Issue 61, SPEX

SMU Economics Intelligence Club

SMU POLITICAL ECONOMIC EXCHANGE

A SMU ECONOMICS INTELLIGENCE CLUB PUBLICATION

This issue in brief:

Budget 2016: What Comes Next?
Being a small country implies that even labour expansion can prove to be limited. Yet
Perry is of the opinion that MAS, by means of measures such as an attractive
exchange rate policy and sound structural and fiscal policy, will ensure that Singapore
remains financially sound.
Will Singapores Banking Industry Survive The Future?
The banking sector worldwide is in peril, thanks to mass layoffs and financial crises.
Will Singapores robust banking industry remain untouched? If not, to what extent
will Singapore be affected, especially in the face of rising, disruptive technologies
such as FinTech? Read Waynes article to find out more.
Growth Amidst External Challenges
Given Singapores extensive links with China, the city state was poised to be affected
the most from Chinas slowdown. Despite the negative speculation, Singapore
remained strong. Rachel feels that the present time is an opportune moment for
Singapore to take a step back and re-evaluate its current economic strategies.

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SMU Economics Intelligence Club

Budget 2016: What comes next?

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By Perry Jian Kangyue

Background
Being a tiny country means that our labour inputs, even with immigration, can only be
expanded to a limited extent. As such, our government decided many years ago to expand our
capital stock instead, by attracting huge amount of foreign investments. To achieve this, the
MAS adopted an appreciative exchange rate policy stance to attract foreign investors since
repatriated profits will be higher. Because our cost of producing our exports is largely
dependent on our imports, using an appreciative exchange rate policy will not hurt us as
much as conventional economics would suggest.

Current External Event: Rising U.S. Interest Rates

However, the principle of impossible trinity does not allow all three elements of
Fixed Exchange Rate, Capital Mobility and Interest Rate Autonomy. As a result, we are
unable to insulate the SIBOR/SOR from our external environment. Three months after the
Fed hiked interest rates, our 1Y SIBOR today stands at 1.438%, a level not seen since
October 2008. Holders of the Singapore currency are demanding a higher interest rate to
compensate for the depreciating currency.
This pushes Singapores economy closer to a recession, as higher interest rate puts
off consumption and investment. GDP growth for 2015 had its most sluggish expansion
since 2009. MAS Core Inflation averaged 0.3% in the past ten months, teetering on the edge
of deflation. COE prices, a reflection of automobile sales demand, have also plunged to their
recent-years low while home prices posted its longest losing streak in 17 years.
Moreover, Singapore pays for its liquidity and attractive carry during bouts of risk
aversion. Because our trade-weighted exchange rate is pegged to many South East Asia
countries, speculators have traditionally preferred to express their Asia EM FX trades
using SGD due our favourable liquidity conditions and low interest rates. This puts further
pressure on SIBOR/SOR, pushing us closer into a recession and triggering further capital
outflows.

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SMU Economics Intelligence Club

What could stop this?

1. Monetary Policy: Thanks to a dovish Fed and subsequent reversal in Asia EM
weakness, there has been considerably less pressure to re-center the SGD exchange
rate or to widen the policy band. This means that market participants will be closely
watching if the MAS will ease its exchange rate policy by reducing the slope of
appreciation in the policy band from 0.5% to zero slope when they meet next month.
Unless GDP growth forecasts for 2016 falls below the range of 1-3%, I do not see any
urgent need for the MAS to ease.
2. Structural & Fiscal Policy: On Budget 2016last week, Finance Minister Heng Swee
Keat outlined the new $4.5bn Industry Transformation Programme, which comprises
of a host of initiatives to support companies, industries and also at individual
employees level. Amongst others, Mr Heng announced the launch of the Automation
Support Package and a one-stop Business Grants Portal will be setup to facilitate
application for SMEs to apply for grants conditional on productivity upgrades.
The increased support for SMEs, which make up 99 per cent of all enterprises here
and provide more than 70 per cent share of total employment, is seen to be especially
significant. Overall, the FY15 deficit was revised to 1.2% of GDP, which would be
seen as lacklustre if one did not consider the unexpectedly large surplus contributed
by a one-off increase in Net Investment Returns by the inclusion of Temaseks
revenues.

Could they have done more?

As expected, the budget is compliant with the Balanced Budget Rule. Singapores decision to
act prudently is a sound one, as opportunities to introduce a supplementary budget or even
draw on its healthy level of reserves remain on its card. Moreover, as government has just
started its new five-year term, a prudent budget also means giving room for more
aggressive policies if the economy weakens in the coming years.

