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As someone living in this country, building a family and my wealth at the same time, it is important to keep abreast with the environment we live in.
This is important because we don’t want to be caught unaware that we have a very bright future and then get a shock that things are really not so well beneath the surface.
If you are an active capital allocator, then you need to be concern whether things are going great, whether there are head winds.
This is a short piece on what I see are some of the strategic headwinds from what I gathered from some of my readings recently.
The time frame and probability whether they have great impact is qualitative at best and unscientific. There have been historical causal result in the past but we won’t know exactly because the world is not a linear system and thus the repercussions and results will be very different.
1. Deglobalization of the world
We have been in a globalized world for a few decades. Globalization is good for a small country like Singapore because it’s difficult to grow just by consumption.
Thus we depend on exporting what we produce. An open world, with many trade ties are conducive for a net exporter like us.
Ruchir Sharma, Morgan Stanley Emerging Market Strategist, travels extensively around this region. He wrote Breakout Nations: In Pursuit of the Next Economic Miracle where he documents down the shift in trends he is observing and anticipating.
One of the main trends is the de-globalization of the world. Countries are now at the tail end and living with the negative effects of globalization such as job losses due to competition and inability to compete well.
Even the rich as well as the poor, realize that globalization creates unequal distribution of income, and benefits only selected group of people.
The voting result of Brexit and what gave Donald Trump greater support was that more dissent voices of these negative effects are being felt.
Countries are reactive and if you close your doors to me, then I will watch my own interest and close my doors in other ways.
For countries with a bigger consumption based and not such a big net exporter the impact is less. For those big exporters, such as Singapore this shift is not good.
It should be noted that this isn’t a few years trend but we can draw parallels to the past where this multi decade globalization trend follow by a shift. We have one in the 19th to 20th Century which duly end in a World War.
2. De-leveraging around the world
For a fifteen year period, economies have done well to take advantage of global stability and cheap financing.
Due to the Keynesian solution to solving a normal cyclic slowdown around the world, interest rate have kept low and this is good.
Debt levels rise and effective use of debt allows economies and families to use other people’s money to build assets that otherwise they cannot.
Interest rates have to rise, and debt levels will need to be rein in. We might be seeing the start of this.
Expansion pace will be curtailed.
From what Ruchir sees except for China, most countries are controlling the pace of their debt growth.
This change in pace will put a barrier on how fast economies grow. This is a broad stroke and it includes Singapore.
3. De-democratization around the world
In the last few decades, the world is dominated by more democracy. This has its advantages where the countries are more open, communicative and transparent.
This creates a more conducive environment to trade.
What gave Donald Trump more power was the message that we need a more authoritarian regime.
This is not new to Singaporean. It means more obedience, conservative at the expense of your power.
If such a shift occurs in more countries, it will mean a very volatile environment. In such an environment, it may not be conducive for global trade.
We are going to see conflicts going up.
We will see more volatility in the market. This might not be a bad thing for investment. Certainly not conducive if your country depends on trade.
4. De-population around the world
There are two factors that impact economic growth greatly. One is the pace of working population change and the other is productivity.
Countries around the world is facing a decline in the working population. What may be surprising is that the slow down happens in emerging market countries, who I used to think are less impacted by this.
The reason for this for China is the one child policy and better family planning and consideration in other countries.
In Singapore we faced this issue of falling birthrate since the 1990s and the easy solution is to allow more immigration and expatriates.
The unabated migration have resulted in discontent amongst the native citizens which they allow their feeling to be shown in the 2011 election.
The incumbent government of Singapore have this cut off from their policy. To be clear, foreign labor population is rising just not at an increased pace.
Since then, the message is clear: Singapore have to ramp up their productivity, which is producing more per worker.
This is easier said then done, for many countries. Singapore have been trying to do this for the longest time since the crisis in the late 1990s when they faced an exodus of MNCs.
Eventually, Singapore have to rely on the growth of population, cheap money as mentioned before and other measures that I will talk about later.
The main themes for Brexit and the USA election is on natives versus new immigrants and have a profound impact on the result. The amount of foreign employment and new citizenship will be constrain in many countries that are closing up.
This may present an opportunity for Singapore if they are looking to become a platform to encourage cutting edge technology growth as these initiative placed uncertainty in countries that are conducive in this area such as USA and UK.
Productivity is a buzzword and may continue to remain a buzzword for countries that think it can be easily engineered.
5. Change in Tax Regime around the world
Different countries have different form of tax system. This is based on the stage of growth the country is in, the makeup of the industries in the country and unique circumstances.
Singapore along with Hong Kong are countries that are attractive because of their low tax rate.
While Hong Kong have a corporate tax rate of 16.5%, Singapore corporate tax rate is 17%. This is among the lowest 10 corporate tax in the world.
When a company setup shop in Singapore, there are much incentives:
- You only need to hold board meetings and exercise de facto control to obtain tax residence. This means that day to day operations need not take place in Singapore
- Regional and International Headquarters aware encourage companies to set up shop in Singapore and use Singapore as their base of operations
- Pioneer Incentive: if a company is a new industry they are exempted on their qualifying profits for 15 years
- Development and Expansion Incentive: provide preferential tax rates on profits above a pre-determined base
- Approved Royalties Incentive: gain tax incentive to transfer technology to Singapore
- To encourage foreign capital flow to Singapore, certain industries have lower tax rates, which could range from 5-10%
This presents an advantage to companies using Singapore as a home base to consolidate earnings as the MNCs enjoy the tax savings.
