Jason Wee Pulses Policy Pg50-57

Journey into uncharted territory How well has Singapore prepared for the possible future paths that lie ahead for the global economy?

TEXT _ JASON WEE

S

INGAPORE HAS DONE WELL in navigating through myriad storms over the last five decades, emerging stronger each time. There is little doubt that Singapore will survive the turmoil that is now upon us. However, whether Singapore will again emerge stronger depends on how well the country has prepared for the possible future paths that lie ahead for the global economy.

At one end of the spectrum is the possibility that this is just another cyclical downturn, with recovery back to status quo around the corner. At the other end, however, is the possibility that we are seeing the beginning of a tectonic shift, which will challenge previously held notions of value and ultimately result in a repositioning of the global powers. In the former scenario, Singapore will

almost certainly rebound quickly, in synchrony with the global macro environment. If the latter scenario pans out, however, the outcome is less certain. In recent months, the odds of this worst-case situation crystallising have been rising, and Singapore needs to be ready should this nightmare scenario come about. I will briefly recapitulate Singapore’s path to its present status, assess its cur-

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rent strengths, outline challenges and other macro-economic risks, and discuss possible policy initiatives that might help buffer against the fallout should the nightmare come about. SINGAPORE: PAST TO PRESENT Singapore’s policy in the early 1960s focused on creating employment via import substitution, and reducing dependency on entrepot trade as the newly elected People’s Action Party paved the way for a post-communist era in Singapore. Then came the turmoil of the mid-1960s to the early 1970s, where Singapore first joined and then had to leave the Federation of Malaysia, had a serious confrontation with Indonesia, and saw the departure of the British military which was then contributing around 20 per cent to Singapore’s GDP. It is hard to exaggerate the challenges that this fledgling economy had to face at this critical juncture. The departure from Malaysia derailed Singapore’s importsubstitution plan, since scale economies would be difficult to achieve without the vast hinterland that Malaysia offered. The confrontation with Indonesia, a significantly larger country, threatened security and its position as a major trading post for the region. Finally, the departure of the British forces meant the loss of some 40,000 jobs and the urgent need to replace the departing military with a credible domestic army, while surrounded geographically by less-than-friendly neighbours on all fronts. Somehow, these challenges were surmounted as the government pursued an export-oriented strategy and managed to attract foreign investors into the manufacturing and finance sectors. During this time, various agencies were set up, including the National Trades Union Congress and the National Wage Council (both set up in 1972), which helped to anchor the tripartite employer-employeegovernment arrangement that has kept labour disruptions at bay to this very day. Various companies were also nationalised at this point where private capital and expertise were deemed inadequate to take critical industries into the global arena, eg, Singapore Airlines, Neptune Orient Lines, and the Development Bank of Singapore. Since 1980, Singapore has pursued growth by targeting first the higher value-added manufacturing and then the

value-added services sector. Augmenting this was a continuing focus on labour productivity via basic education, manpower training and retraining; supportive investment policies through a mixture of tax incentives and fiscal subsidies; and expanding the global reach of companies via encouraging domestic companies to regionalise and internationalise, and setting up free trade arrangements with all major economic groups and countries around the world. During this period, Singapore’s GDP per capita grew from US$4,859 to US$37,597 at a compounded rate of 7.7 per cent per annum, moving at a similar pace to Hong Kong, the other highly successful Asian city, but far outstripping neighbours Malaysia and Indonesia (see Figure 1). There were three blips along this blistering 28-year growth path, namely in 1985, 1998 and 2001. In each instance, the government led the way via a combination of measures including wage cuts (sometimes through a lowering of the statutory pension fund contribution rate), monetary and fiscal measures to regain

Clearly, the average Singaporean has moved well past the basic needs on Maslow’s hierarchy and the government’s challenge has become one of catering to aspirational desires.

