Asian currencies more resilient against Fed policy normalisation Singapore: stars are aligned for new policies in 2022

Highlights from the CAA Weekly Table:

COVID-19 and the omicron variant: don’t rush into pessimistic conclusions

  • The omicron variant has shaken confidence in the economic recovery. But, note that medical experts have cautioned against drawing conclusions until more tests are done. Note, too, that while governments have imposed renewed border controls, they have been generally loath to tighten domestic restrictions. Moreover, medical progress continues to give hope that the dangers associated with the virus can be further contained with time.

Asian economic prospects

  • China’s industrial profits continue to grow, suggesting that the corporate sector stresses are probably contained and not likely to prompt policy makers into large-scale stimulus.
  • South Korea’s economy is improving sufficiently to allow the central bank to mount further rate hikes but the timing may depend on other factors including the presidential election.
  • The Philippines’ fiscal is likely to undershoot the target.

Asian currencies more resilient against Fed policy normalisation

  • With inflationary pressures raising the risk of faster monetary policy normalisation in the US, concerns are rising about the impact on Asian currencies.
  • We think that the worst is over for these currencies. The SGD, VND and TWD should continue to benefit from export strength, the alleviation of shortages and the reopening of borders.


Singapore: stars are aligned for new policies in 2022

  • Three factors – brightening economic prospects, the political timetable and the need to respond to post-covid global trends – are set to prompt major policy moves in 2022. Sectors with a 17.5% weight in GDP are poised to rebound strongly while other sectors should benefit from secular trends. The political succession will be clarified by next year as well. Policy makers are keen to refocus their energies on preparing Singapore for the post-covid era.
  • Look for more monetary tightening in April, an announcement of a GST rate hike in February and more signals on a wealth tax and carbon pricing. Some political reforms are also likely.

Key Drivers of Asian Economies



Asian economies:

How worried should we be over omicron?

What does the omicron variant change in terms of economic outlook?

  • Currently, no medical expert can assess confidently the three ways in which the omicron variant could affect the course of the pandemic: whether the virus is more transmissible, whether it causes more severe illnesses and whether it is able to escape vaccines. There is understandable concern based on a few features of the variant such as the large number of mutations but until the tests are completed in a few weeks’ time, we can only speculate and much of the commentary is, frankly, noise.
  • What has changed is that the added uncertainty has diminished confidence in a swift recovery. Many governments have reacted quickly with travel restrictions and advisories on social mixing and mask wearing. People planning their first holidays in 2 years may be more wary and postpone their trips.

What has not changed is instructive

  • First, governments have little appetite to impose harsh restrictions beyond on cross-border travel. Few governments have imposed limits on domestic activity or internal travel in response to the omicron variant – the sort of restrictions which cause production to be interrupted and supply chain issues to arise. Harsher restrictions within countries are only likely if the tests show that the omicron variant is more transmissible or deadlier or better able to escape vaccines. Indeed, some governments have continued with plans to open up their borders despite the news about the omicron variant. For example, Malaysia and Singapore went ahead today (29 Nov) with the start of the travel bubbles between the two countries for travellers by air and land. Singapore also announced additional travel bubbles with countries such as Thailand and the Maldives even as it restricted entry of visitors from southern African countries.
  • Second, continued medical progress should help bring down mortality and morbidity rates in covid-19 patients, even with this new variant – as a result of expanded vaccination campaigns, development of new types of vaccines which are able to address variants and more effective treatments for covid-19. For instance, in the Philippines which has been a laggard in vaccination, 32% of the adult population is now fully vaccinated and enough vaccines have arrived in the country to allow 70% of the population to be fully vaccinated by 2Q22 or earlier, at the current pace of vaccinations. In addition, new vaccines such as T-cell based ones are in late stage development which will be better able to tackle variants unlike the existing ones which need tweaking that would take months. Regeneron Pharmaceuticals has reported that a single dose of its antibody cocktail can reduce the risk of being infected by covid-19 by 81.6% in a late-stage trial. Finally, new drugs promise to improve treatment of patients infected by covid-19 such as Merck’s Molnupiravir or Pfizer’s Novel COVID-19 Oral Antiviral Treatment.
  • Thus, even if the omicron variant turned out to be more transmissible, more deadly and able to reduce vaccine efficacy, it will delay the recovery for a short period rather than throw it off track completely.

