S'pore economy to be productivity driven

THE local economy is entering challenging times as it transits to one led by productivity and it's also a fallacy to think that the economy will benefit as much as previously from stronger growth of the developed markets.

People tend to compare Singapore with global cities but it actually has a developing market structure, only the cost of living is comparable to places such as New York and Hong Kong, said James Sullivan, JP Morgan head of Asean/Singapore equity research.

"All of us who live here know it is very expensive," said Mr Sullivan yesterday in a Singapore equities outlook presentation.

Not only is Singapore among the costliest cities in the world, its ranking continues to move higher.

This year, Singapore is ranked the 6th most expensive city, up from 9th in 2012, according to the Economist Intelligence Unit world cost of living indexes.

"But the structure of the Singapore economy mirrors that of emerging markets (Malaysia/Indonesia) and emerging market cities like Beijing/Shanghai, whereas our cost structure mirrors that of developed market and global cities like New York," he said.

Singapore still has a big manufacturing sector; in 2011, it made up 27 per cent of GDP, not so different from Indonesia's 26 per cent and Malaysia's 25 per cent, said Mr Sullivan.

Manufacturing in Hong Kong and New York were 2 per cent and 6 per cent, respectively.

He estimates that Singapore's move to a productivity driven economy will likely result in shifting 172,000 manufacturing jobs into the services sector.

The country's inability to continue to rely primarily on immigration implies that existing workers will need to be retrained.

"This represents a significant retraining/ development challenge which will take time," he said.

"In the last eight years, it's been zero productivity growth, now trying to change that is a challenge," said Mr Sullivan.

His colleague Adrian Mowat, in fact, argues that Singapore is most like China.

"Singapore's run out of Singaporeans to put into any jobs, it's been papering over the problem by importing workers," he said.

In China, the supply of factory workers, young people below 35 is now falling on an absolute basis due to declining birth rates.

On next year's growth, Mr Sullivan said it's a fallacy to think that Singapore's open economy means it is well disposed to gain from stronger growth of the US and Europe.

That was 10 years ago, when developed markets (DM) grew, it meant emerging markets (EM) exported more, he said.

"Now a very very large per cent of those exports are intra Asia, mainly China, so this transmission mechanism between DM growing and EM economies doing better than expected is very different today than it ever has been," he said.

"EM is driven by EM today, which is an odd assertion because that's not what most people think," he said.

And some Asean countries have current account deficits, he noted.

Last month, the Monetary Authority of Singapore (MAS) in its Macroeconomic Review October 2013 issue said the country remains more exposed to the advanced economies than to emerging Asia.

As such, the slowing growth in emerging Asia is unlikely to negate the positive effects from a recovery in the developed countries, according to the Review.

Singapore's reliance on the domestic demand of its emerging market neighbours, namely the Asia-6, rose considerably through the 2000s and accounted for 14 per cent of its GDP in 2009, according to OECD-WTO estimates.

Asia-6 comprises China, India and Indonesia, Malaysia, Thailand and the Philippines, also known as the Asean-4.

"Nonetheless, Singapore remained more tied to domestic demand in the advanced economies, with its exposure to the G3 totalling 24 per cent of GDP," it said.

Turning to the local stockmarket, Mr Sullivan said while 75 per cent of the revenues of listed companies are driven by activities offshore, revenues derived from US and Europe is less than 10 per cent each.

Singapore stocks which will do well in 2014 are those sector leaders in either product differentiation/cost efficiency like Keppel Corp and Ezion Holdings. Also names positioned to capitalise on structural industry upcycles are Golden Agri-Resources Ltd and Jardine Cycle & Carriage.

Stocks to avoid are Indofood Agri Ltd, OCBC Bank and Far East Hospitality Trust.