FIGURE 1: GDP per capita (1980 - 2008) (US$)

40,000

Singapore Hong Kong SAR Malaysia Indonesia Philippines

35,000 30,000 25,000 20,000 15,000 10,000 5,000 ’80

’84

’88

’92

’96

’00

’04

’08

Source: IMF (Oct 2008), Singapore Department Of Statistics

overall competitiveness, and continuously refocusing industry towards promising growth areas. The result is that a country devoid of all natural resources and depending primarily on entrepot trade and basic manufacturing is now a bustling city hosting the regional headquarters, R&D laboratories and key support centres of top names in the fields of technology, finance, pharmaceuticals and petrochemicals. It is now 2009, and Singaporeans count among the most affluent in the world, with a purchasing power parityadjusted GDP per capita of $51,649 (international dollars), just behind oil- and gas-rich countries of Norway and Qatar, and financial haven Luxembourg. Even after adjusting for the recent stock market correction, I believe Singapore is a country of household millionaires, with household wealth averaging around S$780,000 per resident household, augmented by government assets of around S$260,000 per resident household, ie, a total of just above S$1 million per household. While this is down some 20 per cent from the all-time high of S$1.3 million in 2007, it remains substantial. Clearly, the average Singaporean has moved well past the basic needs on Maslow’s hierarchy and the government’s challenge has become one of catering to aspirational desires. Alas, the average household is but a statistical concept. At the risk of oversimplifying, we can broadly classify Singapore into two distinct groups: the elite and the masses. The elite are the multimillionaires and high achievers who, together, push Singapore’s ranking on most financial and economic ratings to the top in the world. As an indication, for the year to March 2008, 156,660 residents (9.4 per cent of resident labour force) in the top income brackets contributed $2.9 billion or almost 90 per cent of the country’s total income tax from residents! While this statistic might exaggerate the income disparity due to the highly progressive income tax system, it does highlight how important this small group is towards sustaining Singapore’s current fiscal model. For a better understanding of the income dispersion, the five-yearly household expenditure surveys are probably a better indicator. The last survey in 2003 showed that the top 20 per cent of households earned some 53 per cent of total income, up from 36 per cent in MAY 2009 _ PULSES _ 51 37

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FIGURE 2: GDP per capita (2008) PPP-adjusted Country

Qatar Luxembourg Norway Singapore Brunei United States Hong Kong* United Kingdom Japan Malaysia

FIGURE 3: Total wealth of Singapore – resident households and government

Nominal

Rank

International $

Rank

US$

1 2 3 4 5 6 * 19 22 60

86,670 81,730 55,199 51,649 50,596 47,025 44,413 36,571 34,501 14,225

2 1 3 22 21 17 * 20 24 66

106,460 118,045 102,525 41,291 43,752 47,025 31,849 45,681 37,940 7,866

Note: * HK is shown for comparison purposes only as it is not strictly speaking, a separate country

1993, affirming that income disparity is indeed rising (see Figure 4). However, if we extrapolate the survey data further by subtracting expenditure from income to estimate household savings, we see that the lowest 20 per cent has been experiencing a worsening deficit, while the top 20 per cent has seen their savings more than double over the last 10 years. Using the 2003 data as a proxy suggests that the top 20 per cent contributes to some 80 per cent of total household savings. This is, not surprisingly, similar to the observation of Vilfredo Pareto, a European economist who, in 1906, observed that 20 per cent of the population held owned 80 per cent of the property (wealth) in Italy – a principle which has since been generalised to the 80-20 rule, or Pareto principle, for a variety of uses. Using our dual group model, the data suggests that while the elite in Singapore have continued to thrive, the lowest echelon has seen a decline in their income and a widening of their income-expenditure deficit. Those who wish to investigate this idea on a more macro scale might be interested to read the various books by Nobel Prize winner Joseph Stiglitz, who has outlined why some groups can actually be worse off even during periods of global prosperity. In the case of Singapore, we believe that this issue is not lost on the government and some efforts have been made in directing subsidies to this lower-income bracket. Still, the data suggests that the gap has not been fully offset. The 2008 survey has just been completed and, soon enough, we shall be able to assess the direction of this disparity in the last five years.

