Tough Times Ahead...(Part 2)

Forgot to mention...

4.The tourism sector is not exactly very rosy either. In recent years, Singapore has been spending much to boost its standing as a tourism venue, what with projects like the F1 Night Race, construction of the Singapore Flyer and the integrated resorts. With this recession, tourism revenue will definitely decrease in the coming years as travel is a luxury good that is very price elastic. This means when people have more money, they will tend to travel more, but in this recession where everyone is cash-strapped, they will cut down on unnecessary expenses like visiting other countries. In just one or two more years, the integrated resorts will be up. If the economy has not recovered, one major concern is that the IRs have to continue operating at a loss.

Oh? And the money spent on all these projects? It will probably take a whole lot longer to recoup them back.

http://in.reuters.com/article/asiaCompanyAndMarkets/idINSIN25444820081226

5.Singapore prides itself on its shipping and airline industry. However, the global economic crisis also has implications for the two sectors. For the airline industry, whether SIA can still remain profitable is still an unknown factor. Despite the fall in demand for travel, the lower oil prices can probably help to cushion the impact. For PSA, not too sure about the impact on them, but it's likely that they are also affected to quite a signifcant extent as global demand for shipping has fallen tremendously. I derived this from the Baltic Dry Index.

From Wikipedia:

The index provides "an assessment of the price of moving the major raw materials by sea. Taking in 26 shipping routes measured on a timecharter and voyage basis, the index covers Handymax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain"

The BDI has fallen by more than 90% since 21 May 2008, taking just slightly over half a year to reach its present level.

This might not be entirely accurate, but my view is that if prices for shipping had fallen to such a low level, this indicates a dramatic decline in demand for shipping. Decline in global demand for shipping means less busy port for Singapore. And less busy port means less business for PSA.

A Silver Lining

Following my bearish outlook, I would like to add that there is one silver lining at least.

Despite the gloomy economic forecast for the next few years, it is possible that Singapore may emerge from the crisis stronger in financial services.

http://uk.reuters.com/article/newsOne/idUKTRE4BD01K20081214?sp=true

Quote:"The sun-drenched Asian city-state, with the highest density of millionaires in the world, is seeing wealth management prosper as the U.S. and Europe grapple with the worst slump in a generation."

Two things struck me.

First is obviously the amount of money that is going to flow into our financial services sector, due to implementation of EU Savings Tax Directive across the European countries.

Second is we have "the highest density of millionaires in the world". Wow! And I've always thought countries like Monaco are places where the millionaires live.

Tough Times Ahead...

I am very bearish on Singapore's economy in this financial crisis. Why? Below is the list of reasons.

1)Singapore's economy is heavily reliant on exports. Manufacturing accounts for a quarter of the economy, "with the export-to-GDP ratio at more than 180%, compared with an Asia average of 60-70 percent"(See here for more details). As worldwide demand falls due to the recession, our exports will surely suffer a steep decline.

2)MNCs have a very strong presence in our economy. As such, retrenchment may come suddenly and swiftly, leaving no time for workers to prepare themselves. Such decisions are made by the top management, whose headquarters are often based overseas and where our local government cannot intervene. Unemployment can increase dramatically as such companies slash jobs in an effort to cut costs. Our local unions and the government does not wield any power over the MNCs after all. Today has an article on this.

3)One of the pillars of growth in the Singapore economy is the biotechnology sector.

From Wikipedia:

Singapore is aggressively promoting and developing its biotechnology industry. Hundred of millions of dollars were invested into the sector to build up infrastructure, fund research and development and to recruit top international scientists to Singapore. Leading drug makers, such as GlaxoSmithKline (GSK), Pfizer and Merck & Co, have set up plants in Singapore. On 8 June 2006, GSK announced that it is investing another S$300 million to build another plant to produce pediatric vaccines, its first such facility in Asia. Pharmaceuticals now account for more than 16% of the country's manufacturing production.

This pillar of economic growth is still in its nascent stage, with the government investing heavy amounts of capital in it. Yet, the biotechnology sector seems destined to be heavily battered by the recession. Biotechnology will thrive in a bull market, as people have excess cash to invest in R&D, taking on higher risks in the hope of raking in future gains. But in a bear market, I doubt if investors are willing to part with their ever-more precious money on a venture that may give nil returns if research proves unsuccessful. Biotechnology firms may thus face insufficient funding for further growth and may have to file for bankruptcy. In fact, U.S. companies are already lobbying Congress for more aid.

