Wealth Advisory September 12, 2020

Succeeding As A Small State In A Large International Economy: Focus On Singapore:

More than US$750 billion worth of trade passes through Singapore every year. The island-state sits at a geographically precarious outpost with Malaysia and China to its north and Indonesia to its south yet boasts one of the richest economies in southeast Asia that is bolstered by political stability and respect for the rule of law. The COVID-19 epidemic has raised a question of whether and to what extent this small state will survive the economic dislocations brought on to the international economy by the COVID-19 epidemic.

Singapore’s history provides an answer to this question. The British Empire founded a colony in Singapore in 1819 and used its strategic location as a trading hub between its other far east colonies and the rest of Europe. Singapore gained its independence in 1965 and rapidly undertook the development necessary to bring it on par with the rest of the industrialized world. The country’s small size made it amenable to a form of government that was largely authoritarian but that recognized individual rights and liberties. That authoritarian government adopted an industrial strategy that attracted foreign direct investment and opened its economy to globalization long before any of its regional neighbors joined the international economy. Simultaneously, the country built housing and supported schools for its citizens, which reduced domestic unrest and made Singapore even more attractive to foreign investment.

For more than 50 years, Singapore’s stability and strong institutions gave foreign investors the assurances they wanted and needed to make long term investments. The country’s manufacturing sector experienced rapid growth that was further fueled by a vibrant shipyard industry. When Singapore manufacturers faced increased competition from enterprises in neighboring Asian countries, the country became even more successful by changing its economic backbone with tax and regulatory incentives that led to the establishment of a thriving financial services sector with international banking, consulting, and insurance services that cater to all of southeast Asia.

Singapore’s willingness and ability to transition from manufacturing to services and its highly qualified workforce and strong education system have enabled Singapore to thrive in a challenging geographic region with potentially hostile neighbors and a dearth of natural resources.

Early in 2020, the World Health Organization declared a global health emergency as the COVID-19 pandemic threw the world’s economy into disarray. Singapore was one of the first countries in its region to implement travel restrictions to prevent a widespread outbreak that would otherwise overwhelm the country’s healthcare resources. Those restrictions brought censure from the Chinese foreign ministry, which blamed developed countries with robust healthcare systems for imposing travel restrictions that adversely affected China.

The economic relationship between China and Singapore is a two-way street. China has been Singapore’s largest trading partner since 2013, and Singapore is China’s largest foreign investor. Singapore relies on the millions of international visitors that come to Singapore every year, including almost 3.5 million from mainland China alone. The average spending by Chinese tourists in Singapore is almost double that of visitors from other countries. Singapore swallowed a bitter pill when it precluded those visitors and their pocketbooks from visiting the island-state.

Singapore authorities were likely aware of the risks and costs of a travel ban when they imposed it. Singapore’s government lost more than US$230 million in response to the 2003 Sars epidemic. In a few short weeks, Singapore has experienced an impact on its economy COVID-19 that has already exceeded the costs imposed by Sars.

Perhaps in recognition of its small size, Singapore has slowly allowed work pass holders who have traveled to China to return to Singapore. Singapore is taking this action presumably because its native population is not large enough to meet the needs of all of its healthcare, transport, and waste management services. Singapore has predicted that its manufacturing sector will suffer as a result of its actions in response to COVID-19 and that its relationship with China may be permanently affected by the travel ban. The country adopted a proactive approach to ease those tensions when it announced an assistance package to China and made donations to international aid organizations that were supporting the Chinese communities most affected by COVID-19.

Singapore’s history and its nimble approach to previous economic stresses bode well for the country’s prospects. Investors that are considering Asian opportunities would be well-advised to keep Singapore at the forefront of their considerations. The strength of Singapore’s economy before the COVID-19 epidemic will put the country and its industrial and financial sectors on good footing to recover quickly when the pandemic comes under better control. The country has long been a conduit of Asian trade and shipping, and there is no reason to suspect that this conduit will be closed down or bypassed as the region comes back online.