Source: IMF

Period ending

2007

Estimated March ’09

Total household wealth (S$bn)

0.95

0.85

- Per resident household (S$m)

0.90

0.78

Government net assets (S$bn)

0.41

0.28

- Per resident household (S$m)

0.39

0.26

Total wealth (S$bn)

1.35

1.13

- Per resident household (S$m)

1.29

1.04

1

Notes: 1. Government net assets for FY2007 are as at March 2008 Source: Singapore Department of Statistics, Government Releases, UW estimates* (* UW stands for Universe Within Pte Ltd, the writer’s company)

Using this dual-group model, a conceptual framework for the governing of Singapore could be outlined as follows: • For the masses, the government plays the role of caretaker, making sure that basic needs are met, and opportunities to upgrade into a better life remain open. In return, the masses help to maintain the continuity of the current government through their votes. • For the elite, the government ensures that Singapore’s overall environment remains attractive relative to other global cities in terms of a complex potpourri of metrics, including pay, safety, pollution levels and opportunities. In return, the elite continue to pay their dues in terms of taxes and maintain the country’s overall competitiveness by leading the various private and public institutions in an increasingly challenging global arena. • To ensure that there remain harmony and a sense of fairness between these two groups, the government must ensure that the opportunity to upgrade oneself into a better life remains, eg, via scholarships and other education subsidies. This dual nature of the government’s role is what most foreign critics miss, and why Singapore, while rated highly on most financial and economic rankings, loses out on various individual freedom rankings and their ilk. Like for like, the masses in Singapore have a better life than most other countries in the world, with household ownership at over 90 per cent and low sub-5 per cent unemployment rates over the last 10 years. This keeps the social compact intact. As for the elite, most do not care much that Singapore has just one very dominant ruling party as long as it keeps governing the country well since most really don’t

have the slightest interest in entering politics anyway. As for constraining rules, the reality is that with the ease of international travel that Singapore provides, and information accessibility via the Internet, they present no great issue to those who do seek greater freedoms. To paraphrase a senior lawyer’s words, “as long as you stay clear of politics, drugs and racial/religious issues”, you should be fine. CHALLENGES AHEAD With this dual-nature concept of Singapore in mind, we can now proceed to examine the challenges ahead. First, we discuss the domestic challenges, then the regional issues, before proceeding to examine risks of a global import. On the domestic front, we expect that GDP will decline by anywhere between 5 and 12 per cent for 2009. The best case scenario is arrived at by simply assuming that 2009’s quarterly GDP averages at just 3 per cent below estimated Q4 2008 levels, compared to the 4.8 per cent quarter-on-quarter decline that Q4 2008 itself registered. The worst case is arrived at by assuming that each of Singapore’s industries individually repeats its worst periods in the last three recessions of 1985, 1998 and 2001 (see Figure 6). In this case, the overall GDP should bottom out around Q3 2009 followed by a modest rebound, bringing GDP levels back to 2008’s high only in 2012. The four sectors of manufacturing, wholesale/retail trade, transport/storage and financial services – which might suffer double-digit declines in 2009 taken together – provide some 1.3 million jobs or 46 per cent of all jobs in Singapore. Major labour force dislocation, that is,

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significant unemployment, is thus the near-term risk facing Singapore (and most economies) on the domestic front. The chart of employment expectations in the manufacturing and services sectors puts this risk across most succinctly, with the latest Q1 2009 figures nose-diving. There is every possibility that without the recent wage cost offset and other incentives announced in the recent Budget, double-digit unemployment rates would be around the corner. As it is, one can only hope that enough companies are willing to hold out for a better 2010 before taking more drastic action on headcount. On the regional front, Singapore has always had intermittent difficulties. The causes of these difficulties have been wide-ranging, from territorial disputes (eg, Pedra Branca), to water resource agreements and being blamed for exporting inflation (eg, by parts of Malaysia). For now, domestic politics in Malaysia (and in Indonesia) has taken the limelight. In addition, Singapore’s economy is likely to suffer more than its neighbours given its significantly higher exposure to global trade and finance, smaller domestic consumption base and lack of natural resources. Hence, we foresee no problems here for now. Still, when things settle they will re-emerge. The cause, I believe, is more envy than fear, as Singapore’s affluence has far outstripped that of its neighbours (see Figure 1). For now, differences have been dealt with via diplomacy (including resorting to the International Court of Justice for a recent dispute), continuing development of mutually beneficial economic ties, and the maintenance of a viable defence force as an effective deterrent. We believe there is another way that Singapore can develop even stronger ties with the region, and indeed, the world, which can insulate it against risks of lessthan-neighbourly behaviour. I will discuss this in the next section on potential action plans. On the global front, consensus opinion is that the current downturn has been caused initially by the collapse of the collateralised debt obligations (CDO) market, which snowballed into a full-scale credit crisis, followed soon after by the aftershocks which continue to depress real consumption demand to this day. The response around the world has been a