I'm not the only one with such views. See here, here and here, all of them articles by international newspapers.

And this grim outlook is not taking into account our very own subprime crisis in the making, as explained by Mr Wang.

(Interested parties looking for additional information on HDB may proceed to:

1.http://www.youtube.com/watch?v=GjbXNH0RRoA

2.http://www.youtube.com/watch?v=VlqFl3rMLdg

for Leong Sze Hian's more in depth analysis of the HDB pricing policies.)

Dear Economist

Recently I finished reading The Undercover Economist by Tim Harford(an excellent book, by the way).

There is a slight introduction on the author, where I learned that he also writes the "Dear Economist" column in the Financial Times Magazine, "in which he draws upon the latest economic theories to provide tongue-in-cheek answers to readers' personal dilemmas."

Sounds interesting, so I googled for samples of the article. He didn't let me down. Here is one of his articles.

Dear Economist,My young son came home from school and asked me: “Mummy, what’s a credit crunch?” How can I explain this to a five-year-old?Ms LG, London
Dear Ms LG,
Once upon a time, there was a blameless girl called Consumerella, who didn’t have enough money to buy all the lovely things she wanted. She went to her Fairy Godmother, who called a man called Rumpelstiltskin who lived on Wall Street and claimed to be able to spin straw into gold. Rumpelstiltskin sent the Fairy Godmother the recipe for this magic spell. It was written in tiny, tiny writing, so she did not read it but hoped the Sorcerers’ Exchange Commission had checked it.
The Fairy Godmother carried away armfuls of glistening straw-derivative at a bargain price. Emboldened by the deal, she lent Consumerella – who had a big party to go to – 125 per cent of the money she needed. Consumerella bought a bling-bedizened gown, a palace and a Mercedes – and spent the rest on champagne. The first payment was due at midnight.
At midnight, Consumerella missed the first payment on her loan. (The result of overindulgence, although some blamed the pronouncements of the Toastmaster, a man called Peston.) Consumerella’s credit rating turned into a pumpkin and Rumpelstiltskin’s spell was broken. He and the Fairy Godmother discovered that their vaults were not full of gold, but ordinary straw.
All seemed lost until Santa Claus and his helpers, men with implausible fairy-tale names such as Darling and Bernanke, began handing out presents. It was only in January that Consumerella’s credit card statement arrived and she discovered that Santa Claus had paid for the gifts by taking out a loan in her name. They all lived miserably ever after. The End.

More can be found here.

Entrepreneur

What defines an entrepreneur? Creativity, confidence and risk-taking are all but a few traits of the entrepreneur.

In Singapore, an entrepreneurial environment is sorely lacking. Compared with other developed countries, entrepreneurship has yet to really taken off in Singapore.

Why? Because the Singapore government is systematically killing the traits requried for the entrepreneur to grow and flourish.

This article provides an interesting read about how schooling has destroyed creativity and confidence is lacking. Reminds me of what Princeton economist Alan Binder said in The Flat World:"In the future, how we educate our children may prove to be more important than how much we educate them." Singapore, notorious for its rote-learning and content-based education system, still has a lot to learn. To learn how to learn.

Coming back to the topic, I can futher add on to the lack of entrepreneurship in Singapore. To be an entrepreneur, risk-taking is a must. Nine out of ten businesses fail, and to set up a new business, one must have the guts, the tenacity, the determination to see it through. Unfortunately, risk-taking is a trait that is very scarce in risk-averse Singapore. I feel that one reason is because of the lack of a social safety net in place.



When there is a social safety net in place, the environment should be more conducive for start-up businesses. After all, if you fail, it's easier to stand up and start all over again. You would not be staking everything on your business; you would still have some money for your family, enough money to pay for your electricity bills; you would not be left destitute and poor, unable to afford even three meals a day. The government's stand is that welfare benefits will encourage a dependency mindset, encouraging unemployment. But, it should also take note it may be precisely becasue of the lack of welfare benefits that Singaporeans has lost its mindset to be independent, to have the guts to invent and innovate. The stakes are simply too high. One failure, and you might take forever to stand up again.

There is one more great impediment to cultivating the spirit of entrepreneurship in Singapore, and this great honour goes to the ever-present SAF. For two years, every male citizen is sold into the SAF, where their software is re-written several times over, with risk-averse behaviour embedded into their brains. All are taught to follow the system, follow the hierarchy. One toe out of line and you will get charged, and with that, your future will probably be over. All males are cowed into submissiveness, conformation (they use standardization in the SAF) becomes a norm, differences are frowned upon and punished.

