THE TEMASEK REVIEW

By Imran Ahmed, Business Correspondent

The International Monetary Fund (IMF) recently released a report on the Singapore economy. The report is based on consultations between the supranational organization and officials from the Republic’s Ministry of Finance (MOF) and Monetary Authority of Singapore (MAS).

Not surprisingly, the report card gave the Singapore government high marks for its economic management.

When measured against the orthodox economic policy framework generally encouraged by the IMF, Singapore is a model economy.

Singapore has built up significant cash reserves in the last few decades preparing for the proverbial rainy day. Now that the rainy day is upon us, the government has prudently opened up the taps and is generously spending via a string of public expenditure and skill upgrading programmes.

The gradual trade weighted appreciation of the Singapore Dollar has temporarily been halted by the MAS. The currency moves complements the fiscal measures taken to prime the local economy.

While the health of the financial sector may weaken as the impact of the crisis feeds through into the real economy, it is sufficiently capitalized to meet the challenge. IMF recommendations for stress testing the sector appear to be more a case of ‘going through the motions’ rather than a genuine concern that things may deteriorate rapidly and / or unexpectedly.

Why is it that there is so much economic pain in the real economy if the government is playing exactly by the book? Well, the Singapore economy is extremely susceptible to international economic trends.

In 1998, the ‘Share of Resident Foreigners and Resident Foreign Companies’ in the Singapore Gross Domestic Product (GDP) was SGD 48 billion or 35% of the city’s GDP. By 2008, the number had progressively risen to SGD 118 billion or 46% of GDP.

The good news is that the increase is evidence of Singapore’s attractiveness as an investment destination. Capital is a coward and generally only goes to those environments where it feels safe and is adequately compensated.

The bad news is that, in effect, Singapore has ceded some influence over almost half of its economy to the vagaries of international capital. The government has a large and influential economic constituency, foreign multinational corporations, which can only be ignored only at its own peril.

The implications of a sustained drop in inward foreign direct investment are potentially serious. From being a virtuous cycle that continually provides fresh capital, ideas and processes, foreign capital flows may reverse and precipitate a hollowing out of the local economy.

To be sure, foreign investment is a positive factor in any economy. Arguably, in Singapore’s case it has laid the foundation for the nation’s rapid ascent from a Third to a First World nation.

Singapore’s social contract relies on a gradual increase in the general standard of living of the average citizen.

Mildly restricting dissent and social freedoms is possible only in an environment where per capita income has increased from SGD 1,567 in 1965 to SGD 53,192 in 2008. Stop the trend of increasing per capita income and the social contract begins to weaken.

Singapore’s Growth: Phase II

Now that Singapore is wealthier than many traditional developed nations where will the next phase of growth be found?

As a mature and wealthy economy it is time that Singapore indulges in some transnational capitalism of its own. In other words, the Singaporean private sector must become a global direct investor in its own right.

The numbers are already impressive.

Singapore’s stock of direct international equity investment, including net lending to international affiliates, stood at SGD 154 billion in 2003. In 2008, the category ended the year at SGD 298 billion, representing a near doubling of overseas investment.

Detailed breakdown of the SGD 298 billion is not easily available but anecdotal evidence suggests that the bulk is comprised of overseas investments by government linked corporations or by a government agency like GIC.

‘Genuine’ foreign ventures by the private sector are likely to be a small percentage. The Banyan Tree’s, OSIM’s and BreadTalk’s of Singapore are blazing the path for others but much more must still be done.

The average Singapore private sector corporation is perhaps still too small to seriously consider investing overseas.

An ill fated overseas venture can have grave implications for an otherwise healthy domestic franchise. Still, it is critical that Singaporean entrepreneurs are tempted to try their luck overseas.

The domestic market is wealthy but small. Businesses quickly hit a glass ceiling if they do not broaden their focus to international markets.

Export credit agencies (ECA) are one answer to entice businesses to go global.

ECAs are normally government or semi-government agencies which act as financial intermediaries between domestic exporters and foreign markets. Their financing can take many forms, including guarantees or outright loans.

ECAs typically step in to provide financing for markets and entities for which commercial credits are scarce.

Singapore does have International Enterprise (IE).

IE’s mission is to, “[promote] the overseas growth of Singapore-based enterprises and international trade. With a global network in over 30 locations and our ‘3C’ framework of assistance – Connections, Competency, Capital, we offer services to help enterprises export, develop business capabilities, find overseas partners and enter new markets.”

It sounds like an ECA but in actuality IE appears to be more of a ‘facilitating’ entity. In other words, it helps to source expertise, capital and partners for Singaporean firms but is unable to provide funding directly.

The evidence seems to bear out this assertion.

Under IE’s ‘Internationalization of Finance Scheme’ and ‘Loan Insurance Scheme,’ SGD 204 million was provided in 2007.

Some Cash on the Table Please

No doubt, exports and overseas investments are two distinct activities. However, maybe it is time Singapore considers complementing the existing IE programmes by directly committing capital.

Greater access to capital will assist the drive to diversify Singapore’s international earnings stream.

Such support can take various forms. It can come via a government established fund which directly assists small and medium sized enterprises. However, a government sponsored fund will necessitate more bureaucracy. By being a part of the government it also may not function as a commercially viable entity.

An alternate approach is to make some money available to existing commercial banks for the Internationalization Finance Scheme.

In other words, perhaps the government can make (say) SGD 1 billion available to commercial banks at normal commercial terms only for the purpose of lending under the IE scheme.

Despite the current loan guarantee of 80% by IE, commercial banks have no incentives to provide internationalization loans over other forms of lending. If increasing credit card or mortgage debt is more profitable for a bank then it will take precedence over any IE scheme loans.

The cost and availability of cash is a limiting factor in the utilization of any IE scheme.

The rigours of commercial reality are necessary for Singapore’s businesses to succeed internationally. But prudent intervention by a cash rich government may help transform local entrepreneurs into international capitalists.

About the Author:

Imran Ahmed majored in Diplomacy and World Affairs. He had been a finance professional for the last 20 years, most recently spending five and a half years in Dubai before his return to Singapore in June 2009. Imran blogs at www.imranwrites.blogspot.com

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