FIGURE 4: Average household income by income bracket Year

1993

2003

(S$ per month)

All households 3,458 Lowest 20%

887

Change 2003/1993 (%)

4,867

41

795

-10

2nd quintile

1,645

2,059

25

3rd quintile

2,487

3,379

36

4th quintile

3,799

5,309

40

Top 20%

5,055 12,792

153

Source: Singapore Department of Statistics

FIGURE 5: Average household income less household expenditure by income bracket Year

1993

2003

(S$ per month)

All households

Change 2003/1993 (%)

796 1,623

Lowest 20%

104

-227

-464

104

40

-41

na 110

2nd quintile 3rd quintile

277

582

4th quintile

841

1,405

67

3,044 6,632

118

Top 20% Top 20% as % of all households

77%

82% Source: IMF

FIGURE 6: Worst-case GDP growth outlook for Singapore Year

2009 (%)

2010 (%)

Total

-12.3

Manufacturing

-21.9

8.4

Construction

-3.2

-23.9

Utilities

4.5

3.1

7.6

Wholesale/Retail

-15.3

7.2

Transport/Storage

-14.2

-4.1

Hotels

-5.0

5.4

Info/Communications

-4.6

0

Financial services

-12.5

6.2

Business services

-5.0

4.7

Source: UW estimates

dramatic monetary easing, fiscal stimulus through deficit budgets, and direct market intervention via government bailouts. While the economic free-fall experienced in the second half of 2008 has been ar-

rested to some extent, the jury is still out on whether enough has been done to prevent the current deterioration in global GDP from lingering for years. In the optimistic scenario, one would hope that these measures manage to stabilise confidence and resuscitate flagging consumption, followed by recovery in bank lending, improvements in capacity utilisation as inventories get drawn down, allowing companies to start replenishing stocks, followed later by recovery in investments as utilisation levels reach capacity. Should this scenario pan out, we would be seeing a bottoming out of the global economy sometime in late 2009 with recovery only slowly becoming more palpable in 2010. The world will then slowly revert back to status quo with the developed world returning to very modest growth from late 2010 onwards, and the emerging powerhouses of China and India resuming high single-digit growth rates at around the same time. Inflationary risks would remain mild for some years yet, since there would remain significant slack in capacity utilisation levels for most industries. Under this scenario, the significant short-term fiscal boosts enacted in the latest Singapore Budget and current strategic positioning of Singapore’s assets should allow the country to return to a modest growth trajectory by 2010. Unfortunately, there is a darker possibility on the horizon. The premise here is that the days of the consumption-led growth model in the US and other developed economies are over, and that markets are now demanding more responsible fiscal management at both the individual and government level. The problem signs have actually been around for some time, but it is only now, when the US has actually started printing money in an attempt to reflate the economy, that the death knell is finally sounding. Consider the following: • The latest estimate from the Congressional Budget Office of the US suggests that debt held by the public is poised to rise from 41 per cent of GDP in 2008 to 57 per cent in 2009 and 82 per cent by 2019. Rising spending on Social Security, Medicare and Medicaid driven by an ageing population will continue to push this deficit beyond 100 per cent by 2040, a level that is clearly unsustainable. • The US can continue these deficits as MAY 2009 _ PULSES _ 53

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FIGURE 7: Quarterly employment forecast by sector (%)

