Some time ago, Singapore's heavily export-oriented growth model came under fire. The Wall Street Journal published an opinion piece, criticising the lop-sided dependence on exports and the crowding out of the private sector by the government:
The export-led economy is falling on its face. Minister Tharman Shanmugaratnam predicts the city-state is "likely to experience" the deepest recession in its history. The government will tap its reserves to help pay for the stimulus package. Growth contracted 16.9% in the fourth quarter last year. The Ministry of Trade and Industry has revised down GDP forecasts twice this month already, and expects the city-state's growth to contract 2% to 5% this year. The pain is now leaking into the domestic economy as consumers retrench.
Singapore's economy would be more resilient if it were better balanced. Consumption composes only about 40% of GDP -- far less than other developed Asian economies, nearer to 55%. Yesterday's budget doesn't do much to change long-term incentives to consume. The government announced a 20% income-tax rebate for one year, but no permanent cuts. Nor did it cut the 7% goods and services tax. Singaporean workers and businesses invest a total of 34.5% of wages into the state pension fund, but receive less than a 2% return from the government. That's a measly payout compared to what private funds return over long investment periods.
These thoughts and others were echoed by many financial and economic analysts around the world. Naturally, however, Singapore's government took a stand against its critics, and Tharman Shanmugaratnam was forced to declare that "Singapore's Growth Model Works", in defence of the government's economic policies:
The Government will keep restructuring the economy to emerge 'leaner and smarter' after each downturn, Finance Minister Tharman Shanmugaratnam said in an interview with Bloomberg Television on Wednesday.
'The fundamentals of our growth model are sound,' he said, adding that 'we should not be less susceptible to global markets. That's our future, that's where our fortunes are tied to'.
Singapore's economy may shrink a record 5 per cent this year as the global recession erodes demand for exports and companies lay off workers.
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'We are plugged into the markets that are largely in the rich countries and when we go through a global crisis like this, we come down very quickly,' Mr Tharman said, adding that there was no Asian domestic demand to provide a cushion for Singapore
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'Singapore will come out of this,' said Mr Tharman. 'We will bounce back the way we've bounced back three times already in 10 years.'
But the global bloodbath makes it increasingly unlikely that Singapore is going to bounce back any time soon. This global recession is the worst since world war II, and some even say that recession is an understatement - they say that we are in for an economic depression.
Just yesterday, Japan's GDP was reported to be shrinking at an annualised 12%:
Japan Economy Goes From Best to Worst on Export Slump, Yen Gain
By Jason Clenfield
Feb. 17 (Bloomberg) -- Japan’s economy, only months ago forecast to be the best performing among the world’s most advanced nations, has become the worst.
Gross domestic product shrank an annualized 12.7 percent last quarter, the Cabinet Office said yesterday. The contraction was the most severe since the 1974 oil crisis and twice as bad as those in Europe or the U.S.
The credit crisis that crippled the U.S. financial system may have also knocked out the props that supported Japanese growth between 2002 and 2007: a U.S. consumer-spending bubble and a cheap yen. The speed of the deterioration has taken companies by surprise: Toyota Motor Corp. this month forecast a 450 billion yen ($4.9 billion) loss, reversing a November estimate it would make 550 billion yen.
“We thought this would be a cyclical slowdown for the Japanese economy,” said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. “It’s now clearly a structural one. Eventually we should see some stabilization in consumption globally, but there just won’t be the same” willingness to fund spending by taking on debt, he said.
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‘Devastating Effects’
The end of easy credit in the U.S. will lead to a “quantum downward shift” in consumer spending in the world’s largest economy that may have long-term and devastating effects on economies that have relied on it, according to Allen Sinai, chief global economist at Decision Economics Inc. in New York. Exporters Toyota and Canon Inc. get more than a third of their sales in North America.
“Companies that planned their businesses around the idea that U.S. consumer spending would grow by 3 percent per year, as it has for decades, are in for a shock,” said Sinai, who spoke in an interview in Tokyo after he briefed Japan’s biggest business lobby, Keidanren, on the U.S. outlook.
