Global Economic Outlook and Challenges Faced by Singapore - Essay Example

While economies round the world had been experiencing a slow down in recent times, the recent bankruptcy of Lehman Brothers, takeover of Merill Lynch, financial support to the AIG and recent collapse of Wachovia banks has further impacted nations across the world. Just before this, the US had faced the subprime mortgage crisis and declining dollar value. Oil prices globally have surpassed all previous figures. All these have had and will have long-term repercussions in different ways. According to Santiso (2008) a shift in the global economic power and wealth has overturned perceptions of what a downturn in the US could mean to the rest of the world. This is endorsed by a survey by the McKinsey Group which finds that amid the uncertainty the prospects for investment banking in the emerging markets remain relatively bright (Böhme, Chiarella & Lemerle (2008). Southeast Asia however, has been making solid economic progress since the financial crisis of 1977 but Singapore has been going through a lean pitch and much depends upon the economic activity that take place globally in the near future. The OECD countries accounted for 75% of the world GDP less than 5 decades ago which today accounts for less than 55 percent (Santiso, 2008). The US stock market that accounted for 50% of the world market capitalization now accounts for less than thirty five percent and continues to decline. Emerging markets like Brazil, Mexico, Turkey and South Korea have already become OECD members and Brazil is all set to become the global player. It is growing into a global trader reaching into markets like Middle East, Africa and South East Asia. The subprime crisis of the US can provide new oppurtunities for the Asia-pacific region. The Asia-Pacific investors are playing a key role in supporting the developed countries during the current financial turmoil. Berner (2008) of Morgan Stanley however fears that recession will go global and the industrial economies will be flat in 2009. Most emerging economies have been facing a combination of external shocks and tighter monetary policies. Since the exports to the US would be reduced, it would impact the other economies as they would face decline in employment, which would have pressure on the income, consumers and their lenders. Most predictions estimate that the US economy will take a V-turn and not U-turn. The airline industry too is facing the darkest future as multiple airline liquidations will further cripple the economy that depends on affordable and efficient transportation system. This would result in massive job losses, turndown in the associated and dependent industry, the unemployment compensation burden would increase on the government, apart from declining tax revenues (ETN, 2008). According to a report by the UN Economic and Social Commission for Asia and the Pacific (ESCAP), the downturn in the US housing market would widen the gap between the rich and the poor in the Asia and pacific regions. It is a period of “heightened uncertainty” and further turmoil can be expected. Countries like Singapore, Korea and Taiwan Province of China export high-technology products to the US, and this is likely to be affected (Raja, 2008). China will be able to absorb the shock because its domestic demand is very high. In fact the entire Asia-Pacific region has strong macro-economic fundamentals and high domestic demand coupled with high foreign reserves which will provide the buffer even when US experiences downturn. The Asia-Pacific economies remain immune to the credit crunch of the US and the European Union. India and China have shown clear signs of ruling the global market. The buying of the Corus Steel and Jaguar by Tatas from India is testimony of the rising economy (Santiso, 2008). China in 2006 was more exposed to the emerging economies than to the G7 countries. Its exports to the G7 countries have been falling while exports to the emerging economies like Chile and Brazil are on the rise. A “shifting balance of financial power” is evident from the figures that outward direct investments from India more than quadrupled between 2005 and 2007 and that from China more than doubled (Raja, 2008). India definitely expects to gain from the US downturn because funds from the US could be diverted to emerging economies like India. The GDP ration of contributing tax is expected to reach 13% in 2008 from 9.2% in 2005 (Devonshire-Ellis, 2008). Both China and India are set for growth but inflation remains a major issue in both these countries which is driven by food prices. In the emerging economies food makes a larger portion of the consumption basket and this is some reason to worry. The emerging economies are following a restrictive monetary policy to sustain in the market but a highly restrictive monetary policy could dampen growth (UBS, 2008). The Asian countries have been selling of their stocks due to heightened anxiety and deteriorating credit quality (Lee & Park, 2008). In Philippines, the economy has been making slow progress to reduce the country’s poverty. It is struggling to maintain a rapid growth to keep pace with the increasing population. They are however prepared to meet the global economic slump and have downgraded their growth projections to meet the rising commodity prices Romero, 2008). The government is determined to boost expenditures on infrastructure, agriculture and social services and improve revenue collection to fund projects. Indonesia has been able to control the inflation caused by rising oil prices. By cutting down on fuel subsidies, it could boost the investor trust. It thus managed to avert a financial crisis threat. The role of the Asian Development Bank is very vital in Indonesia and Philippines as it has increased the loan approvals thereby revitalizing the economy (ADB, 2005). Indonesia has a strong banking performance and robust commodity exports. It exports coal, textiles and palm oil apart from tin, cocoa, coffee, nickel, copper, gold, rubber and vanilla and hence does not face any threat of the current economic scenario elsewhere (Suharmoko, 2008). Indonesia’s non-oil exports have shown an increase of 23.2% in the first half of 2008. They have acquired monetary and banking stability after the Asian crisis of 1999. In Singapore and Malaysia the GDP has been generally expanding and exports have been fueled. The Japanese growth has so far not been adversely impacted but due to reduced domestic demand and appreciation of Yen, will constrain Japanese growth. The GDP is expected to expand by merely 1.2% in 2008 (UBS, 2008). One-third of Thailand’s economy relies on exports and global slowdown would definitely affect it (Pratruangkrai, 2008). Because of the rising commodity prices, they plan to develop the farming sector. The country is also preparing for exchange-rate volatility and current account problems due to overuse of fossil fuels. The banking