FIGURE 8: US-owned assets abroad vs foreign-owned assets in the US US-owned assets abroad, foreign-owned assets in US$ trillion

30 Services 20

(US$ trillion)

25

1.0 0.5

20

A – B (RHS)

0.0

10

-0.5

15 0

-1.0 Manufacturing

-10

-1.5

Foreign-owned assets (B)

-2.0

5

-20 -30

10

-2.5 US-owned assets abroad (A)

0 2004

2005

2006

2007

2008

’80

Source: Department of Statistics, Ministry of Trade and Industry, Economic Development Board

long as there remains foreign investor appetite for its domestic assets. However, by 2007, foreigners already owned some US$20.1 trillion in US assets. Netting this off against US ownership of foreign assets, the deficit is already at a historical high of US$2.4 trillion. • China, the single largest holder of US debt at around US$740 billion (January 2009), or 24 per cent of all estimated foreign holdings, has just suggested the need for a new reserve currency. • Of the six other top foreign holders of US government debt, the appetite for US debt looks increasingly suspect. The UK (which just failed to find enough buyers for its latest bond auction) and the Caribbean banking centres have already been trimming holdings, Russia is in concurrence with China on the call for an alternative reserve currency, Japan needs to deal with its own domestic economy first, and Brazil and the oil exporters will need higher oil prices. • The US has already started printing money by using the Federal Reserve to buy government debt. With just US$135 billion remaining in the US$700 billion financial-sector bailout fund approved by the US Congress, and much left to be done, it appears that more printing lies ahead. The problem with the call for an alternative reserve currency is that China and Russia alone do not, yet, have the political muscle to push for its creation at the International Monetary Fund (IMF). Even if the United Nations panel of economists led by Joseph Stiglitz, who have voiced their concurrence, do come up with a viable solution soon, it will still be years be54 _ PULSES _ MAY 2009

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fore this structure can be created due to political wrangling and likely opposition from current beneficiaries of the status quo. The quickest solution would be for another currency to take the place of the US dollar as the reserve currency, but the European Union and Japan are in no position to proffer their own currencies given their own economic mess, and China seems to favour a far more modest pace of currency appreciation. If the US does continue printing money, and other major economies follow suit, then the Chinese will probably have to do likewise or risk seeing the renminbi appreciate sharply or re-experience significant domestic asset inflation. In this nightmare scenario, the likely outcome is that inflation will return with a vengeance well before consumption recovers, due mostly to a capital flight away from increasingly worthless paper currencies and into hard assets and commodities. This frightening scenario is actually the base-case expectation of the gold bulls and why gold coins have suddenly become scarce. Meanwhile, we have the related problem of creeping protectionism as governments around the world are pressured by their constituents to cushion rising unemployment levels. To those at risk of losing their job, redirecting domestic demand towards domestic enterprises is one simple solution, while the counter-argument that trade protectionism ultimately leads to greater structural dislocation due to titfor-tat responses by other countries is an all-too-distant hypothesis. On the issue of creeping protection-

’85

’90

’95

’00

’05

-3.0

Source: US Treasury

ism, there is unfortunately little that Singapore can do except perhaps remain vigilant and use diplomatic channels to forestall or reverse specific instances. We shall thus focus on the other major risk, ie, that the policies of the developed world will fail to resuscitate demand sufficiently before inflation returns with a vengeance, with the US economy ultimately capitulating under the weight of its own debt and countries around the world forced to find an alternative reserve currency. Thankfully, there is still time to adjust since this nightmare scenario remains a black swan event which many among the intelligentsia, except for the gold bulls, are hoping does not pan out. In the final section, I discuss how Singapore is positioned against the challenges outlined thus far, and suggest how to perhaps buffer against these risks and increase the island republic’s overall resilience in the long run. REPOSITIONING FOR THE ROAD AHEAD Let’s now review the balance sheet of Singapore’s households before moving on to the government balance sheet and suggest areas for further assessment. Thereafter, I will look at other steps that might help improve Singapore’s long-term resilience. Let’s first look at the balance sheet of the top 20 per cent of Singapore’s resident households. I estimate that this elite group has garnered some S$2.9 million in net wealth and remains lightly geared at around 15 per cent (S$500,000 loans against $3.4 million in assets), even after accounting for the steep fall in asset values in recent months.With cash of around MAY 2009 _ PULSES _ 37

