Can Growth Be Sustained?

Source : The Business Times, August 9, 2007

ANNA TEO takes stock of the perils and prospects that face Singapore's economy

LIKE just about everyone else, the Monetary Authority of Singapore was upbeat about Singapore's growth prospects - both near and medium-term - when it released its latest annual report two weeks ago. But amid the optimism, the central bank did sound out a note of caution about global financial shocks. It couldn't have known then how quickly the warnings would ring true.




















At a media conference to unveil the report, MAS pointed to economic and financial risks that threaten financial stability, not least of which include weaker-than-expected US growth as a result of a more severe unravelling of its sub-prime market. The US housing mortgage problem has led to increased risk aversion in the credit market, particularly in structured products, MAS noted. If the risk aversion spreads, there could be a sharp spike in volatility across various asset classes and markets, with spillover effects on the Singapore economy and domestic financial sector. Sentiment around the region would take a hit, and investor decisions will be affected, it said.

Sure enough, the US sub-prime woes worsened, and stock markets across Asia-Pacific were mauled early this week, to put it mildly. The question is - will it prove to be a short sharp slump, another blip on the charts, or will the market turmoil develop into a full-blown crisis with deleterious effects on Singapore's financial markets and economy at large, just when it looked like Singapore was ensconced in a new 'golden era' of growth?

The signs and indicators so far - buoyant job market, rising incomes, erstwhile bull stock market, a runaway property market, plus an influx of business talents and opportunities- had 'Boom Town' written all over. Exuberant economists could hardly contain their enthusiasm about Singapore's exciting prospects and potential in the years ahead.

With the economy having notched up well over 8 per cent growth in the second quarter (despite weak manufacturing output in June), Singapore has seen nine consecutive quarters where its GDP growth exceeded 6 per cent. And if growth for the year turns out at 8 per cent - about the same pace as in 2006 - it would be the fourth straight year that the economy has outrun the official trend growth estimate of 3-5 per cent.

Such growth streaks - with scant hints as yet of overheating pressures - have no doubt inspired talk of the dawn of a Golden Era here. The question - as always, but particularly in light of the latest market meltdown - is, how sustainable? The world - not least the regional economies - has, of course, undergone some sea changes in the last 10 years since the Asian crisis. But a look at Singapore's growth record over the past 25 years or so does show a pretty impressive pre-1997 growth streak that would be hard to beat, or even match.

Between 1987 (when it pulled out of a debilitating recession) and 1997, Singapore's GDP growth averaged about 9.2 per cent a year. The period includes two relatively 'slower' years - 1991 and 1992, when economic growth eased to about 6.5 per cent.

In his 1992 Budget speech, then Finance Minister Richard Hu spoke of Singapore's medium-term sustainable growth as 5-7 per cent, which he said 'may seem a let-down after the average growth of 8.5 per cent in the last three decades'. But Singapore's GDP had reached a higher base of over US$10,000 per capita, he said, the economy was at full employment, and 'expansion could no longer be as effortless and rapid as before'.

The official estimate of the country's long-term growth potential was later cut to a more conservative 4-6 per cent, but economists in the mid-1990s were confident that 'regional factors' could add a few more bonus growth points.

In the event, the government has actually since pared the economy's trend growth potential down to 3-5 per cent, given its maturing status and supply constraints, notably slow labour growth.

Fast forward past the 1997 regional crisis, the 2001 IT bust-up, and a restructured, revitalised economy has, since 2004, enjoyed above-trend growth every year. And economists again believe that the economy's underlying growth potential has risen to near-8 per cent, helped this time by not just new 'regional factors', the Chinese and Indian growth dynamoes, but also domestic policies. An even more proactive pro-enterprise strategy, diversification away from the electronics mainstay, as well as a more liberal immigration policy, are key.

Still, even with the best-laid plans, there will emerge external factors, forseen and unforseen, to throw things awry. This 'sub-prime' fallout is not the first market battering this year, and surely it won't be the last. For now, most analysts are of the view that the region will come away perhaps a little battered and bruised from the upheaval but with its economic fundamentals intact, and Singapore should still be on course to achieve another milestone of sorts this year - when its per capita GDP crosses US$30,000.

Still, for an indication of the effort and challenge it takes to scale new peaks as the economy prospers, it took Singapore five years - between 1989 and 1994 - for its per capita GDP to rise from about US$10,000 to over-US$20,000. In 1980, it was still under US$5,000.

Evidently, breaching the US$30,000 mark - still just over a third of Luxembourg's income level - has taken Singapore a whole lot longer, 13 whole years. But considering that back in 1965, the newly-independant country's per capita GDP was just over US$500, the growth has been nothing short of a feat.