China: industrial profits continue to grow

  • Nationwide industrial profits grew faster at 24.6% y/y in October, up from 16.3%YoY in September. For the first nine months of the year, profits grew 42.2% y/y. If we look at the two-year compound growth rate on order to adjust for the distortions of the pandemic period, profit growth was still impressive accelerating from 13.2% in September to 26.4%.

  • Financial ratios in the corporate sector improved marginally: At a time of growing concern over financial stresses in the corporate sector, the data showed small improvements in key ratios such as profit margins, debt-asset ratios, accounts receivables and inventories. This lends credence to the view that the financial turbulence is mainly in the real estate sector – so far, at least.

  • The state sector continues to prosper while the private sector lags. State enterprises delivered extraordinary growth in profits of 74.2% in October, leaving the private sector’s growth of 30.5% far behind. Upstream industries which the state sector dominates performed well. However, as producer price inflation eventually subsides and downstream industries gradually raise prices, the gap between the two sectors might narrow.

  • The policy takeaway: China’s policy makers have, so far, been leery of committing to large-scale stimulus despite mounting concerns over how stresses in the real estate sector might be transmitted to the larger economy. The performance of the corporate sector would probably reinforce their view that only selective measures are needed rather than a major macro-level stimulus.

South Korea: More rates hike to come in 2022

  • Consumer confidence continues to improve, edging up to a 5-month high in November (107.6 points) (October: 106.8 pts). On living standards, consumer sentiment was unchanged at 92 points whereas future expectations were slightly lower at 97 points. On household income, consumer sentiment was unchanged at 101 points, but future expectations on spending rose 3 points to 115 points. Consumer sentiment on economic conditions was up one point to 81 points, while future expectations were unchanged at 96 points.

  • Business confidence for the manufacturing sector was unchanged at 90 points in November. As for the non-manufacturing sector, sentiment edged down to 83 points, from 84 points in the previous month.

  • The Bank of Korea (BoK) raised the benchmark policy rate to 1% in the final monetary policy meeting of the year. The central bank struck a relatively upbeat note, as it looked beyond slowing facilities investment and singled out buoyant exports and quickening private consumption as key reasons for optimism. Labour market conditions continue to improve, which, together with strong exports and investments, will support the economy moving into 2022. On prices, the BoK now thinks that inflation will run “considerably above 2%”, as opposed to “mid-2%” in its previous monetary policy statement, because of rising oil prices and improving demand conditions. On future policy adjustments, the BoK similarly reiterated that inflation will “run above the target level” for some time yet, in a sign that the central bank is not done with its rate hike cycle. Driving home the same point, BoK governor Lee Ju-yeol suggested that policy rates are below the neutral level with real rates being negative alongside excess liquidity in the financial system.

Assessment: The only way is up for rates, but how high will it go?

  • The BoK is not done with hiking just yet: The BoK’s rate hike was in line with market expectations, seeing as inflation was staring to run hot in the Korean economy with inflation rising upwards of 3% in recent months. In terms of the BoK’s reaction function, the threshold for raising rates lies on 3 main planks – keeping inflation expectations well-anchored, reining in financial excesses and household indebtedness, particularly in the housing market and to keep pace with the Fed and other major central banks in the normalisation of monetary policy.

  • Moving into 2022, we expect 3 more rate hikes, with the first hike taking place in 1Q22. Two more hikes will follow in 2H22, as quickening price pressures at home and what is expected to be a faster pace of policy normalisation by the Fed will spur the BoK to do the same. The tail risks are twofold.

  • First, higher rates could squeeze household income as debt servicing cost rises. This is a matter of inevitability, in our view, as having rates at rock bottom serve only to fuel asset bubbles that imperils the economy over the longer-term. The question is whether the economy, which has been shaking off the chills from Covid-19, is able to stomach the successive rate hikes without setting off explosions in the financial and banking sector. A rising tide lifts all boats, and the confluence of the revival in both external and domestic demand will help rein in this key pocket of risk.

