Economic Analysis - Commitment To Free Trade Positive For Business Environment - MAY 2017

BMI View: The report released by the CFE reiterated the importance of upholding free trade and engaging the world, demonstrating the Singapore government ' s commitment to maintaining an open economy. Given that Singapore ' s small and open economy remains dependent on trade, we believe that this will be positive for the business environment and the country ' s longer term prospects. We thus maintain our relatively positive long-term forecast for growth to average 2.7% over the next decade.

A key recommendation by the Committee on the Future Economy (CFE) is that Singapore seek to deepen and intensify its international connections to enable it to maintain its business friendly environment and remain engaged with the region. We believe that this recommendation demonstrates the government's commitment to maintaining an open economy, and believe that the proposed measures would be beneficial to long-term growth, if carried out successfully. Singapore's small and open economy remains dependent on trade, and efforts to diversify its sources of trade would provide the republic with a degree of resilience. In addition, the continued pursuit of free trade despite the rising wave of global trade protectionism suggests that Singapore's business environment is likely to remain open to foreign trade and investment. These bode well for the country's longer-term growth prospects, and we maintain our relatively positive long-term forecast for growth to average 2.7% over the next decade.

Adherence To Free Trade Necessary For Economic Survival

We view Singapore's commitment to deepen and diversify its international connections despite the rise in trade protectionism globally as positive for the city-state's long-term prospects. The report noted that 'the benefit of open trade as a tide that lifts all boats remains true, and many parts of the world continue to engage vigorously in and grow robustly from open trade', adding that 'Singapore must remain open to trade, investment and talent'.

Business Environment To Remain Investor-Friendly
Asia - Trade And Investment Risk Index, Out Of 100

Having little natural resources, the republic is almost wholly dependent on trade and its interactions with the rest of the world. As such, a refusal to engage with the world despite the rise in protectionist sentiment would be detrimental for Singapore, which continues to benefit from inflows of foreign talent and ideas. Indeed, we are seeing evidence that the government remains a committed advocate of free trade even after the stalling of the multilateral Trans-Pacific Partnership (TPP) agreement. Singapore has at least 20 free trade agreements (FTAs) with 31 trade partners and is currently negotiating seven more. In addition, there are three FTAs that are awaiting ratification.

We thus believe that the government is unlikely to reverse its existing trade position, and expect that it could further accelerate its efforts to engage with the world through the recommendations listed in the report. This will ensure that Singapore's business environment remains investor friendly, and this is reflected in the city-state's high trade and investment risk score of 87.2 out of 100 (compared with a regional average of 75.4).

Emphasis On Personal Ties Marks A Shift In Strategy

In particular, we view the government's shift in the way bilateral relations are conducted as a positive step in Singapore's efforts to seek greater engagement with the world. The CFE recommended moving beyond official ties and instead seeking to strengthen ties at the business and individual levels. We believe that this form of engagement is a more sustainable one, with increased personal ties likely to lead to a deeper understanding of Singapore's partners and the markets that Singaporean firms are operating in. This will also enable companies to develop a stronger appreciation of the different market conditions, which would enable them to formulate effective strategies to address the unique needs of each market. We believe that this will become increasingly important as the government encourages more homegrown enterprises to expand their operations overseas given the limited size of the domestic market.

Large Number Of FTAs Underscores Commitment To Trade
Asia - Number Of FTAs Signed And In Effect In 2015

Closer Cooperation Between Businesses Boon For SMEs

Lastly, the recognition of the need to work together with the various trade associations and chambers of commerce (TACs) to fully utilise Singapore's existing FTAs is a positive step. We had previously noted that small and medium enterprises (SMEs) are likely to be ill-placed to take advantage of the various provisions of the different FTAs as they lack the resources to do so. SMEs which employ approximately 70% of the workforce, account for 99% of all enterprises in the city-state and contributed 48% of value added to the economy in 2015. As such, the expertise provided by the TACs to help businesses better understand and utilise the benefits from the existing FTAs will further help SMEs diversify and grow their businesses in the region.

Macroeconomic Forecasts (Singapore 2013-2019)
Indicator 2013 2014 2015e 2016e 2017f 2018f 2019f
e/f = BMI estimate/forecast. Source: National sources, BMI
Nominal GDP, USDbn 299.4 292.8 278.0 277.4 297.6 320.2 347.0
Real GDP growth, % y-o-y 5.0 3.6 1.9 2.0 1.9 2.2 2.6
GDP per capita, USD 55,401 53,181 49,602 48,697 51,441 54,575 58,414
Industrial production, % y-o-y, ave 1.7 2.7 -10.0 9.9 1.3 1.8 2.3
Population, mn 5.4 5.5 5.6 5.7 5.8 5.9 5.9
Consumer price inflation, % y-o-y, eop 2.3 -0.1 -0.6 0.2 2.0 2.5 2.5
Consumer price inflation, % y-o-y, ave 2.4 1.0 -0.4 -0.2 1.1 2.3 2.5
Central bank policy rate, % eop 0.00 0.00 0.25 0.25 0.50 1.00 1.75
Exchange rate SGD/USD, ave 1.25 1.27 1.37 1.38 1.41 1.37 1.34
Exchange rate SGD/USD, eop 1.26 1.33 1.42 1.45 1.39 1.35 1.31
Budget balance, SGDbn 4.7 5.2 -4.8 4.1 2.5 2.2 1.9
Budget balance, % of GDP 1.2 1.3 -1.2 1.0 0.6 0.5 0.4
Goods and services exports, USDbn 579.0 577.6 516.7 511.4 510.9 553.3 597.8
Goods and services imports, USDbn 508.8 502.4 438.1 434.6 435.4 474.7 515.4
Current account balance, USDbn 54.1 58.8 57.6 56.5 54.4 55.6 57.5
Current account balance, % of GDP 18.1 20.1 20.7 20.4 18.3 17.4 16.6
Foreign reserves ex gold, USDbn 273.1 256.9 247.7 246.6 258.9 271.8 285.4
Import cover, months 6.4 6.1 6.8 6.8 7.1 6.9 6.6
Total external debt stock, USDbn 1,182.8 1,179.6 1,106.8 1,094.7 1,085.5 1,081.7 1,080.9
Total external debt stock, % of GDP 395.0 402.8 398.2 394.6 364.8 337.8 311.5
Crude, NGPL & other liquids prod, 000b/d 0.5 0.5 0.5 0.5 0.5 0.5 0.5
Total net oil exports (crude & products), 000b/d -1,215.1 -1,267.1 -1,280.0 -1,286.6 -1,293.1 -1,295.8 -1,298.4
Dry natural gas production, bcm 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dry natural gas consumption, bcm 9.4 11.1 11.1 11.2 11.5 12.0 12.0