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BUDGET COMMENTARY

Positioning Singapore to be future ready

Wednesday, February 22, 2017 - 05:50

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Economic slowdowns and recessions often spur policymakers to rethink the merits of the prevailing economic wisdom. We are witnessing such a shift in Singapore.

Singapore

IN 2013, during a press conference to announce Microsoft's acquisition of Nokia's mobile phone business, Nokia CEO Stephen Elop ended his speech saying: "We didn't do anything wrong, but somehow we lost," upon which he wept publicly. In Nokia's case, the world changed too quickly. As technology evolved, the company failed to adapt to the changes, lagged behind and eventually got acquired.

The release of the Committee for Future Economy's (CFE) report and the 2017 Singapore Budget announcement on Monday brought Nokia to mind. It is a budget which looks to position Singapore to be future ready; to adapt to a changing world and ensure we can learn and change quick enough to thrive over the next 50 years. And avoid losing relevance just like Nokia.

The past few years have been humbling for Singapore. Accustomed to average growth rates of 4-6 per cent in the past few decades, the Singapore government's future projection of 2-3 per cent growth over the next decade takes some getting used to.

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In fact, the economy barely touched 2 per cent last year, thanks to a last minute surge from the manufacturing sector in Q416. With job redundancies rising to post Global Financial Crisis highs, it is no wonder that the mood on the ground is rather somber.

To this end, the 2017 Singapore Budget is largely about helping SMEs tide through the economic slowdown and executing the findings of the CFE, which stressed the creation of new industries via digitization as well as the transformation of key industries such as finance, manufacturing and healthcare. It is more about accelerating the existing strategic shifts that the government is already undertaking, than an extensive overhaul of a model that has served us so well.

S$2.4 billion over the next four years to implement the CFE report's strategies as well as another S$4.5 billion via Industry Transformation Maps (ITMs) to help firms transform is a shot in the arm, but it could perhaps have gone further by offering tax credits to companies in their R&D expenditure. In fact, the UK and Canada are offering tax credits to the tune of 31 per cent and 41.5 per cent of a company's overall research and development expenditure. While R&D activities may not have an immediate pay-off, these are ultimately crucial in building a competitive advantage for Singapore as new businesses, entrepreneurs and ecosystems are created.

While there were calls by trade groups for more extensive help over the short term (from the Singapore Business Federation), we view the S$1.4 billion worth of near-term targeted measures as adequate lest we create a sense of dependency.

As expected, there was no easing of the property tightening measures. A shift away from an over-reliance on rental income is healthy as that could perhaps unlock capital needed to promote entrepreneurship and innovation. Notwithstanding that, the increased subsidies for first-time buyers on the resale HDB market should help sustain the nascent recovery in the HDB resale market, where a large increase in supply is forthcoming due to the 18,000 Build-to-Order HDB units that is reaching the end of their minimum occupation period (MOP) or 80 per cent higher than 2015.

Singaporeans will also need to get used to coming changes in the tax regime. Both corporate and individual taxes have been falling since a high of 40 per cent in 1986, until 2015 when the individual tax rate was increased to 22 per cent. According to Ernst & Young, Singapore's effective tax rate of 14 per cent for the S$400,000 bracket is the second lowest in the Asia-Pacific region.

An increase of 2 per cent for the tax bracket as well as increasing GST to 8 per cent could add around 0.5 per cent of GDP to revenues. It is also not unthinkable that wealth taxes could perhaps be re-introduced in the medium term.

Although the Budget is less supportive of growth than what the capital markets would like it to be, hence the equity market's less than enthusiastic reaction, the current backdrop of improving growth and inflation dynamics should keep the MAS on hold at its policy meeting in April. Singapore's non-oil domestic exports (NODX) growth has recovered into the high single-digits, while headline and core inflation have risen further above zero per cent and one per cent respectively in recent months.

Leading PMI indicators also continue to improve, signalling continued expansion in manufacturing and electronic sectors. The new diesel duty and 30 per cent hike in water tariff will likely lead to higher CPI over the next 24 months.

We therefore expect the MAS to tone down its dovish bias at its upcoming meeting in mid-April, and shift towards a more neutral stance. However, we would not expect an outright shift towards a hawkish bias, given that Singapore's output gap remains negative, and considering ongoing uncertainties related to European political risks and US trade protectionism.

Economic slowdowns and recessions often spur policymakers to rethink the merits of the prevailing economic wisdom. We are witnessing such a shift in Singapore as the government searches for new or rediscovered formulae to stimulate a slowing economy and an ageing population.

The CFE report and the 2017 Budget goes some way towards meeting these challenges with its prudent and forward-looking approach. Ultimately, for the strategies outlined in the CFE to succeed, we need a holistic shift in perception, outlook and approach. What served us well in the past may not be so applicable in a future where we compete on ideas and creativity, not on price. Perhaps a re-think on the Singapore education system next?

  • The writer is managing director and chief investment officer, Southern APAC at UBS
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