Nimble island needs to adapt again

The Jurong Industrial Estate was developed in the 1960s to industrialise the economy. Source: Wikimedia

Singapore’s financial troubles are raising questions about the trade hub’s wider health. Hit heavily by falling fuel prices and reduced demand from China, the island’s dramatic skyscrapers appear to be creaking in the chilly climate of an economic slowdown.

However, the well-educated, expertly organised, semi-democratic micro state has always been able to think on its feet and will no doubt already be working to diversify an economy that remains a model for most of Asia.

With a market value of just S$50 million (US$37 million), Swiber Holdings did not seem the kind of firm to send shockwaves through the financial markets. But the near-liquidation of the penny-stock firm has set off tremors in the city-state’s banking and energy sectors.

Two days earlier, it filed for liquidation, which was subsequently dropped following discussions with lenders.

Meanwhile, Singapore’s economy grew 2.2 per cent from April to June, according to official data, compared to the 2.1 per cent recorded over the same period in 2015. And manufacturing expanded 0.8 per cent in the second quarter, reversing six quarters of decline.

But below the hood there are signs that uncertain global outlook is hurting the economy, argues Mizhuo Bank economist Vishnu Varathan.

The manufacturing boost was largely due to a surge in the volatile biomedical sector, which produces drugs, he opined. “The manufacturing sector, stripping out biomedicals, is pretty much in a recession,” Varathan says.

Swiber, the Singapore-based provider to offshore oil and gas extractors, facing about US$50.5 million of demands during July from various creditors, said on July 29 that it was seeking to operate under court supervision as it tried to change its fortunes.

Spending cuts by explorers such as Royal Dutch Shell and Statoil ASA are questioning Singapore’s role as a hub for the marine and offshore industry that accounted for 6.9 per cent of its manufacturing output last year. Singaporean lenders, including DBS Group Holdings, said it expected to recover only half of its exposure of around S$700 million to Swiber.

“The sector has been a drag on the overall gross domestic product,” said Song Seng Wun of CIMB Private Banking in the republic. “The period of downturn could last longer. There will be pressure on all the players, large and small.”

The city-state hosts 25 to 35 per cent of Asian commodities trades, claimed International Enterprise Singapore, a branch of government. Asia’s largest physical oil trading hub, it is home to the globe’s biggest bunkering port.

Singapore’s maritime and offshore industry, which includes the world’s two largest oil rig manufacturers, Keppel and Sembcorp Marine, are responsible for 19 per cent of Singapore’s manufacturing employment. The halving of Brent crude prices in the past two years is endangering the projected growth of 1.8 per cent this year, already the slowest pace in seven years.

The Straits Times Index has dropped 2.4 per cent since Swiber’s demise was revealed. The FTSE Straits Times Oil and Gas Index, which follows the marine and offshore engineering sector, dropped 5.6 per cent during the same period, while Ezra Holdings plummeted 21 per cent and Ezion Holdings dropped 12 per cent.

Stockbroking house UOB’s Kay Hian warned that without banking support, offshore and marine companies would probably run into cash-flow troubled, leading to further defaults.

More troubling was the fact that the services sector, which makes up more than 60 per cent of the republic’s economy, is showing signs of troubles, growing by a measly 1.7 per cent, the slowest growth since the 2008 financial crisis.

“This is particularly worrying as the services sector contributes 68 per cent of Singapore’s GDP and accounts for nearly 72 per cent of total employment,” said a UOB report.

Swiber’s shares fell to a feeble 10.9 Singapore cents on July 28, from 88.4 Singapore cents two years earlier.

DBS, which provided a bridging loan to Swiber before the liquidation filing, has the most exposure among Singapore’s banks, according to official reports.

The bank’s exposure to Swiber was a reported S$721 million. Of that, S$403 million was to finance working capital for two projects, S$197 million was for June and July bond redemptions and S$121 million was for mainly secured term loans for shipping, property and hedging purposes. DBS saying it hoped to recover about half of the exposure to Swiber with around S$300 million of those loans secured by collateral, including property and vessels.

Singapore’s financial services have been hit hard by growing volatility after the shock referendum result on June 23 by Britain to leave the European Union.

Uncertainty appears to be the new certainty. Singapore’s central bank’s managing director Ravi Menon said: “Uncertainty prevails over exactly when and how Brexit will take place; we can expect recurrent bouts of market volatility in the months ahead.”

Even the job market, which attracts migrants from around the world, is starting to wobble, with rising job losses and unemployment. Unemployment rose to 3.1 per cent in June, up from 2.6 per cent in March. Layoffs reached 5,500 between March and June, higher than the 3,250 last year.

“We now see emerging signs of softening seeping into the job market, known to be a lag indicator of the economy,” Varathan announced.

While it may be too early to say if the island nation is heading for recession, Varathan did not rule it out. Brexit negotiations and whether China has a soft economic landing will do much to regulate its growth.

Nations should look in terms of decades not quarters and Singapore’s all-powerful political elite, largely unencumbered by the need to secure democratic backing, needs to be looking forward to a world where fossils fuels are of diminishing importance and technology runs our cities. And it already is.