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FIGURE 9: Estimated average Singapore household wealth breakdown for top 20% Per resident household

S$m

% of total assets

Net wealth

2.9

85

Total assets

3.4

100

Cash & deposits

0.9

26

Shares & securities

0.4

10

Life insurance & pension funds

0.8

24

Property

0.3

10

Total loans

0.5

15

Source: Department of Statistics, Ministry of Trade and Industry, UW estimates

S$900,000, they seem well-buffered for the current downturn. The only suggestions for this group would be to remain light-footed on their securities holdings and stand ready to shift heavily into inflation hedges (like precious metals and commodities), should investors signal that they are no longer willing to fund the US deficit, eg, a failure at its bond auction, rising long-term government bond yields, and reductions in Chinese holdings of US debt. As for the rest of Singapore, the average household wealth would be S$200,000 with the bulk being illiquid assets like property (about 70 per cent) and pension funds (about 17 per cent). This means that a sustained downturn would exact a tremendous toll on the average person. Of course, it would be far more exacting on the weakest 20 per cent of households given that they would barely have any savings. This brings us to the government balance sheet which becomes extremely important to the less wealthy in Singapore as it can augment future financial needs via subsidies and other fiscal measures. Using available data and recent publicised disclosures of the performance of the Government of Singapore Investment Corporation (GIC) and Temasek Holdings, I estimate that the government is now overseeing around S$530 billion in total assets (after marking Temasek’s assets to market values), with around S$123 billion lodged as deposits in the Monetary Authority of Singapore (MAS), S$127 billion in Temasek, and up to S$205 billion in the GIC. This suggests that the recent market

FIGURE 10: Asset and liability breakdown for Singapore government Period ending

March 2004

2005

2006

2007

2008

2009e

(S$ billion)

Assets Cash Investments Government stocks Other investments - quoted Other investments - unquoted Deposits with investment agents

399 87 313 78 180 53 2

437 102 335 74 200 58 2

483 112 371 76 198 95 2

522 107 414 77 208 127 3

610 113 497 76 241 177 4

548

Liabilities Deposit accounts Funds set aside for specific purpose

301 2 299

327 2 325

357 2 355

381 3 378

436 4 432

420 4 416

98

110

126

141

174

127

Estimated breakdown by manager Government stocks Deposits held at MAS Temasek shareholders' funds Potential assets under GIC Total assets

78 86 65 171 399

74 101 71 191 437

76 115 91 202 483

77 111 114 220 522

76 117 144 273 610

76 123 144 205 548

Temasek at market value Total assets with Temasek at market value Less outstanding government debt Net assets at market value

90 425 200 225

103 469 200 269

129 522 200 322

164 572 206 365

185 651 244 407

127 531 255 275

Consolidated fund

Source: Government reports, UW estimates for March ‘09

sell-off has resulted in net assets falling by just over 30 per cent from S$407 billion in March 2008 to S$275 billion by March this year, returning to around March 2005 levels. This leaves the accumulated surplus at a still formidable S$127 billion – equivalent to almost three years of annual government expenditures (using FY09’s generous budget spending) or 67 per cent of GDP. A discussion of potential steps must first distinguish between the functions of the three major institutions tasked with managing the country’s sovereign assets. First, there is the MAS, Singapore’s de facto central bank, which is tasked with managing Singapore’s official foreign reserves and seeks to “promote sustained non-inflationary economic growth, and a sound and progressive financial centre”. Singapore’s monetary policy focuses on targeting the exchange rate on a tradeweighted basis. This system has worked very well in the past as the MAS has allowed the Sing dollar to appreciate to offset inflationary pressures and appears to be allowing the reverse as inflationary risks have abated, for now.