The country basically lower their tax margins, but hope that this increases the volume of companies setting up shop.
Due to the ratio between natives and foreign workers the company can hire, this creates jobs in Singapore, that otherwise will not come.
In short, lower tax rate, more companies come, more tax revenue collected, more employment.
The headwinds going against Singapore is that countries are realizing that their citizens are doing this, whether legitimate or ill gotten gains, and are trying to get the money back to their home country.
Indonesia is a recent example and in Donald Trump’s campaigned speech, he spoke of lowering the tax rate to 15% from 35% and provide incentive for USA companies to repatriate their vast cash holdings back to the country.
This means that more countries may take their lead. This might or might not work out for them, because the devil is in the details. To lower so much tax will mean loss of tax revenue and you need to be sure that will work out.
However, if this happens, it means one key driver of keeping employment, developing the private banking and wealth management sector and ta revenue is going to be very challenging.
Remember whether the impact is bigger for the other countries or the country that depends on this greatly.
In fact, this could be the last line of defense (the corporate tax rate and incentives to set up shop) to keep Singapore employment so low.
6. Rise of Automation, Machines and A.I
One way that was talked about to increase productivity is to using machines and more automation to carry out repetitive things.
We are at an inflexion point such that, machines and automation can not only do the repetitive things, but also so smart that they can drive cars, replace typical human decision making.
Some countries have made themselves out of superior middleman, broker based businesses. Some individuals have made thriving middleman and broker business. Web 2.0, the smartphone proliferation have made it viable that this middleman layer are aggregate to a very large scale, and have altered these middleman and broker business entirely.
This enhances productivity because according to the equation, this will increase production with roughly the same amount of people.
If Singapore succeeds in this form of productivity then we will get our GDP growth.
However, this is a rush to succeed here faster than other competitors.
I struggle to imagine Singapore at the forefront of the technological curve compared to other countries.
To make matters worse, if the competition comes to the stage of how many machines and how advance your AI and automation is, what are the chances of us outdoing and out differentiating countries that have the resources to have more of these machines.
They can complement the production better by having the raw materials closer to where they produce and thereby lowering the costs.
Employment in such a world will change dramatically. Can the human population still get more pay by stepping up to “higher value added” work, or they will be so useless compared to machine that its not justifiable to employ them, or pay them their “deserved” wage increment?
7. Transportation Challenges
Singapore is one of the busiest transhipment port around the world. The maritime industry contributes 7% to Singapore’s GDP and makes up 10% of the services sector (which is 75% of Singapore’s economy).
The country have successfully diversified its economy away from shipping. In recent years, shipping have not done well yet Singapore manage to keep its growth from dropping.
We do wonder if the transshipment part of Singapore, can be truly be uncorrelated to Singapore’s other sectors.
In recent times, there have been so much hearsay about trade diversions that may greatly impact the role of Singapore in global trade.
- As Ice Melts, the Arctic Shipping route is possible for connecting Northern Europe to China
- Building a deep sea shipping channel, called the Kra Canal between China and Thailand, that will enable trade to bypass the Straits of Malacca
- One Belt One Road which will possibly link inner China with Europe and Africa
These are not fresh challenges to Singapore’s status as a major transhipment port. There was much fanfare when Maesek shifted their ship handling over to the Port of Tanjong Pelepas, Malaysia’s port to challenge Singapore.
Since then, Singapore have continue to handle more cargo and containers them the Malaysian port.
Recent data have shown that Singapore handled 30.9 mil TEU, a drop of 8.7% from previous year. This is the lowest container volume since 2011. In contrast, Port of Tanjong Pelepas have registered an 8.9% growth in their throughput.
The problem here is perhaps that the level of trade required between China and the rest of the region is much larger than in the past, and the capacity of just one Straits of Malacca may be inadequate. These alternate routes, if they come to fruition, in conjunction with more trade carried out due to Asia taking a bigger role in global trade, may help spread out the load.
End of the day, it is not as if there is one shortest route thus all the traffic will past by that route.
Singapore for their part, wants to play a role in One Belt One Road, and the development of 2 new air terminals and a shift of our major transhipment port from Pasir Panjang to Tuas are indicators of that.
How should we make use of this?
Take this as a list of things for your inquisitive minds to go down to see if the points I raised are valid or not.
As for whether this helps in your investment, if the macro trends play a large part in your investment decision and its impact to your portfolio, then do assess the impact accordingly.
The impact and result might not be seen so soon. There will be much cross currents taking place.
The results might not be close to what I think as well.
Remember the baseline, this doesn’t just affect one tiny red dot. Many countries will face much of these problems as well. It will be naive to think this is only our problem.
However, it is my view that if your portfolio depends on the progress and success of Singapore, there is a huge concentration and you should watch it well.
(Topmost picture is of Singapore Chinatown. Image Credit: dingytooth)
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