Banking on Emerging Economies

Singapore's head start in developing trade with emerging economies is now paying off

Issue: Aug 2009

Developing trade
Singapore is well-positioned to tap on faster growing emerging economies to ride out of the recession
As Singapore celebrates its 44th birthday this August, a mood of cautious optimism prevails. The economy is mired in one of its worst recessions since independence and the labour market still faces tremendous stress. With the sharp decline in overseas demand, many workers have lost their jobs.

In the first quarter of 2009, some 10,900 people were retrenched - much higher than the 7,800 retrenchments for the entire year of 2007. Paycuts or headcount freezes have also been put in place in many companies.

Signs of recovery

Yet, a range of indicators suggest that the global economy has passed its worst. The Purchasing Managers Index (PMI), industrial production and export numbers are generally grinding higher globally.

Sentiment indicators such as consumer, business and investor confidence have also generally improved in many countries while the upturn in leading indicators for major economies like US, Eurozone, Australia and China is also heartening.

However, this stabilisation is occurring at extremely low levels. Some of the improvement is probably due to normalisation from the overshooting that occurred in the first quarter of 2009.

Signs of recovery are also visible in Singapore. Its non-oil domestic export (NODX) is now about 17% higher than the trough in January 2009. Anecdotal evidence suggests that the port terminal is now filled with containers waiting to be loaded onto the ships, a sharp contrast to the scene a few months back when the port was eerily empty.

With exports growing again, producers are increasing their output. Industrial production in April and May posted positive year-on-year growth of 0.4% and 2% respectively. This was a marked improvement from the sharp double-digit contraction in the first quarter of 2009.

The June manufacturing PMI also registered 51.1 - above the crucial 50 level that signalled growth - for the second straight month. By that measure, it could well imply that the manufacturing sector could be seeing further expansion in the months ahead.

A shift in power

Back in October 2008, the International Monetary Fund (IMF) forecasted that the GDP of emerging and developing economies, in PPP terms (purchasing power parity), would overtake that of the advanced economies by 2013. The current global economic crisis has probably accelerated this shift.

Although we are past the darkest hour, growth prospects in the developed economies remain weak. The severely weakened state of the Western financial institutions will continue to weigh down on credit availability in the West.

US consumers are also under tremendous stress, with more than 6.5 million jobs lost in the US since the beginning of the recession. US consumers are paying down debt, and the US savings rate has hit 6.9%, the highest level in more than 15 years. The continued consumer deleveraging implies anaemic US growth in the near future.

Sub-prime debacle weighs down on the US economy
However, the emerging economies, as a whole, are in much better shape. With limited direct exposure to the sub-prime debacle, the financial systems of emerging economies (except Emerging Europe) have emerged relatively unscathed.

Growth prospects for large emerging economies such as China, India, Indonesia and Brazil, are also much better than the developed economies. It is therefore likely that global growth in the medium term will be increasingly attributed to the developing and emerging economies.

Tapping the emerging markets

Singapore is well positioned to tap on this structural trend. Efforts to diversify our export markets and latch onto the faster growing emerging economies have in fact been undertaken long before the crisis.

For example, IE Singapore (the national agency in charge of promoting trade), has been organising study trips or trade missions to new markets such as Russia, Latin America, the Middle East and Africa.

IE Singapore has also set up platforms like Network China, Network India and Network Indonesia to help Singapore-based companies share knowledge and facilitate networking at various levels.

The increasing exposure to the emerging regions may be seen in the evolving composition of our exports. From the heavy dependence on G3 markets (US, Eurozone, Japan), Singapore's exports are now going more and more to the emerging markets.

For example, the G3's share of our NODX has fallen from 56% in 1995 to 35% currently. On the other hand, the share of NODX to China has surged from 5% in 1995 to 13% currently, making China as important an export destination as the US.

This greater focus on cultivating the emerging economies as exports markets has paid dividends in the past few months. Looking at the detailed trade patterns, it can clearly be seen that Singapore's export recovery is driven primarily by the demand from non-G3 countries, in particular, China. As an illustration, NODX to the G3 economies plunged 23% year-on-year in May 09, while NODX to the emerging economies grew by a phenomenal 30% in May 09.

Strengthening resilience and enhancing growth

Looking ahead, as the global balance of power shifts towards the developing and emerging economies, Singapore's many years of head-start in cultivating these new fast-growing export markets will not only allow her to strengthen her resilience by diversifying her geographical reach, but also to turbo-charge her growth by latching onto the fastest-growing regions in the world.

Contributed by Andre Lim and Serene Lim of the CapitaLand Economics Unit.
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