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R M Cutler
Hopes that surging share prices in Singapore over the past three months point to an early recovery may be short-lived. A decline in exports, the city’s life-blood, is picking up pace even after 13 months of falls, and stock declines this week may herald a longer pull back.
Singapore’s gross domestic product (GDP) fell 10.1% in the first quarter this year from the same period in 2008. This represents a decline of 14.6% quarter-on-quarter following a 16.4% fall in the fourth quarter of 2008. All sectors experienced further quarter-on-quarter declines, with the exception of construction and financial services. The broad weakness was especially marked in electronics, biomedical manufacturing, precision engineering, chemicals and manufacturing.
Exports have fallen for 13 months straight and, at least for the time being, the decline in exports is accelerating: down 19% in April from the year previous after a 17% year-on-year decline in March. Singapore’s exports-to-GDP ratio is over 1.8, meaning that capital expenditure cannot be expected to recover significantly anytime soon either. This notwithstanding, the country’s Purchasing Managers’ Index climbed to a nine-month high in May, just above the 50 level, meaning that manufacturing is expanding, despite earlier expectations that manufacturing output would contract throughout 2009.
While there is some month-on-month improvement, however, levels remain far below the equivalent period from 2008. Increased unemployment throughout 2009, resulting from decreased global demand, will mean that domestic consumption will also lead to further production declines in goods intended for domestic consumption.
The corporate sector will therefore continue to be under enormous stress while access to credit will remain tight as well. Small and medium enterprises are faring marginally better than the large corporations thanks to relaxation of conditions of their access to credit under the stimulus package adopted earlier this year.
Despite the improvement, therefore, the country’s national bank maintains its forecast of a 9% decline in GDP during 2009, around which level the consensus forecasts also falls. This follows a deceleration to 1.1% growth in 2008 after a 7.7% rate in 2007. Insofar as recent growth had been led by the banking sector and by exports, the country’s central bank projects a slow recovery dependent on the recovery of export markets.
According to many observers, all this means that no meaningful economic recovery will come in Singapore by at least the end of 2009. Citigroup, for example, expects GDP to recover to pre-recession levels only by the end of 2010. Given the continuing weakness in the economic systems of developed industrial countries (negative economic growth, still fragile financial and banking institutions, rising unemployment, restrained consumer spending), it is surprising that such analysts are so relatively optimistic.
The journalistic commentary has lately begun, in order to avoid discussing the “L” shaped depression (or worse), to adumbrate a “W” shaped recovery now that the “V” won’t happen and the “U” seems unlikely. The “green shoots” theme recently in vogue has passed out of currency, and while the US situation ameliorated slightly before showing its continued further weakness, neither Japan nor Europe has shown even the slightest improvement.
The consensus inflation forecast for 2009 is slightly negative (about 1%), with deflationary pressures greater than inflationary ones due to the falling currency abetted by foreign exchange and monetary intervention by the central bank. Countervailing, inflationary pressures are likely to come from such sources as increased transportation prices for imports due to such factors as the recent rise in the price of oil.
Meanwhile, PetroChina has bid US$2.2 billion to buy half a refinery in Singapore, as part of a long-standing Chinese strategy for its parastatal companies to become more influential in global energy markets. Since most of Asia’s oil prices are determined in the Singapore trading
hub, the move provides not only a significant source of supply but also a still greater presence where the markets are made.
PetroChina has doubled its fuel trading volumes in Singapore over the past four years, participating more and more deeply in the price-setting mechanism itself. In the end, this will especially increase its leverage on spot prices in Singapore. According to Reuters, it will also give PetroChina a more equal ground with Sinopec in matters of trading expertise and market influence as well as a more dispersed economic geography of refining.
The country’s equity market benchmark Straits Times Index (STI), which closed as low as 1,457 on March 9, has risen over 60% from that level to the high 2,300s in less than three months, is now set to retrace some of those gains, perhaps back as low as the low 2,100s. Indeed, the Singapore market has already begun this process in the past two days.
Generalized risk aversion in world equity markets has also hurt Singapore’s stock markets as capital outflows have increased, raising long-term pressure on the Singapore dollar. This comes as Asian markets in general also prepare for a generalized correction of their recent run-up.
Dr Robert M Cutler has researched and taught at universities in the United States, Canada, France, Switzerland, and Russia. Now senior research fellow in the Institute of European, Russian and Eurasian Studies, Carleton University, Canada, he also consults privately in a variety of fields.