After two years, they emerge from their cocooned environment to face a society that is politically and culturally oppressive. Political dissidents being slapped with lawsuits are not an uncommon occurrence, and all media has to go through the censorship board. The climate of fear prevails, and everyone continues to keep their head down and focus on the work on hand, never thinking, never wondering what they want, what they can have, and what they can become.

In this environment, how can entrepreneurship flourish? In fact, perhaps the most important factor in cultivating entrepreneurship is freedom. Freedom to think, to do what we want, with no restraints and no thoughts of the consequence. In Singapore, the school with its monolithic system takes away our freedom; the lack of a social safety net places heavy restraints to hold us down while we try to fly, denying us our freedom; SAF pummels all aspiring entrepreneurs into conformity, brutally snatching away all shreds of freedom which we desperately try to grasp.

Thus, it is no surprise that entrepreneurship does not thrive. In an increasingly competitive world, without a strong entrepreneur presence, Singapore will always play second fiddle to bigger economies.

Connect and Collaborate

Thomas L. Friedman in The Flat World emphasizes and re-emphasizes: in today's world, we must adopt a connect and collaborate system instead of the traditional command and control. Yet our leaders in Singapore are slow to implement, or even realise this. For the past few years, there has been rising discontent among the populace due to a series of unpopular policies, where the government is perceived to have lost touch with the ground. A series of ERP hikes, public transport hikes, electricity prices hikes, and then the ministers' insistence that they deserve high salaries: all has been force-fed into the citizen. In cyberspace, vitriol and abuse is not uncommon, with many labelling politicians as "elitists" and "living in their ivory towers".

I have a theory why our leaders are so apathetic to citizens' concerns.

Because we have the SAF. Every male citizen is sold into National Slavery at the age of 19 and for 2 years, are inducted with the concept of COMMAND and CONTROL.

Don't want to listen? Good. I CHARGE YOU.
Don't want to obey? Good. I CHARGE YOU.
Don't want to follow instructions? Good. I CHARGE YOU.

We can certainly blame a lot of things on the SAF.

Many of the ministers in the government are former SAF officers. Their word is the authority back then, so why should it be any different now? In the SAF, only Command and Control is recognised as a sign of a good leader. Connect and Collaborate simply does not exist.

Scarcity

In my first post, let us talk about the underlying principle in economics--Scarce resources used to satisfy unlimited wants.

Because resources are limited and our wants are unlimited, we are forced to make a rational decision to maximise our satisfaction. Hence, for every decision we make, there is an opportunity cost involved, which is the real cost in terms of the next best alternative.

Let us not turn to the local scene.

It is common knowledge that many of the government-linked companies or statutory boards invest overseas. For example, we know that Singapore Power invests extensively in countries like Australia. The profits earned by the company is not being returned to the citizens, but instead, leaked out of the economy to provide capital for overseas company.

I am personally not too happy about this. I would understand if a company want to invest overseas because of better returns, but in cases of companies like Singapore Power, they are granted a monopoly on our electricity prices precisely because they are supposed to provide the prices at a low level to benefit the residents. Unfortunately, the company itself does not have such altruistic motives. They want to make profits, and the profits they had earned had gone to investments in countries like Australia to earn even more profits instead of going back to the residents in Singapore. After all, that is how they manage to earn billion-dollar profits. The government owns the company, and the government is doing nothing about it, because everybody wants profits.

However, as was mentioned, with all decisions come the opportunity costs. In this case, I would broaden the scope of opportunity cost to contain not just purely a monetary value, but also potential loss of goodwill from consumers aka citizens.


















The above diagram is a Production Possibility Curve(PPC). PPC shows the maximum combination of goods that one can attain given scare resources. PPC illustrates the theory of scarcity in two ways.
1. Each point on the curve represents the maximum possible combination of goods attainable given scarce resources.
2. Points outside of the curve are unattainable due to scarcity of resources.

In the diagram, I have labeled the two axes, one as citizens' goodwill, the other as profits. By focusing single-mindedly on profits, the government has neglected the needs of Singaporeans. Right now, the point we are at now is dangerously close to the lower axis.

Focus more on profits and risk losing votes come the next election. Bring prices down, lose some profits, and gain citizens' goodwill. Shouldn't be too hard to understand.