Conclusion
Overall, I believe the Singapore government is capable and able to do the right thing to
cushion the economy from further downturn in the economy. Singapore has a track record for
implementing policies at will and free from political gridlock. I believe it will continue to
implement policies to boost productivity and promote innovation, provide support for
downside pressures and ultimately bring sustainable growth in the long run.

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SMU Economics Intelligence Club

References:
1. Channel News Asia (2016, March23). COE Prices End Mixed in Latest Bidding
Exercise. http://www.channelnewsasia.com/news/singapore/coe-prices-endmixed-in/2629314.html
2. Chew, H.M. (2016, March 24). Singapore Budget 2016: 11 things that stood out
in Heng Swee Keat's Budget.
http://www.straitstimes.com/business/economy/singapore-budget-2016-11-thingsthat-stood-out-in-heng-swee-keats-budget
3. Lee, M. (2016, March 24). Inflation Down for 16th Straight
Month.http://www.straitstimes.com/business/inflation-down-for-16th-straightmonth
4. Leong, G. (2016, January 13). Sibor and SOR jump to 7-year highs.
http://www.straitstimes.com/business/economy/sibor-and-sor-jump-to-7-yearhighs
5. Mahrotri, P.T. (2016, March 24)Still `Premature' to Lift Singapore Housing Curbs
as Prices Fall. http://www.bloomberg.com/news/articles/2016-03-24/stillpremature-to-lift-singapore-housing-curbs-as-prices-fall
6. Monetary Authority of Singapore (2013, March).Monetary Policy Operations in
Singapore.http://www.mas.gov.sg/~/media/MAS/About%20MAS/Monographs%2
0and%20information%20papers/20130313%20Monetary%20Policy%20Operatio
ns%20Monograph.pdf
7. Tay, K. (2016, February22). Singapore Budget 2016: A Big Bang Unlikely.
http://www.businesstimes.com.sg/government-economy/singapore-budget2016/singapore-budget-2016-a-big-bang-budget-unlikely-say
8. The Association of Banks in Singapore(2016, March 28).Abs Co. -SIBORand
Swap Offer Rates. http://abs.org.sg/rates-sibor

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Will Singapores Banking Industry

Survive The Future?
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By Tan Ming Wayne

Introduction
We have seen a global cutback on banking jobs, Singapore being no exception. So it begs the
question: Will Singapores banking industry survive the future?

Rise of Dominance of FinTech

The problem: This is an issue that pertains to all global corporate banks, not just the ones in
Singapore. FinTech is considered by many as a disruptive technology to corporate banking.
The main characteristics of FinTech which distinguishes themselves from traditional
corporate banking are higher process efficiency, lower costs to both the consumers and the
operators, as well as the high convenience it offers. The Singapore government has also
shown its support towards FinTech start-ups, in a bid to boost the economy through value
creation.

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Natural mitigants to the problem: The characteristics of corporate banking which mitigates
its fall to FinTech are that banks generally have a deep understand of their clients needs;
having accumulated experience in risk management, advisory, as well as the pricing,
distributing and structuring of assets; perhaps most importantly, they possess the
infrastructure. However, corporate banks still ought to devise strategies to prevent a loss of
foothold in the finance sector, and should not remain status quo.
Possible Strategies: If you cant beat them, join them- Some possible strategies would be
to engage in M&A with FinTech companies that are in-line with the value proposition of the
bank, and operate within the geographical proximity of Singapore. Another alternative to
M&A, yet similar in its core idea, is to invest heavily in FinTech companies to be a major
shareholder.
Big data for big results: It should be obvious that one of the main focus of corporate banks
should be on customer relationship management, a characteristic which FinTech companies
lack. The establishment of sophisticated predictive models could offer bespoke solutions to
clients, by better understanding consumer behaviours. Corporate banks tend to use the
same solution to corporate clients, which may lead to inappropriate results. Banks need to
segment the corporate client market into smaller parts with clear distinguished needs.
Collaboration through B2B could be undertaken as well.

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SMU Economics Intelligence Club

The problem: According to AFP 2016 risk survey, the biggest threat to organizational
earnings are political/regulatory uncertainty. This is especially true for banks. With the
prevalent agenda for environmental preservations, as well as the negative stigma against
corporate banks, the tightening regulations will squeeze revenue streams out of banks, and
inject additional operating costs to ensure adherence to these regulations.
Solutions: The truth hurts. Perhaps the only way to go against this trend is for the
Singapore government to not implement similar stringent regulations. Then again, key profit
streams tend to originate from overseas, and hence any action taken by the government may
have minimal impact, if any at all.

