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Published December 10, 2008

Sword of open economy cuts the other way

Singapore's climb up value chain makes it more dependent on advanced economies

By ARTHUR SIM


SINGAPORE is the most open economy in Asia, says Citigroup, but this could now see it suffer more from the effects of the global recession than its Asian neighbours.

In the report Surviving Recession, Re-thinking Globalisation - Confronting Challenges of a Post-Crisis World, Citigroup said that the economic restructuring of post-2001 did seek to 'further leverage on globalisation and push out the economy's aggregate supply curve'.

However, it said that the restructuring may have ironically made Singapore more, rather than less, vulnerable in the current recession.

As Citigroup points out, the most 'iconic industries of this period' - biomedicals and tourism - have suffered badly in the current downturn because of the heavy reliance on external trade.

Citing an International Monetary Fund (IMF) study, Citigroup also said that Singapore's climb up the 'value chain of production' made it more dependent on advanced economies - notably the US, EU and UK - as final export destinations. And the study found that a one percentage point decline in US growth could lower growth in Singapore by 0.9 percentage point, about twice the impact a decade ago.

Citigroup said that within Asia, Singapore ranked as the third least exposed to China's domestic demand, a point that hits home when considering that Singapore needs to be sufficiently diversified and 'plugged' into the markets that are still growing.

Citigroup found that Singapore's non-oil domestic exports (NODX) to the US, EU and UK remained broadly stable at about 30 per cent of gross domestic product (GDP) until 2007 when it fell to 23 per cent. NODX to Asia remained at 35-38 per cent of GDP between 2004-2007 while NODX to China, at 6.7 per cent, was a fall from 7.5 per cent in 2005.

It also noted that imports from Singapore for China's own domestic demand comprised just 37 per cent of Singapore's domestic exports to China (including oil) - just 4.2 per cent of Singapore's total domestic exports. The numbers also mask the fact that a 'large chunk' of exports to Asia are in reality indirect exports to the US, EU and UK.

Challenges that face Singapore in the 'post-crisis' future - falling demand, cost competitiveness, structural relocation, widening income gap - are daunting.

To weather this, Citigroup believes that Singapore needs to better tap into final demand from Asia. This could be through bilateral or regional free trade agreements. Alternatively, it could focus on products and services demanded by the region.

Interestingly, Citigroup feels that domestic consumption here is artificially depressed because of the high home-ownership rate and the limited avenues to withdraw housing equity. It said that 'policies that facilitate the unlocking of housing wealth are therefore important if consumption is to play a greater stabilising role to buffer against cyclical external headwinds'.

It also said that institutionalised social safety nets could reduce the incentives for precautionary savings, providing some support for consumption spending.