sectors in the US and the Europe have weakened and they are seeking equity investment from the Asia-Pacific region to shore up their depleting capital bases (Raja, 2008). Growth in Europe as a whole has not weakened despite a surge in the Euro. Unemployment is showing a downward trend in Germany and France. It is believed that the European economic cycle is a little behind the US economy and the European growth is expected to be 1.7% in 2008 and only 1.2% in 2009 (UBS, 2008). The German economy is growing at a faster pave than average European growth while Italy’s growth is below average. Several European countries are also facing housing bubbles like the US and Spain can expect a similar downturn in 2009. The GDP in the UK too is decelerating and it could also experience an economic slowdown. The UK economy is closely tied to the US economy than the rest of Europe and hence the impact of the global crisis would directly impact the UK. The Middle East as of now has a limited capital markets but investments banks are reassigning more and more from London and New York to the Middle East. The oil-rich countries of the GCC are generating wealth at unprecedented levels. This region will enjoy the fastest capital market expansion as high oil prices have fueled the growth. Several corporate headquarters are moving in to the Middle East and according to the McKinsey report, GCC would have invested about $3 trillion in the region by 2020 (Böhme, Chiarella & Lemerle, 2008). Domestic companies are expanding globally as well apart from modernizing their regulatory and institutional framework. The Middle Eastern countries have amassed wealth over the past few years and they will remain unaffected even if the global demand for oil reduces of flow of capital into the region slows down. The down turn in the US economy will impact the consumer confidence in the whole of Asia and Singapore will be affected too. Singapore currently exports high-technology products to the US and this would be affected. China already has other options like exporting to Chile and Brazil and Singapore should look for newer markets. Singapore gets an opportunity and had already started investing in the weakened banks in Europe. For instance, Government of Singapore Investment Corporation has made equity investments in Citigroup and UBS, and Singapore’s Temasek Holdings in Merrill Lynch (Raja, 2008). Even though the liquidity in the global capital markets has been affected, the impact on the Singapore economy will be limited. The country has appeal for inward FDI and its relations with the neighboring countries like Malaysia and China have been productive. Its economy is forecast to grow at an annual average rate of about 5% between 2008 and 2012, which will be especially fueled by strong growth in domestic demand (The Economist, 2008). Due to currency appreciation and strong domestic demand, the imports are expected to outstrip exports and hence even if its exports to the US are reduced, it would not impact the Singapore economy. The economy can experience a temporary slowdown and even unemployment could increase but since the unemployment in Singapore is low, fewer jobs may be created (Tharman, 2008). Industries like marine engineering, construction and manufacture of high-end products are doing well and so are the wealth management and the private banking industry. Since they have a strong fiscal position, they will be able to handle the turmoil efficiently. Singapore economy will be able to ride through the downturn because of the surplus reserves they have been holding and will not really feel the impact of the global financial turmoil. Nevertheless, Singapore should not ignore the competition that it would face from the low-cost economies in Asia and the government has already taken steps by offering tax incentives for pioneering products and industries in Singapore (Propertymarketupdates, 2008). Operating costs need to be reduced to augment the income so that people can fight inflation, which is affecting Singapore as well. As exports would reduce and the business would be dragged down to the downward spiraling of the US economy, the corporate taxes should also be reduced for 2008-09. Reduction in corporate taxes would make the country more appealing for inward FDI and overall enhance the country’s economic competitiveness. The Asian financial markets have suffered limited impact. The balance of wealth may be maintained but the focus is shifting away from the US to the emerging economies. Foreign reserves, high savings and domestic consumption will help the South East Asian economies to face the turmoil in the financial market caused due to the down turn in the US. The growth is slowing in the Asian and other emerging economies but they are not going into recession. They will be able to recover from this shock soon. Most of the Asian nations are looking at developing the agri-sector. The current situation also provides the emerging economy with several opportunities. Singapore would have to adopt measures to combat competition from the low-cost economies of Asia. The global slowdown has already affected its commodity prices, inflation and hence the country needs to assess the situation both in the developed economies as well as the developing and emerging economies. It has a robust economy but for continued and sustained growth it needs to maintain the trust and confidence of the investors. References: ADB (2005). Southeast Asia. [Online] Available at: http://www.adb.org/documents/reports/annual_report/2005/ADB-AR2005-08-Southeast-Asia.pdf [accessed 07 October 2008] Berner, R. (2008). A Deeper US Recession Goes Global. Global Economic Forum. [Online] Available at: http://www.morganstanley.com/views/gef/index.html [accessed 08 October 2008] Böhme, M. Chiarella, D. & Lemerle, M. (2008). The growing oppurtunity for investment banks in emerging markets. McKinsey on Corporate & Investment Banking. [online] Available at: http://www.mckinseyquarterly.com/PDFDownload.aspx?L2=10&L3=51&ar=2183 [accessed 08 October 2008] Devonshire-Ellis, C. (2008). Does India Have Built In Resilience Over US Downturn Concerns? 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[Online] Available at: http://www.asianewsnet.net/news.php?id=1891&sec=2 [accessed 08 October 2008] Tharman (2008). Economy may slow for ’several quarters’ But strong fundamentals will see Singapore past global crisis. [Online] Available at: http://luxuryasiahome.wordpress.com/2008/10/06/economy-may-slow-for-%e2%80%99several-quarters%e2%80%99/ [accessed 07 October 2008] The Economist, (2008). Economic data. [Online] Available at: http://www.economist.com/countries/singapore/profile.cfm?folder=Profile-Economic%20Data [accessed 07 October 2008] UBS (2008). Global Economy. [online] Available at: http://www.ubs.com/1/ShowMedia/wealthmanagement/wealth_management_research/economic_research?contentId=143453&name=economic_theme.pdf [accessed 07 October 2008] Read More