Should our nightmare scenario transpire, however, I doubt there is much that the MAS can do since, when all major countries start printing, allowing the Sing dollar to appreciate too sharply would decimate many of Singapore’s businesses. Perhaps the only suggestion might be to reconsider its strategy on its gold holdings, which has seen a steady decline from S$374 million in March 2003, to S$228 million in March 2008. Temasek and the GIC are the other two important institutions managing Singapore’s wealth. The difference between the two is that Temasek is a more active investment manager which began as the holding company for various businesses held by the Singapore government in 1974 and has since seen its initial portfolio of S$350 million grow some 360-fold to S$127 billion. The GIC, on the other hand, began some seven years later in 1981, and is tasked with managing Singapore’s foreign reserves. Thus this portfolio would be less aggressive than Temasek’s and skewed towards capital preservation. Both institutions have performed credibly well over the last 20-odd years, and it MAY 2009 _ PULSES _ 55

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The Interfaith Group – which makes up of the main religions in Singapore – presenting a cheque to humanitarian group Mercy Relief

Singapore can have an added role on the world map as an intermediation place for religious and spiritual matters, a role which might actually supersede its current role as a trade and financial intermediary. would be unfair to be overly critical due to their dismal showing last year. I thus proffer the following as suggestions for further consideration. First, the assets managed by both funds can be skewed towards areas which might offset the risks inherent in Singapore’s domestic economy. For starters, Singapore lacks natural resources and thus a more significant stake in energy and agri/aqua-culture assets would be a helpful balance. An additional benefit is that it would more closely align with the future consumption needs of Singapore’s resident population. Second, investments should skew towards economies with prospects of longterm productivity gains (eg, from demographics) and away from countries facing structural fiscal problems (eg, the US). Third, investments in cyclical industries where Singapore’s domestic economy is already heavily exposed to, like finance and transport, can be curtailed. Taken together, these suggestions would probably have forestalled Singapore’s recent acquisitions into Citibank, UBS and Merrill Lynch. This investment approach will also be less dependent on

the need for defining value based on a specific functional currency, thereby reducing problems caused by turmoil on this issue in our nightmare scenario. In the longer term, these external assets would provide a useful counter-cyclical balance to Singapore’s inherently cyclical domestic economy due to its exposure to trade and finance. In terms of the domestic economy, Singapore has already implemented some of the suggestions I made some six years ago while in my capacity as research head in my previous firm. This was in a 72-page report entitled Wake-Up Call published in March 2002, which suggested making Sentosa an enclave for the super-wealthy and made the case for allowing casinos, among other things. There is, however, one area of significant strength that Singapore has yet to take to its natural conclusion. I believe that one of Singapore’s least heralded miracles is the racial and religious harmony that has existed for the last two decades amid much turmoil experienced by other countries in this dimension. Singapore is thus eminently qualified to foster an inter-religious and

spiritual organisation that acts as a bridge to the country-level organisations in India, the Vatican, the US, etc. A successful implementation of this strategy will see Singapore become the world’s pre-eminent centre for religious and spiritual pursuits, and a venue for continuing dialogue and discussion in areas of religion and spirituality. Suffice it to say, these organisations are rich, and rather than needing financial incentives, Singapore might actually benefit from a slice of their vast assets under management. More importantly, these bridges to other countries around the world will augment existing diplomatic channels currently based largely on trade and commercial considerations, possibly buffering Singapore against un-neighbourly behaviour borne of envy. Singapore will also have an added role on the world map as an intermediation place for religious and spiritual matters, a role which might actually supersede its current role as a trade and financial intermediary. Best of all, this is one role that other countries like China will never be able to usurp for the foreseeable future. There are, of course, some risks that

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FIGURE 11: CPF withdrawals for investments vs MSCI Singapore Index Quarterly net withdrawals from CPF for investments (S$m)

MSCI Singapore Index

700 600 MSCI Singapore Index

500 400 300 200

Withdrawals for investments

100 0

2003

FIGURE 12: Average per capita monthly income (including rebates) vs expenditure

2004

2005

2006

2007

2008

1,600 1,400 1,200 1,000 800 600 400 200 0 -200 -400 -600

Income including rebates (A) (S$ per month) Year

A–B

(S$ per month)