  • Second, Covid-19 could rear its ugly head following the discovery of a new variant (“Omicron”) in South Africa, which is potentially and significantly more transmissible because of the multitude of mutations in the spike proteins. That said, it is not all doom and gloom. Armed with an updated information set, policymakers have acted with more urgency to limit and curtail (although not staunch) the spread of Covid-19 and buy more time for scientists and epidemiologist to better understand whether the mutations render the virus more benign or otherwise. Vaccination rates are also higher across most of the rich world, which should provide some degree of protection. Last, mRNA vaccines and anti-viral pills that are in the pipeline could be easily tweaked to tackle the new strain, if need be.

  • In short, the new Omicron is definitely a cause for concern, but there is no reason to be overly pessimistic for the time being until more is uncovered about the virus.

  • But some uncertainty over the timing of the rate hikes: Two events could complicate matters insofar as the rate hike cycle is concerned. BoK governor Lee is due to step down in March 2022, and will preside over 2 more monetary policy decisions, feeding into uncertainty over whether he will raise rates higher or leave it to his successor to set the stage for normalisation. Second, the looming March 2022 Presidential Elections raise questions on the succession in the BoK, as incumbent President Moon, who is formally ending his term in May 2022, could name a governor, or defer the decision to the next administration. Our view is that Lee will raise rates once more as price pressures intensify, before leaving office for his successor, where the state of affairs in the domestic economy may have shifted by then.

The Philippines: fiscal position in good shape

  • Government spending rose 9.6% y/y in October, cooling from +17.5% in the previous month. Revenues were up 10.9% y/y, up from +9% in the same period. In particular, tax collections eased to +7.2% in October, marked by a modest deceleration in collections by both the Bureau of Internal Revenue (+6.6%), which is oriented to domestic activity, as well as that of the external trade-oriented Customs (+9.8%). The fiscal deficit narrowed sharply to PHP64.3bn in October (September: PHP180.9bn).
  • Capital expenditures were up 18.3% y/y in September, down from +40.5% in August. Infrastructure spending tracked the moderation in capex, rising 25.1% y/y and down from +60.0% in August. The pre-election ban on infrastructure spending kicks in from 25th March – 8 May 2022, suggesting a brief spurt in infra spending should kick in soon.

infra-spendingSource: CEIC

Assessment: Fiscal deficit likely to undershoot relative to target this year

  • Near-term – fiscal deficit likely to undershoot as growth recovers: Considering that the cumulative fiscal deficit through October (PHP1.2tr) stood at just 65% of the full-year ceiling (PHP1.9tr), and a cyclical pick-up in growth and revenues, the fiscal deficit should undershoot relative to expectations (2021e: 9.3%). This is all the more salient, given that YTD public spending is already at 79% of full-year estimates, which has lagged that of total revenues (86%). We are penciling a full-year fiscal deficit of around 8.5% instead for 2021.
  • Longer-term fiscal outlook fraught with risk as political cycle turns: Paring down the bourgeoning debt pile at upwards of 60% of GDP will be a pressing concern for the next administration, as the prospect of a sovereign downgrade, starting from Fitch ratings, looms large moving into 2022. To date, prospective presidential candidates have not espoused any plans for fiscal consolidation because of the extent of the post-pandemic economic scarring. If anything, most if not all candidates have backed more spending on a variety of items palatable to the voter on the street, such as education, infrastructure or social aid, all of which will boost growth in one way or another. The broader question is whether this entails a higher structural fiscal deficit in the Philippines, where underspending used to be the gripe of the economic managers.

Asia more resilient against Fed policy normalisation

The renomination of Federal Reserve Chairman Jerome Powell for a second term has fed into growing expectations that the Fed could expedite the normalisation of monetary policy, starting from an acceleration of the tapering of asset purchases, which was due to conclude by mid-2022 and may now be brought forward to end-1Q22. This became all the more salient after the PCE index, which is the Fed’s go-to measure to assess price pressures, rose 5% y/y in October.

