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SCMP Reporter

This year has been relatively kind to Singapore, but as it comes to a close there are clear indications next year will present the city-state with tougher challenges.

Economists say they are expecting the country's expansion to slow sharply in the months ahead, triggered by a slump in growth in the United States and a possible further deterioration of conditions in Singapore's nearest neighbours.

As always the eventual outcome will depend in no small part on the strength of global demand for electronics, a pillar of Singapore's export capacity.

There are also concerns that foreign investors' focus could remain skewed towards Northeast Asia.

'Surging domestic exports and industrial output seen in the past nine months could start to moderate as the record US economic expansion begins to simmer down,' said Sim Poh Kheng an economist at DBS Bank.

'In addition, regional political developments would also have crucial bearings on investors' confidence and business sentiments.'

The macro-numbers over the past 12 months have come through more strongly than most observers expected as the region's recovery from the deep-seated malaise of 1997 and 1998 gathered pace.

The latest snap-shot, of the third quarter, brought growth in gross domestic product to 9.8 per cent during the first nine months. The surge prompted the government to lift its target for the full year to a restrained 9.5 per cent, up from an initial estimate of 7.5 per cent.

The revised target would imply a need for final quarter growth of 8.5 per cent, which, given the economy's momentum, should be easily achieved. If it is, Singapore's economy will have put in its best performance since 1994, when GDP growth hit 11.4 per cent, and left well behind the anaemic 0.4 of a per cent expansion of two years ago.

However, Song Seng Wun, economist at G K Goh, said the outlook was less benign, with export growth seen slipping. He has a GDP growth target of about 6.5 per cent for next year, towards the top end of estimates.

'If we are seeing that exports are slowing down at this juncture, clearly Singapore will be affected by that,' he said.

'If you look at the economy, what drives headline GDP is exports.'

The first signs of a slowdown in manufacturing have already appeared. Last month's Purchasing Managers' Index - regarded as a reasonably accurate leading indicator with responses from more than 100 companies - sank 2.3 points to 55.3. A number above 50 indicates an expansion of the sector, below that a contraction.

Philip Poh, chief executive of index compiler Singapore Institute of Purchasing and Materials Management, said a further decline was in store this month as external demand growth continued to dip.

'It is still growing, but more slowly. It is pretty much what industry has been expecting,' he said.

'December will come down further to somewhere between 53 and 55 [points]. But we do not expect a contraction.'

The decline had caused a build-up of inventories and stock of finished goods, which now stood at their highest level since February last year.

As expected, the electronics industry saw its sub-index decline, falling a steeper 2.4 points to 53.7. Companies in the sector have also cut back on hiring, with the electronics employment index holding at just over 50 points.

'Electronics comprises some 43 per cent of manufacturing production [which is about a quarter of GDP], and forms nearly 70 per cent of non-oil domestic exports in 1999,' S G Securities said in a recent research note.

'This high exposure can be both a vulnerability as well as a strength.'

Policy makers and economists in Singapore remain concerned about a deterioration in the regional picture -  potentially knocking confidence in Singapore.

The on-going drama of the Philippines' impeachment trial of President Joseph Estrada, the uncertainty of next month's general election in Thailand and continued internal tensions in Malaysia combine to provide an unsettled backdrop.

The biggest risk of all remains Indonesia. The abrasive comments last month from President Abdurrahman Wahid that Indonesia should team up with Malaysia to teach Singapore 'a lesson' served to highlight the mini-state's precarious hinterland.

Meanwhile, simmering regional tensions in Aceh, Irian Jaya and the Maluku islands act as constant reminder about the southern neighbour's increasing fragility.

'The best case is that the [Indonesian] economy continues to recover slowly, and social and political harmony remains,' the note from S G said.

'An unsettled Indonesia with a breakdown of central rule and provinces seeking independence could pose a potential social backlash and negative consequences for Singapore in terms of trade, tourist flows and Singapore companies doing business in Indonesia.

'These issues are regarded as critical by Singapore's political leadership in the ruling People's Action Party [PAP]. The party's annual report from the central committee, released last week, noted that foreign investors' perceptions of Singapore were governed, in part, by events in its neighbourhood.

'Developments in Indonesia and Malaysia, and to a lesser extent Thailand and the Philippines, will affect the unity and the strength of the Association of Southeast Asian nations, and the prospects for Singapore,' the report said. 'Analysts have commented that, while Singapore seems to do most things right, it is 'in the wrong place at the wrong time'.'

To try to keep 'doing things right', the government will press on with its cautious liberalisation of the economy, slowly but surely unravelling its tight hold over what has been termed Singapore Inc. Officials say progressive deregulation enhances competition, providing a spur to faster growth.

Analysts say that they expect greater divestment of government-linked companies, with listings on the stock exchange. At present the main focus is on PSA, the country's port operator -  slated to list this year, but now expected to list sometime in the first quarter next year.

The government is also pushing hard to develop the biotechnology sector in a bid to reduce the economy's dependence of electronics, as well as continuing to stress the importance of the 'knowledge economy'.

It has announced a revamp of the educational system to place greater emphasis on independent thinking. It has also redoubled efforts to attract skilled workers from abroad.

'I suppose that all of these initiatives are for long-term needs. They are getting back to basics with the need to teach kids creativity and life sciences,' Mr Song said.

There is also a recognition by Singapore's political elite that the country and its Asean partners must do more to try to claw back the share of foreign direct investment which has tilted towards Northeast Asia. The trend is likely to be hard to fight next year, with much fanfare over Beijing's eventual accession to the World Trade Organisation.

As the PAP report noted: 'Japan, China and Korea are exploring co-operation among themselves. They are also better placed to win in the new economy. Their workers are better educated and their populations more IT literate. The income gap between Northeast Asia and Southeast Asia will continue to widen.'

jake@scmp.com

Graphic: anal12gbz



Singapore pace peaks