Increasing openness in Asian economies:

The problem: In the past, Singapore served as a medium for western investors to invest into
China. As China becomes increasingly open, this role has diminished significantly, as the
red-tapes are now more manageable.
Mitigants: Singapore still serves as a medium, perhaps not so much so for China specifically,
but for many Asian countries. Singapore currently holds Double Taxation Agreements
(DTAs) with around 18 different emerging Asian economies (Source: IRAS). This means that
there is still a huge incentive for western investors to park their money within Singapore
holdings if they want to invest in one or multiple Asian countries with relatively lower tax
rates.
Possible long-term problem: A real and probable problem in the future is that when these
countries become more open, they may follow the path of China and allow direct investments
into their countries without unnecessary taxations. If investors are able to invest directly into
these countries, then it eliminates the importance of Singapore as an investment hub.
Possible solutions: Banks should devise effective strategies to establish stronger ties with
governments of emerging economies (such as CSR initiatives), and gain a deeper
understanding of Asian countries in general, and in particular the south Asian countries. This
would enable banks operating in Singapore to be in a unique and advantageous position to
continue serving foreign investors, if in the future, Singapore cease to become a medium for
investments into Asian countries.

Conclusion
The key purpose of this article is to point out that although on the surface Singapores
banking industry may be facing its doom, upon closer inspection, they may very well survive
as we approach the second-half of the decade. However, whether they survive with heavy
injuries or prosper in the face of uncertainty and threats will depend upon the strategy they
take going forward. Banks need to leverage on their definitive qualities over FinTechs, and to
constantly evaluate and improve its position in the market using technology to better engage
its customers, and effectively utilize relationship management tools such as CSR initiatives.

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SMU Economics Intelligence Club

References:
1. Singapore in Figures. (2015). Department of Statistics Singapore. Retrieved March
31, 2016, from https://www.singstat.gov.sg/docs/default-source/default-documentlibrary/
publications/publications_and_papers/reference/sif2015.pdf.
2. Inland Revenue Authority of Singapore. (2016, March 30). International Tax.
Retrieved March 31, 2016, from https://www.iras.gov.sg/irashome/QuickLinks/International-Tax/
3. Risk Infographic - Association for Financial Professionals. (n.d.). Retrieved March 31,
2016, from http://www.afponline.org/pub/res/research/Risk_Infographic.html

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SMU Economics Intelligence Club

Growth Amidst External Challenges

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By Rachel Tan Yi
Singapore has been singled out as the country which is expected to lose the most from
Chinas economic slowdown in the region. Over the past few decades, the economic linkages
between Singapore and China grew significantly. The Singapore manufacturing sector and
even the services sector have strong ties to China. There are also strong investment and
tourism links between the two countries. Currently, China is Singapores top trading partner.
In 2015, two-way trade between the countries came up to a figure of $121.5 billion dollars.
ANZ economists have projected that Singapores economic growth will fall by 1.4
percentage points for every 1 percentage fall in Chinas economic growth.6Chinas
weakening demand will also affect other countries in Asia, which is likely to have
secondary negative impacts on Singapores economy.
With a small, open economy, Singapore depends on trade and investment links with
other countries to fuel her economic growth. This makes Singapores growth prone to
fluctuations due to global economic events. Despite these challenges, Singapores
economy has been growing at a rather stable rate. Yet with the new issue of Chinas
slowing economy, it may be an opportune time for Singapore to refine her current economic
strategies in order to achieve sustained growth in the years to come.
The impact of the slowdown is expected to be felt greatly by Singapore because of the strong
economic links which we have with China. It may be cushioned by fostering stronger
economic relationships with India, a rising growth engine. The export volume of natural
resources and manufactured goods from India to China is not very significant, indicating that
India may not be greatly affected by the decreasing demand from China. Moreover, there is
great potential for economic growth in India. From 2011, Indias year-on-year gross domestic
product (GDP) growth has been around 5% to 7%, and is predicted to continue at this rate.
Also, the economic restructuring in China may lead investors to find alternative investment
opportunities in other emerging economies like India. Under Prime Minister Narendra
Modis leadership, India has been actively seeking to boost its manufacturing industry,
riding on its current comparative advantage due to low manufacturing costs and a
favourable foreign investment climate.
Of course, India is not without its own challenges. In the past few years, Indias economic
growth has been somewhat impeded by its lack of public infrastructure. Presently,
Singapore has already started several infrastructure projects in India. However, infrastructure
investment is still lacking in areas such as power generation, distribution, transmission, and

