Mind the triple whammy of higher debt, tax and wage costs hitting Singapore stocks 

IN THE early days of the Covid-19 outbreak, economic activity plummeted as many countries imposed movement restrictions to slow the spread of the virus, and stock prices plunged. 

The Dow Jones Industrial Average (DJIA) fell by 35 per cent between Dec 31, 2019 and Mar 23, 2020. Remarkably, it closed up 7 per cent between end-2019 and end-2020. Between end-2020 and end-2021, the DJIA rallied a further 19 per cent. 

Driving the recovery in US equities and other stock markets elsewhere from Covid-driven market lows, effective vaccines were made available from mid-2020, and central banks rolled out a combination of aggressive monetary easing and huge fiscal spending.

That policy drives stock markets is further illustrated by the DJIA’s performance in 2022. Economies have opened up further in many places, and international travel rebounded in 2022. But US Federal Reserve’s series of interest rates hikes to tame raging inflation has depressed share prices. The DJIA may end 2022 down versus end-2021, with the technology-heavy Nasdaq faring even worse..

Using the policy lens to decipher the direction of the Singapore stock market over the next few years throws up three areas of concern.     

Potentially negative trends

Firstly, borrowing costs may not go back down to the levels seen in the period spanning mid-2020 to early 2022. The three-month compounded Singapore Overnight Rate Average rose from about 0.2 per cent at the start of the year to over 3 per cent in early December. 

Geopolitical tensions, unfavourable demographics in leading economies, transition to green energy which requires more resources for similar output, and the reconfiguring of supply chains could result in inflation persisting, and with that, the need for central banks to keep interest rates higher. 

While some companies have locked in cheap fixed-rate debt, borrowing costs will rise as fixed-rate debt matures and companies refinance. Also, borrowing costs for new investments will be higher. Invariably, higher debt costs could squeeze profit margins of many businesses. 

Additionally, stock investors will use higher rates to discount future projected earnings of companies. Using a higher discount rate leads to a lower stock valuation. 

Secondly, in this year’s budget, property tax for many property owners and income tax for top earners rose. Might next year’s budget feature more tax hikes?       

For owner-occupied homes, the property tax rates for the portion of annual value (AV) in excess of S$30,000 will rise from 4-16 per cent to 5-23 per cent from 2023, and 6-32 per cent from 2024. For non-owner-occupied homes, the rate will rise from 10-20 per cent of AV to 11-27 per cent from 2023 and 12-36 per cent from 2024. The AV of buildings is the estimated gross annual rent of the property if it were to be rented out, excluding furniture, furnishings and maintenance fees.

For individuals, the portion of chargeable income in excess of S$500,000 up to S$1 million will be taxed at 23 per cent, while that in excess of S$1 million will be taxed at 24 per cent; both up from 22 per cent, for the year of assessment 2024.

Meanwhile, the goods and services tax (GST) will rise from 7 per cent to 8 per cent in 2023 and to 9 per cent in 2024, but there are generous packages to offset additional GST expenses for many Singaporean households.

Also, the carbon tax rate will rise progressively from 2024, and reach S$50 to S$80 per tonne of emissions by 2030 versus S$5 per tonne today.

With an ageing population and rising spending on areas such as healthcare, the government may need to raise more tax revenue going forward. While corporate taxes may be untouched, businesses will be hit if consumption falters as individuals pay more taxes. 

Thirdly, wage increases were unveiled in 2022 for many public sector workers, such as nurses and teachers. The Progressive Wage Model (PWM), which aims to uplift the wages of lower-wage workers who are Singapore citizens and permanent residents, currently covers the cleaning, security, landscape, lift and escalator, and retail sectors. The PWM will be rolled out to cover the food services and waste management sectors in 2023, as well as those working as administrators and drivers.

With a tight labour market, control on the inflow of foreign workers, and initiatives to raise the wages of lower-wage workers as well as workers in key sectors, expect wage bills across the board in Singapore to continue rising. Higher wage bills could hurt the profitability of businesses and their ability to pay dividends.

Productivity gains, automation and relocation of jobs to cheaper locations can help businesses mitigate the effects of higher wages in Singapore. Nonetheless, coming out of the Covid-19 pandemic, wages and work conditions may improve, and a larger share of profit may accrue to labour in many places.  

Growing the middle class

In sum, the combination of higher borrowing costs, taxes and wage bills offers unfriendly terrain for Singapore’s listed companies. Perhaps, faced with a tough backdrop, many listed entities, which are substantially undervalued, can be spurred to restructure to unlock value.

Crucially, a silver lining for businesses could emerge if rising wages lift the middle class in Singapore, as incomes rise strongly. The richest households tend to have a high propensity to save, while the buying power of the poor is limited. 

If those in the middle of the income distribution enjoy strong gains, consumption may rise substantially. The middle-income earners may buy more and trade up, which will cheer businesses. For some businesses, greater revenue can hopefully more than mitigate higher cost pressures. 

Perhaps, listed entities that own or operate suburban malls, budget airlines, mass to mid-market eating outlets and consumer banking franchises, among others, can thrive from serving a growing and prospering middle class.