Indeed, Japan's economic woes are reflective of what is happening across the troubled east asian tigers - economies that are heavily dependent on exports for economic growth. Singapore, Taiwan and Korea are facing steep falls in exports as the US & European financial systems implode, causing massive deleveraging and sharp drops in consumer spending previously fueled by easy credit.
Yet many of Asia’s tiger economies seem to have been hit harder than their spendthrift Western counterparts. In the fourth quarter of 2008, GDP probably fell by an average annualised rate of around 15% in Hong Kong, Singapore, South Korea and Taiwan; their exports slumped more than 50% at an annualised rate. Share prices in emerging Asia have plunged by almost as much as during the Asian financial crisis a decade ago. That crisis was caused by Asia’s excessive dependence on foreign capital. This time the tigers have been tripped up by their excessive dependence on exports.
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In the fourth quarter of 2008, real GDP fell by an annualised rate of 21% in South Korea and 17% in Singapore, leaving output in both countries 3-4% lower than a year earlier. Singapore’s government has admitted the economy may contract by as much as 5% this year, its deepest recession since independence in 1965. In comparison, China’s growth of 6.8% in the year to the fourth quarter sounds robust, but seasonally adjusted estimates suggest output stagnated during the last three months.
Asia’s richer giant, Japan, has yet to report its GDP figures, but exports fell by 35% in the 12 months to December. In the same period, Taiwan’s dropped by 42% and industrial production was down by a stunning 32%, worse than the biggest annual fall in America during the Depression.
Asia’s export-driven economies had benefited more than any other region from America’s consumer boom, so its manufacturers were bound to be hit hard by the sudden downward lurch. Asian exports are volatile anyway. And though the 13% fall in the region’s exports in the 12 months to December was slightly smaller than in 1998 or 2001, those dismal records seem certain to be beaten soon.
The plunge in exports has been exacerbated by the global credit crunch, which made it harder to get trade finance. Destocking on a huge scale has further slashed output. Trade within Asia has dropped by even more than the region’s sales to America or Europe. Exports to China from the rest of Asia were 27% lower in December than a year earlier, partly reflecting weaker demand for components for assembly into goods for re-export.
The press has mostly focused on the financial meltdown in the US. Yet, the European financial system now appears to be in an even worse condition than their American counterparts. John Mauldin analyses the dire situation in Europe:
European Bank Losses Dwarf Those in the US
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But European banks may be in far worse shape. Bruno Waterfield of the London Daily Telegraph reports to have seen an eyes-only document prepared by the European Commission for the finance ministers of the various EU member countries. The problem revealed in the report is an estimated write-down by European banks in the range of 16 trillion pounds, or about $25 trillion dollars! The concern is that bailing out the various national banks for such an unbelievable amount would push the cost of government borrowing to much higher levels than we see today.
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Waterfield reports, "National leaders and EU officials share fears that a second bank bail-out in Europe will raise government borrowing at a time when investors -- particularly those who lend money to European governments -- have growing doubts over the ability of countries such as Spain, Greece, Portugal, Ireland, Italy and Britain to pay it back.
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Part of the problem is that European banks were far more highly leveraged than US banks. Some banks were reportedly leveraged 50:1. And they lent money to Eastern European projects and businesses which are now facing severe financial strain and plummeting local currencies.
Let that number rattle around in your head for a moment: $25 trillion. Even $5 trillion would be daunting. But the problem is that Europe does not have a central bank that can step in and selectively save banks from one country without taking on all euro zone member-country banks. Yet, as noted above, some countries may not have the wherewithal to save their own banks. It is reported that some Austrian banks are hoping that Germany will step in and help them. Given Germany's problems, they may have a long wait.