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SMU Economics Intelligence Club

equipment.9This has been identified as one of the key obstacles which is impeding faster
economic growth in India. Given Singapores experience in building a nation, the
government could do more to provide advice and support to India about infrastructure
development. At the same time, Singapore could increase the level of foreign investment in
the manufacturing industry, which has been earmarked for growth in the years to come.
In addition, Singapore could look to strengthening economic ties with countries within the
Association of Southeast Asian Nations(ASEAN). ASEAN member countries are set to
become more integrated with the recent establishment of the ASEAN Economic Community
(AEC). According to the chief executive of HSBC Singapore, the AEC has the
potential to allow Singapores GDP in 2030 to be 9.5%greater than if the community
was non-existent.10Such benefits may serve to counterbalance the negative effects from
Chinas slowing growth. Thus, it is important to pursue policies which will allow this
growth potential to be reaped. It has believed that in the short term, firms can gain by shifting
labour-intensive production.
Given the lack of expertise which some firms have in offshoring production, this process
may be slow at the beginning. The government could encourage this shift by providing
more information about the economic conditions and markets in ASEAN economies to firms.
In the longer term, the success of the AEC may depend on the presence of sufficient physical
infrastructure, robust political institutions and the availability of human capital. Presently,
Singapore can play her part by providing her expertise on the ways to develop a world-class
education system and strong legal and political infrastructure in ASEAN. Furthermore,
Singapore can provide much needed funds for infrastructure development in less
developed ASEAN countries. With stronger fundamentals, ASEAN may achieve higher and
more sustainable growth, which will have a positive impact on Singapore. There is no one
definite measure which will allow Singapore to escape dampened growth in the years ahead.
At this point in time, strengthening ties with India and ASEAN countries seem to be viable
options which may help Singapore to mitigate the negative effects of Chinas economic
slowdown on her economy.

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References:
1. Chong, K. (2016, January 12). China's slowdown will hit Singapore hardest: ANZ
warns. The Straits Times. Retrieved March 29, 2016, from
http://www.straitstimes.com/business/economy/chinas-slowdown-will-hit-singaporehardest-anz-warns
2. Chia, Y. (2016, January 17). For Singapore, a new normal. The Straits Times.
Retrieved March 28, 2016, from http://www.straitstimes.com/business/economy/forsingapore-a-new-normal 5Chia, Y. (2016, January 17). For Singapore, a new normal.
The Straits Times. Retrieved March 28, 2016, from
http://www.straitstimes.com/business/economy/for-singapore-a-new-normal
3. Zhong, R., & Roy, R. (2015, September 8). Indian Leaders Discuss How to Fortify
Economy Amid China Slowdown. The Wall Street Journal. Retrieved March 27,
2016, from http://www.wsj.com/articles/indian-leaders-discuss-how-to-fortifyeconomy-amid-china-slowdown-14417182078
4. Shah, K. (2016, March 7). India Poised For Regional Dominance Amid Global
Economic Slowdown [Report]. Inquisitr. Retrieved March 27, 2016, from
http://www.inquisitr.com/2865820/india-poised-for-regional-dominance-amid-globaleconomic-slowdown-report/
5. Prakash, S. (2015, October 12). India PM Modi praises Singapore's investments in
India's infrastructure. Channel NewsAsia. Retrieved March 27, 2016, from
http://www.channelnewsasia.com/news/singapore/india-pm-modipraises/2187938.html
6. Koh, J. (2015, November 23). New Asean Economic Community could give
Singapore GDP a 9.5% boost by 2030: HSBC. The Straits Times. Retrieved March
28, 2016, from http://www.straitstimes.com/business/economy/new-asean-economiccommunity-could-give-singapore-gdp-a-95-boost-by-2030-hsbc
7. Koh, J. (2015, November 23). New Asean Economic Community could give
Singapore GDP a 9.5% boost by 2030: HSBC. The Straits Times. Retrieved March
28, 2016, from http://www.straitstimes.com/business/economy/new-asean-economiccommunity-could-give-singapore-gdp-a-95-boost-by-2030-hsb

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SMU Economics Intelligence Club

SEIC Correspondents for Issue 61:

Sreya Sanyal (Director, SPEX)

Perry Jian Kangue (Writer)

Undergraduate

Graduate

School of Business

School of Economics

Singapore Management University

Singapore Management University

ssanyal.2013@business.smu.edu.sg

kangyuejian.2012@economics.smu.edu.s
g

Nguyen Duong Thuy Uyen (Creative

Director)
Undergraduate
School of Business
Singapore Management University
dtunguyen.2014@business.smu.edu.sg

Tan Ming Wayne(Writer)

Undergraduate
School of Business
Singapore Management University
mwtan.2014@business.smu.edu.sg
Rachel Tan Yi (Writer)
Undergraduate
School of Economics
Singapore Management University

rachel.tan.2014@economics.smu.edu.sg