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ECONOMY | Contributed Content, Singapore
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Istvan Loh

What is in it for SMEs with the current economic outlook

BY ISTVAN LOH

According to flash estimates, Singapore's economy grew at a respectable rate of 2.1 percent in 2015, close to the official government estimate of 2 percent. While this is a reasonable achievement, it is much lower than the 2014 figure of 2.9 percent.

But what does 2016 hold for the country’s economic prospects? Will there be a rebound or will low oil prices, a strong U.S. dollar, and weak global demand continue to be a drag on export growth figures?

Making predictions about economic performance is an inexact science but it can be useful to look at the factors that influence growth and use these to arrive at a forecast.

Some of the key issues that will determine how Singapore’s economy fares in 2016 are:

China's economy
The strong trade, investment, and tourism links between the two countries mean that slower growth on the mainland can severely influence both the manufacturing and service sectors in Singapore.

Most countries that have large volumes of trade with China will continue to be affected as the second largest economy in the world loses steam.

According to an ANZ estimate, a 1 percent fall in China’s economic growth will pull Singapore’s economy down by 1.4 percent.

These projections are similar to the experience during the global financial crisis when Singapore’s growth fell 8.8 percent on a year-on-year basis in the first quarter of 2009, corresponding to a 6.2 percent fall in China’s economic growth in the same period.

It is important to remember that unlike other countries, Singapore does not have a large domestic market to make up for the weak demand from China. Both the manufacturing and service sectors can expect to continue to feel the effects of China’s downturn.

Improving US economy to present new opportunities
Singapore enjoys strong economic ties with the US and about 3,600 American companies have a presence in the country. The US is also one of the largest foreign investors in Singapore.

With the improving economy in the US, Singapore-based companies can expect to see a growth in export volumes especially in computers, computer parts, and telecommunication equipment.

Total exports to the US are currently at a level that is only a third of what is exported to China, giving Singapore companies a tremendous opportunity to make inroads into the US markets.

Labour constraints
Many Singapore businesses find it difficult to fill vacancies. According to a survey by Hays, a recruitment firm, almost half of employers believe that skills shortage has the potential to hamper the effective operation of their business.

These findings are based on a survey of over 2,300 employers, a large number of whom say that finding entry to mid-management candidates across various functions is getting increasingly difficult.

Specifically, businesses cannot find suitable candidates for sales, engineering, technical functions, operations, IT, accountancy, and marketing.

Although the government has taken a number of steps to provide continuing education and training to Singaporeans, it is highly likely that the skills shortage in the country will continue into 2016.

Merger and Acquisition activity to pick up
The slowing economy, especially in certain sectors, will result in a number of privatisations, takeovers, and corporate restructuring activity. The property, healthcare, and offshore and marine sectors can expect to see the maximum activity.

The oilfield service industry will need to work out ways to reduce expenditure if it is to survive and ensure that it can be profitable. A number of smaller players will get taken over by larger companies.

Another factor that will lead to increased merger and acquisition activity is the lack of opportunities for growth in other developed markets. Singapore’s stringent corporate governance norms give foreign companies the assurance they require when acquiring a business.

An added attraction for companies seeking inorganic growth through acquisitions is that equity markets in Singapore are subdued and businesses can be bought at relatively low valuations.

Service sector will continue to see growth
The manufacturing sector in Singapore is in the doldrums with declines recorded in 2015 in the output of the electronics, transport engineering, and precision engineering clusters. In the fourth quarter of 2015, this sector registered a 3.1 percent contraction at an annualised rate.

On the other hand, the service sector saw sustained growth with strong support from wholesale and retail trade, finance, and insurance. The fourth quarter of 2015 witnessed service industries expanding at an annualised rate of 6.5 percent from the 2.9 percent clocked in the previous quarter.

The service sector also faces certain headwinds. Notably, the domestic manpower crunch and the slowdown in the manufacturing sector have proven to be constraints, a trend that is expected to continue into 2016.

Spending on infrastructure
Increased allocations for various projects including the MRT Masterplan-Cross Island Line, the MRT Masterplan-Downtown Line, and the Tuas West Extension will serve to give the construction industry a boost in 2016.

It is estimated that the government plans to award contracts of a value between $26 billion and $37 billion annually for infrastructure each year up to 2019.

The residential sector will also continue to see high levels of investment as the need for housing continues to accelerate.

According to the United Nations Department of Economics and Social Affairs, Singapore’s population is expected to climb from 5.5 million in 2013 to 6.3 million in 2025, a factor that will lead to continued investment in the building of residential units.

Conclusion
At a macro level, manufacturing companies will most likely continue to see weak demand in 2016. This has been the trend for the last five quarters as oil prices have continued their fall accompanied by weakness in the entire commodities sector.

The services sector will retain its positive trajectory into 2016, offsetting the reduced economic activity resulting from sluggish factory output.

Overall, the rate of growth clocked in 2015 is likely to continue. According to an OCBC Bank Treasury Research official, growth in Singapore’s economy is expected to remain in the range of 2 to 3 percent in 2016.

The views expressed in this column are the author's own and do not necessarily reflect this publication's view, and this article is not edited by Singapore Business Review. The author was not remunerated for this article.

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Istvan Loh

Istvan Loh

Istvan Loh Wye Lung is a professional FX trader. He spends his free time researching relevant investment opportunities and analysing the markets.

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