The slump in exports is not just driven by a drop in US demand alone - it is driven by a broad-based drop in consumer spending in East Asia's key export markets of Europe and the USA, economies whose financial systems are up to their noses in toxic credit and whose financial problems aren't going to be solved any time soon. At the same time, there has been broad-based concern about the Obama administration's lack of leadership in coming up with a detailed plan for fixing the credit system. Tim Geithner's recent speech inspired no confidence in analysts and business leaders, and has left much to be desired:
The Obama rescue
Feb 12th 2009
From The Economist print editionThis week marked a huge wasted opportunity in the economic crisis
By any recent historical standards America’s banking bust is big. The scale of troubled loans and the estimates of likely losses—which are now routinely put at over $2 trillion—suggest many of the country’s biggest banks may be insolvent. Their balance-sheets are clogged by hundreds of billions of dollars of “toxic” assets—the illiquid, complex and hard-to-price detritus of the mortgage bust, as well as growing numbers of non-housing loans that are souring thanks to the failing economy. Worse, banks’ balance-sheets are only one component of the credit bust. Most of the tightness of credit is owing to the collapse of “securitisation”, the packaging and selling of bundles of debts from credit cards to mortgages.
Fixing this mess will require guts, imagination and a lot of taxpayers’ money. Mr Geithner claims he knows this. “We believe that the policy response has to be comprehensive and forceful,” he declared in his speech, adding that “there is more risk and greater cost in gradualism than aggressive action.”
But his deeds did not live up to his words. His to-do list was dispiritingly inadequate on some of the thorniest problems, such as nationalising insolvent banks, dealing with toxic assets and failing mortgages. Mr Geithner promised to “stress-test” the big banks to see if they were adequately capitalised and offer “contingent” capital if they were not. But he offered few details about the terms of public-cash infusions or whether they would, eventually, imply government control. His plan for a “public-private investment fund” to buy toxic assets was vague and its logic—that a nudge from government, in the form of cheap financing, would enliven a moribund market—was heroic. Banks’ balance-sheets are clogged with toxic junk precisely because they are unwilling to sell the stuff at prices hedge funds and other private investors are willing to pay. Vagueness, in turn, led to incoherence. How can you stress-test banks if you do not know how their troubled assets will be dealt with and at what price? Amid these shortcomings were some good ideas, such as a fivefold expansion of a $200 billion fledgling Fed facility to boost securitisation. But for nervous investors and worried politicians, desperate for details and prices, the “plan” was a grave disappointment.
So, is Singapore really going to "bounce back" like it has bounced back "3 times in the last 10 years," as Tharman Shanmugaratnam claims? The dire straits of the global economic situation point to a resounding NO! Indeed, far from looking like it is going to bounce back like it has in the past, Singapore looks like it is in for a protracted recession.
On top of that, to compound the situation, just as Singapore is entering into its worst ever recession, its reserves are getting pounded by the collapse in global markets. Temasek recently reported that it lost 31% to Nov 08, and GIC is rumoured to have lost a whopping 41% on its portfolio! Just when Singapore needs its reserves the most, it is finding that its investments are evaporating by the bucketloads.
The implications, then, of this economic and financial crisis, are going to be deep and profound. More PAP sacred cows are likely to be slaughtered, as workers lose their jobs and find themselves without a social safety net. The lack of a quick economic rebound will mean that unemployment is likely to rise and stay at high levels - the Singapore government will need to re-think its policy on social handouts in order to deal with the growing social unrest brought about by the steep downturn. More pro-worker policies like those championed by the workers' party are likely to gain ground in the minds of Singaporeans as they feel the pinch of a protracted recession.
Economically, the government is going to have to come up with better ideas than just orienting Singapore's economy for export markets. The receding of the tide of easy credit has caught Singapore with its pants down, and it is going to have to find a new set of clothes because the tide isn't coming back up anytime soon to cover Singapore's exposed ass.
Singapore's reputation with the management of its reserves is also likely to take a severe hit. The performance of Temasek, and that of GIC - which is yet to be released but unlikely to be very good - has been unexceptional in this global downturn. One would have expected the best and the brightest of Singapore's elite to have at least somehow anticipated the the credit crisis and have at least had some foreknowledge of the lax credit standards and massive leverage that was accumulating in the US and EU financial systems. Yet not only did they miss the boat, they got very badly hurt in the process of investing in financial institutions such as UBS, Citigroup, Merrill and Barclays.
In short, the global economic meltdown means that Singapore's export-dependent economy isn't bouncing back any time soon. And given that the PAP's hegemony has been built on economic policies that have failed to factor in the oncoming structural change in global headwinds, Singapore looks like it is in for much change in the years to come.
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