(S$ per month)

1998

2003

1,300

1,482

856

962

444

520

Lowest 20%

306

308

524

568

-218

-260

2nd quintile

610

660

626

712

-16

-52

3rd quintile

942

1,029

766

864

176

165

4th quintile

1,425

1,597

959

1,129

466

468

Top 20%

3,216

3,816

1,404

1,537

1,812

2,279

Average

Source: Singapore Department of Statistics

need to be considered. First, there would be the rules governing non-interference with politics. Second, Singapore must consider how to manage potential repercussions should, say, the Dalai Lama wish to visit this intermediation zone. Third, there would be a need to ensure that harmony is indeed preserved by a careful balance of the various religious and spiritual factions. Fourth, it would be wise to create physical proximity among the various factions and, perhaps, shared resources like libraries and meeting places to reinforce a collegial atmosphere. I believe that the risks can be managed, and where Singapore missed the opportunity to become the world’s headquarters for international organisations like the UN and IMF, becoming the global coordinating centre for religion and spirituality might be just as pivotal. Coming back to individuals, we believe that Singaporeans need to become more independent in the management of their wealth. Certainly, the experiment of allowing Singaporeans to invest in equities and unit trust products has been less than successful. The chart above (Figure 11) reaffirms past studies which have suggested that Singaporeans have done poorly in their investment forays. Essentially, the net investment outflow from Central Provident Fund savings peaked at S$1.3 billion for Q1 2008, almost in synchrony with the stock market, before dwindling into net withdrawal territory in recent quarters. The response from the government seems to be a curtailing of these investments by requiring a minimum balance

Expenditure (B)

of S$20,000 in the Ordinary account and S$30,000 in the Special account of Singaporeans’ CPF funds before they can invest in products like shares and unit trusts. This, of course, transfers the investment responsibility to the government’s asset managers, namely the MAS and GIC (more the latter), who will then have to redeploy these savings. However, I believe this is counterproductive in the longer term. By insisting on these hefty minimums, it makes it

Instead of just linking pay to the average of Singapore’s best-paid individuals, one might also set up a cap to this pay (future leaders’) based on a multiple of the income of the bottom-most 20 per cent. much more difficult for the average Singaporean to build a retirement nest-egg, since traditional life-cycle investment models would suggest a far more significant portion of investments (sometimes up to 80 per cent) be geared towards higher-risk, higher-return products like stocks and shares while one is young – not cash. By transferring the responsibility of managing this minimum sum to the MAS and GIC, but not giving similar equity-like returns, simply fosters continued dependency of the people on the government. Better, perhaps, is a more structured way to ensure that individuals acquire

1998

2003

1998

2003

Source: Singapore Household Survey 2003, UW analysis

requisite knowledge before allowing them to invest their pension in risky assets. The government can simply require that individuals wishing to invest in equities, bonds or other exotic products pass a standard examination, with higher investment sums allocated to those passing more advanced tests. Executed well, this should bolster the investment education field in Singapore while also allowing those individuals wishing more autonomy for their own pension funds an avenue to achieve this. Finally, there is the matter of the less well-off in Singapore. This is the segment of the population that needs the most assistance from the government. Despite rebates which have targeted the less well-off, the 2003 survey shows that the income/expenditure deficit has risen for the bottom-most 40 per cent of Singapore households! (see Figure 12) Perhaps a rising income disparity is unavoidable as we progress towards ever higher levels of affluence, but the government might consider ensuring that future generations of leaders do not forget about Singapore’s bottom-most 20 per cent by setting some quantitative linkage to their pay package. My suggestion is that instead of just linking pay to the average of Singapore’s best-paid individuals, one might also set up a cap to this pay based on a multiple of the income of this bottom-most 20 per cent. This multiple can be set at some reasonable level without being excessively onerous, so that future leaders, in their pursuit of ever-higher quantitative metrics, will never forget about the less welloff in Singapore. P

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