Singapore: Risk Assessment
Country Risk Rating
Business Climate Rating
- High non-price competitiveness
- Mature high added value sectors (new technologies, finance, chemicals, pharmaceuticals)
- Major (aerial and maritime) transport and trading hub for goods and financial services
- Large FDI inflows thanks to the advantageous tax regime, political stability and excellent business climate
- Leading exporter of capital in Asia through its large sovereign funds
- Dependence on exports and imports (energy and food)
- Shortages of skilled labor and housing, aging population
- Limited freedom of speech
- Vulnerability to the slowdown of the Chinese economy
- Sino-American geopolitical tensions could force a diplomatic alignment
Risks to global trade will continue to loom over the economy
The economy is expected to avoid recession and rebound slightly in 2020. Singapore is the quintessential small, open economy: imports and exports represent 150% and 176% of GDP, respectively. As such, it is particularly sensitive to the global business cycle and developments in international trade, with exports expected to shrink by 10% in 2019. Export performance will be strained again in 2020 by the economic fallout from the Hong Kong protests, the Chinese slowdown and uncertainty stemming from the Sino-American trade war. Trade woes are concentrated in the manufacturing industry, and in particular electronics and machinery, which account for half of the export basket and have seen a sustained decline in output. In contrast, the pharmaceutical and financial services industries, as well as oil refining and marine engineering, have held up well and will act as buffers. Financial firms diverting their activity away from Hong Kong in reaction to the political turmoil will stimulate FDI. At 27% of GDP, investment will remain high by developed country standards. The city-state’s high population density and propensity to attract foreign talent pose the risk of a property bubble, which authorities are combating by tightening financial regulation. Private consumption, which accounts for only 35% of GDP, will remain resilient amidst sustained wage growth and low unemployment (2%). In response to the surprisingly acute slowdown observed in Q2 2019, the monetary authority loosened the speed at which the Singaporean dollar depreciates against the composite currency basket to which it is pegged, making for the first monetary easing in 3 years.
Large twin surpluses fund economic transformation
With a current account surplus of 16% of GDP and a trade surplus of 25%, Singapore enjoys an extraordinarily strong external position. While export-led growth has been the basis for an outstanding development performance, such a dependence on external demand could make the economy harder to manage in a context of deglobalization, trade policy uncertainty and sluggish global growth. While the country is a net exporter of capital by a margin, its holdings are tilted towards portfolio assets while its liabilities have a large share of FDI, creating a negative yield differential that results in an income balance deficit. Most of the imports are inputs used by the manufacturing and oil-refining industries, making the net impact of trade headwinds on the current account largely muted. The largest single determinant of trade performance is demand for electronic components and consumer electronics, which in addition to protectionist headwinds suffers a maturing tech cycle. Though high in appearance, public debt is used to create a domestic safe asset market and is constitutionally isolated from the funding of expenditures. Years of fiscal surplus accumulation have amassed large fiscal reserves (estimated at 300% of GDP) on which the government can draw to finance rare deficits. This margin, along with political continuity, allows authorities to direct spending to forward-looking policies such as labor force retraining and environmental programs.
A new generation of party technocrats to underpin political stability
Though elections are officially scheduled for 2021, the convening of the Electoral Boundaries Review Committee (the body responsible for drawing the electoral map) in September 2019 signals that the vote will be moved forward to early 2020. The People’s Action Party (PAP), which has ruled the country since gaining independence in 1965 and currently holds 83 out of 89 legislative seats, is virtually guaranteed to continue in power. However, it will be crucial for the PAP to obtain an emphatic victory, as it seeks a strong popular mandate for the recently appointed fourth generation of party leaders. Deputy PM and finance minister Heng Swee Keat is positioned to take the reins from current PM Lee Hsien Loong, son of founding statesman Lee Kwan Yew. In contrast to the smooth functioning of the PAP, the opposition is weakened by the recent legal woes of the Worker’s Party (WP). In October, leading figures of the WP were found guilty of misusing public funds, ending their chances of standing as a credible alternative. The combination of outstanding political continuity, an apparent absence of corruption and a technocratic approach to policy design have catapulted Singapore into one of the world’s most prosperous economies. Thanks to its deep integration into global supply chains, state of the art port infrastructure and bureaucratic seamlessness, it ranks second in the World Bank’s ease of doing business ranking.