Singapore's economy grows by 1.6% in Q1 2012

Euro crisis poses threat to S'pore

Trade ministry keeps growth forecast at 1% to 3% despite positive showing

By Aaron Low, The Straits Times, 18 May 2012

A 'DISORDERLY' default in Europe is now a possibility and holds grave dangers for the Singapore economy, the Government warned yesterday.

The increased risk that the European crisis will spin out of control is a key reason the Trade and Industry Ministry (MTI) is sticking to its growth forecast of between 1 and 3 per cent this year, despite positive signals from the economy in recent months.

The economy expanded by 1.6 per cent in the first quarter compared with the same period a year ago, driven by construction and services.

But while economic activity picked up in the first quarter, the MTI said the outlook for the rest of the year is cloudy as recovery in the global economy remains fragile and vulnerable.

The recovery in the United States, which seemed to be picking up earlier in the year, has started to lose steam and China's growth prospects have also fallen.

But the biggest risk is in Europe, where fears of Greece defaulting on its loans have sparked turmoil in financial markets.

MTI permanent secretary Ow Foong Pheng told a briefing yesterday that changes in the political landscape in the region 'endanger promised reforms and crisis measures'.

The French have a new President while the Greeks will head to the polls next month after elections on May 6 failed to deliver a government.

'The high level of uncertainty surrounding the euro zone's political climate and fiscal outlook will continue to weigh on the global economy. This will in turn dampen growth in Singapore's externally oriented sectors,' said Ms Ow.

The MTI added that a 'disorderly' default by euro zone members 'cannot be ruled out at this stage'. 'If it materialises, there will be considerable downside for the global economy and Singapore's externally oriented industries,' it said.

A disorderly default occurs when a country such as Greece does not pay its creditors on time.

'This then leads to investors dumping bonds of other European countries, such as Portugal and Italy. The fear is really over contagion,' said OCBC economist Selena Ling.

The MTI's warnings came despite first-quarter gross domestic product (GDP) figures which show that the economy, especially the domestic sectors, continued to show resilience.

Construction was the main driver of growth for the three months to March 31, growing 7.7 per cent over the same period last year. Services expanded 2.2 per cent, but manufacturing fell 1 per cent compared with last year.

Compared with the last three months of 2011, the economy actually grew by 10 per cent, suggesting that the pace of growth has picked up.

Non-oil domestic exports in April were up a surprisingly high 8.3 per cent, lifted by pharmaceuticals, which surged 38.4 per cent.

Barclays economist Leong Wai Ho noted that the MTI composite leading index, a forward-looking indicator of the health of the economy, rose 2.9 per cent.

'We believe growth has bottomed out and expect the economy to expand 4 per cent for the whole of 2012,' he said.

But Credit Suisse economist Robert Prior-Wandesforde said the strong export figures are largely due to exporters' belief in a 'false dawn'.

He pointed out that exports to Europe and the US continued to fall in double-digit figures and that the bulk of growth of pharmaceutical exports last month stemmed from a 124 per cent increase in drug exports to Japan compared with last year. If the Japan export numbers were stripped out, export growth was just 1.1 per cent.

'It looks to us that output overshot orders in the first couple of months of the year, perhaps reflecting renewed optimism about the US and euro zone economies,' Mr Prior-Wandesforde added.

'This has subsequently proved to be yet another false dawn.'

Productivity still slipping especially in finance, infocomm

By Melissa Tan, The Straits Times, 18 May 2012

PRODUCTIVITY continues to slide, falling 2.2 per cent in the first quarter.

The latest decline in output follows a 0.5 per cent dip in the final three months of last year, according to the Economic Survey of Singapore out yesterday.

Productivity - the output generated by a worker, equipment or capital - edged up 1 per cent last year.

Falling productivity is a concern because it indicates that the economy is becoming less efficient or cost-effective.

There were a few bright spots in the first quarter, with construction output up 1.2 per cent. Also, there was a 1.5 per cent increase in the service sector, which includes health care, education, the arts and casinos, among others.

However, most segments of the economy turned less productive.

The main culprits were the finance and insurance industries and the information and communications sector, each of which declined by 4.8 per cent.

Productivity in the wholesale and retail trade industry fell by 3.8 per cent.

Even though output is down, business costs have shot up. The unit labour cost across the economy rose 3.7 per cent from levels in the corresponding period a year ago - far outstripping the 1.7 per cent growth seen in the final three months of last year.

In particular, the unit business cost for manufacturing leapt 5.1 per cent.

Dr Tan Khay Boon, a senior lecturer at UniSIM's school of business, said manufacturing costs had gone up because oil prices, industrial property prices and wages had increased.

He added that the soaring costs could 'erode our competitiveness in the export market'.

'With growth slowing in China and the instability in the European market, it is not clear whether the good manufacturing performance and the high export growth can be sustained.'

Exports, jobs, stocks and property at stake
By Aaron Low, The Straits Times, 18 May 2012

WHAT exactly is a 'disorderly debt default' in Europe and how would it affect Singapore?

Basically, a debt default occurs when a borrower - who may have issued bonds or taken loans - cannot pay creditors back on time.

In an orderly scenario, the borrower negotiates with its creditors - banks or bondholders - to extend or roll over the debt.

If the borrower is bankrupt, receivers seize its assets, sell them and try to pay creditors back.

Unfortunately, in today's globalised and complex markets, debt defaults are not that straightforward - especially when the defaulting borrowers are not just companies but entire countries.

If Greece defaults on its debt, the casualties will not just be its sovereign bond holders, who will take heavy capital losses.

All sorts of complex financial instruments, like credit default swaps that are linked to Greece's financial health, or the banks and institutions that hold Greek bonds, could fail.

The widening fallout could spark panic in financial markets as investors dump not only Greek bonds, but also Italian, Spanish and Portuguese bonds, and bank stocks as well. In the worst-case scenario, the endgame may be another full-blown financial crisis.

This could hit Singapore in three ways. The first and most direct way is through Singapore's exports. In a crisis, confidence plummets. In Europe, businesses will stop investing and consumers will stop spending.

Singapore's exports will be badly hit, given that the European Union is the country's largest export market with a 14.3per cent share.

Experience from the financial crisis in 2008 showed manufacturing will suffer the most. As production slows, jobs could be lost.

The second way that Singapore could be hit is via the many European banks that could run into trouble. European banks have traditionally been among the largest sources of credit and lending for companies in Asia. Should they suffer big losses and run out of capital, they could defensively pull funding back in a big way.

Already the International Monetary Fund says this is happening, with many European banks announcing some US$2trillion (S$2.5trillion) worth of reductions in assets in the region.

A more drastic pullback could lead to a credit crunch, with Asian banks still unable to make up the shortfall. This would create huge repercussions for businesses and the real economy as firms depend on bank lending to survive.

Lastly, a disorderly default situation in Europe could lead to investors pulling their money out from assets such as stocks and property, causing huge drops in value.

At the height of the market panic following the fall of Lehman Brothers, the Straits Times Index lost more than half its value between August 2008 and February 2009. Over-extended property investors could be mired in losses or even be in negative equity.

OCBC economist Selena Ling says these price falls may not be as drastic as in 2008, but a repeat of the pain experienced then cannot be ruled out.

Noting investor funds have stopped flowing into the region for six weeks now, she warned: 'Investors have taken to the sidelines and are watching. It's not become a fund outflow situation yet but it could very well happen.'