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Resourceful, but resource-scarce, Singapore has nimbly changed with the times in its first 50 years of self-governance. But the global economic slowdown has thrown the trade-dependent city-state into its worst recession and issues from unemployment to huge losses at two sovereign wealth funds have set fresh challenges for the People’s Action Party (PAP), which marked a half-century in power this month.
Analysts say future risks include political change after the current generation of ageing leaders, possibly even from a split in the ruling party, and external threats such as conflict with neighbours and competition from cheaper manufacturing centres.
“It won’t be as stable and as unchangeable as people think,” said Roman Scott, who runs a private equity firm in Singapore. He is bullish on the country’s long-term prospects, but said terror attacks or political changes were the biggest risks.
“Even in Singapore, nothing lasts forever.”
Singapore is favoured as a base for its dependability, efficient bureaucracy and clean environment. Few investors expect shocks in a region where stability can quickly turn to chaos.
“I looked at all the cities in the world and decided to move to Singapore,” said American investor Jim Rogers, who co-founded the Quantum Fund with George Soros in 1970. Rogers is bearish on the U.S. dollar and pound but expects the Singapore dollar to stay strong because of political and economic competence.
Singapore’s stability rests on the vision of Cambridge-trained Lee Kuan Yew, who came to power in June 1959 after leading the PAP to its first general election victory. The party has never lost more than four seats in any poll since.
The government recently offered to nominate more opposition members to parliament, a move analysts said could be a release valve for criticism but may also stimulate some fresh ideas.
“It needs to accept a level of accountability and debate that it currently will not do,” said Bob Broadfoot of Political & Economic Risk Consultancy.
The government has been looking for younger stars, and cadres have started speaking about Singapore after Lee Kuan Yew.
Kishore Mahbubani, Singapore’s former United Nations envoy, saw a two-thirds probability Singapore would make a “smooth and seamless transition” after the retirement of octogenarian Lee.
This was due to a “deep institutionalisation” of the values of Singapore’s first generation of leaders, though corruption would have to be kept at bay, he told a recent seminar. Singapore is rated the least corrupt country in the region.
“We don’t see any dramatic or unstable political change in Singapore in the coming 10 years,” said Vincent Ho of Fitch Ratings, which gives Singapore its top sovereign rating of AAA.
Pierre Cailleteau, managing director for sovereign risk at Moody’s ( MCO – news – people ) Investor Service, said its AAA rating for Singapore hinged on strong financial fundamentals, a pro-business stance and the ability to adapt to changing economic conditions.
“We don’t look at the rulers of a country, but the way the country is ruled. For Singapore, we don’t see reasons to believe there will be any change in the degree of predictability if there is a change in leadership,” he said.
Even if future Singapore leaders became more vulnerable to public pressure and engaged in populist policies at the expense of economic goals, the shift would take place over a period of years rather than months, he added.
As it faces up to the global downturn, the government has just set up an “Economic Strategies Committee” comprising ministers and business leaders, to fine-tune plans for growth, as it aims to stay a hub for multinationals and trading.
Singapore has already been looking to wean itself off manufacturing by developing service industries such as wealth management and tourism, with two casino resorts due by next year.
It also hired ex-BHP Billiton ( BBL – news – people ) CEO Chip Goodyear to run state investor Temasek, replacing the prime minister’s wife Ho Ching. Goodyear is expected to look at investments in the resource sector, after the fund was burned by high profile investments in Western banks in the past year that created discontent among Singaporeans worried about the state’s savings.
Analysts say the country will continue to diversify into high value sectors such as nanotechnology, biomedical research, and renewable energy. But it is expected to remain dependent on overseas demand given its small 4.6 million population.
Among Lee Kuan Yew’s favourite topics is urging Singaporeans to have more babies. But this has not had much success, leaving the state looking to foreign labourers from China and other Asian countries, plus Western professionals, risking future social tensions as the population mix changes.
Singapore saw deadly race riots in the 1950s and 1960s.
Analysts say Singapore will have to be more politically open and culturally tolerant to attract rich migrants and to prevent a brain drain of young local talent.
“If you want to be a world city, you have to take on some of the characteristics of New York and London, a lot more diversity, a lot more tolerance, and a lot more openness,” Scott said.
(Additional reporting by Kevin Lim; Editing by Neil Chatterjee and Bill Tarrant)