When the tide goes out

September 17, 2012
Singapore Democrats

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Toh Beng Chye

Mr Warren Buffett, the world famous
investor, also known as “The Oracle of Omaha” is credited
with the following quote: “When the tide goes out, we can see who
is swimming naked”.

What he means is when the economy is
booming, most companies have no problem staying profitable and
solvent. Companies with unsound management may take on
large amount
of debt for investment to pursue growth.

However when the economy
down, unwise growth strategies and poorly thought-out business
models will be exposed for what they are.

On the
other hand, companies with prudent management that only take on
limited debt for sound investment will remain solvent and profitable
despite the downturn.

The global economy has begun a downward trend. The table below shows that 80% of some of the
world’s strongest economies have declining manufacturing PMI (Purchasing Managers’ Index).

How does this show up good and bad economic management in the various countries? The three charts below show how the
manufacturing sectors of the exporting nations of Asia have been
declining. According to Warren Buffett, we can expect
to see all the flaws and structural imbalances of the
economy of each country revealed as the global downturn proceeds.

Australia provides us with a good
example of the gross structural imbalance that has built-up in her
economy over the past decade as she rides the commodity and mining
boom (driven by China’s boom in infrastructure development). It does
not take an economist to recognize this imbalance when iron ore is 25% of a country’s total export. She has under-invested in  
manufacturing as
shown by the Australian Capex for manufacturing (see chart below).

With the
price of iron ore
plummeting and China
staring at a hard landing, one
can predict that Australia is going to face serious problems. This is
illustrated by the recent trouble of
Fortescue Metal Group, Australia’s
third largest iron ore
producer. (For more about
the looming problems of Australia, see

What about Singapore? How is Singapore going to fare in this global downturn? Have we managed our economy well so that we will come out stronger at the end of it?

Singapore has many structural imbalances built up over the
years in our economy. As the global economy slows, it is appropriate for everybody to
consider the issue and discuss how we can address it.

Former GIC chief economist
Yeoh Lam Keong had recently discussed the various structural issues
of Singapore’s
economy. Mr Yeoh pointed out that Singapore’s immigration policy especially in the recent past has created a growing underclass of citizens. He talked argued that the minimum wage may not be as bad as the PAP Government paints it out to be.

(Editor’s note: These are the issues that SDP has been advocating and campaigning on
for the decade and more.)

Similarly, Prof Lim Chong Yah advocated administering a “wage
shock therapy” to address Singapore’s problem of low income

These are troubling structural problems that may haunt Singapore as the downturn looms. Whether we will be caught naked when the tide goes out is anybody’s guess but given the problems that we have, there is cause for concern.

Hopefully, we
can emerge from the downturn a more cohesive nation with a more
balanced economy.

Dr Toh Beng Chye is a medical doctor and is a member of SDP’s Healthcare Advisory Panel.