Asia and its advantages as a financial hub.

Singapore’s tiny size (2008 pop. 4.84 million) has traditionally been its greatest economic vulnerability. Add to that an almost complete absence of natural resources, and Singapore was left little choice but to trade its way to prosperity — a realization its first Prime Minister, Lee Kuan Yew, came to as far back as the late 1960s, when a commitment to free trade was unfashionable in the developing world.

But after more than four decades of trade-driven growth, Singapore has found that its relatively wealthy citizens can now help to provide the economic cushion it lacked at its independence in 1965. According to Singapore’s Department of Statistics, the average income per working household member has grown 5.5% over the past three years, to $1,652 a month or roughly $20,000 a year. A stunning 84% of Singapore’s citizens live in subsidized public-housing estates, which keeps the cost of living and mortgages low. And because most large Singapore companies have so far refrained from mass layoffs, unemployment in Singapore, at just 3.3%, remains enviably low. Citigroup’s Kit points out that though 18,600 jobs were lost in Singapore in the first half of 2009, that’s less than half the the number lost at similar stages of recessions in 1997 and 2001.

That’s why, despite the recession, ordinary Singaporeans have more cash in their pockets to spend than debt-burdened Americans or jobless Europeans. Inside the Harry Winston luxury-jewelry store in a mall on Orchard Road, a pear-shaped $5.3 million diamond ring has been pulling customers through the shop’s bulletproof doors. Although nobody has yet snapped up the ring, Ginny Ng, managing director of Harry Winston in Singapore, says with a shrug, “I don’t feel the global recession here.”

Singaporeans have also continued to spend because they still feel like they are getting ahead in the world rather than losing ground. According to Citigroup, the total value of assets held by the average household has increased by almost 60% since 2000 despite the recent downturn. “Singapore households have always had a strong balance sheet, but what they lacked before was confidence,” says Mark Matthews, chief strategist for Asia at Fox-Pitt Kelton Securities in Hong Kong. “Now they are confident.”

To be sure, Singapore can’t isolate itself from the economies of the U.S. and Europe and expect to prosper. The sea lanes around Singapore, once dotted with three-masted clippers bearing tea and silver, and crowded today with oil tankers and container vessels, will be as vital to Singapore’s economic future as they have been for its past. “We have to export,” says Banerjee of PricewaterhouseCoopers. But by shifting its nautical gaze from West to East, as well as looking inward, Singapore may be charting a new economic course for the rest of Asia.