Core PCE (i.e. PCE less food and energy) was also strong, rising 4.1%, adding to growing evidence that supposedly transitory inflation risks becoming more entrenched. Markets are now pricing the first rate hike by June 2022, well ahead of the Fed’s initial dot plot suggesting an fine split in the timing of normalisation between 2022 and 2023. The December FOMC meeting will shed more light on the Fed’s plans for tightening, though this has to be weighed against the emergence of the new Omicron variant, which cast a pall over the ongoing recovery, particularly if the variant, with its bevy of mutations, is able to evade the antibodies cultivated by vaccinations or natural infections.

Asian currencies have taken a beating

Covid-19 was the single-most important indicator in predicting the performance of Asian currencies in 2021. This stems from the fact that the output gap has closed in the US (though labour market slack is still a concern for the Fed), and the relative outperformance of developed markets have piled downward pressure on Asian currencies. Talk of the Fed normalising monetary policy has not helped things either, as it threatens to worsen yield differentials with Asian economies at best; at worst, central banks that refuse to move ahead of or in tandem with the Fed for purposes of keeping monetary conditions accommodative risks a run on the currency as yields creep up.

    • Only the Chinese Yuan (+1.1% YTD) and the Taiwanese Dollar (+2.1%) have held up this year, thanks to the stellar management of Covid-19 by the respective authorities. China’s zero-Covid approach helped keep death rates low, but the medical naivety does raise concerns that Beijing is merely delaying the inevitable, and a gargantuan wave will eventually overwhelm dilapidated and under-funded hospitals.
    • All other Asian economies are laggards but there is clearly some differentiation in terms of the relative risk profile. Singapore (-4.1%), Malaysia (-6.2%), Indonesia (-3.0%) and the Philippines (-5.1%) have only seen moderate outflows. Rising commodity prices and solid export strength help explain why the currency has held up. The other piece of the puzzle lies with collapsing caseloads in once-hard-hit economies such as India (-1.5%), which more than offset the negative sentiment stretching from hefty energy prices. Vietnam’s manufacturing prowess (-1.7%) was a formidable offset for a time, before buckling under the pressure of the relentless rise of caseloads amid medium-concerns that labour shortages are holding back the manufacturing sector.
    • Thailand (-12.1%) and Korea (-10.3%) have stood out, albeit for the wrong reason. With tourism in the doldrums, the recovery in the Thai economy has lagged the region, which also shows up in external accounts, as we elaborate below. As for Korea, a perfect storm arising from rising caseloads, the prospect of hitting “peak growth”, and shortages that have hit prominent tech champions such as Samsung and SK Hynix meant that the Won has been particularly vulnerable to capital outflows this year as investors took stock of Korea’s growth outlook moving forward.
    • Besides currency weakness, the uncertainty over the interaction between growth and stability (from stirring prices) plays out in currency volatility. This also implies central banks have turned to currencies as a shock-absorber, as opposed to smoothing out the shocks through reserves which is not case, given the bountiful reserve accumulation since the outbreak of the pandemic, as we elaborate later. On this metric, the Won (1.6), Rupiah (1.6) and the Thai Baht (1.5) have been most volatile; the Rupiah’s inclusion may come as a surprise, given its modest depreciation this year. But it also points to the constantly shifting expectations among investors of Indonesia’s growth prospects with the rise and fall of Covid-19 caseloads, as well as hefty commodity prices that are now under threat with a slowdown in the Middle Kingdom.charts

That said, we should point out that currencies that have lost significant ground should start to witness a recovery in 1H22 on the back of several common denominators that will lift all boats.

    • Commodity prices should remain elevated through 1H22, which should undergird the Rupiah and the Ringgit. Solid demand for manufactured exports will also buoy other Asian currencies such as the Baht and the SGD.
    • The reopening trade, on the back of the reopening of borders, albeit in a measured manner, will be a positive for economies reliant on tourist footfall. Singapore and Thailand should be main beneficiaries, assuming the new variant does not put paid to hopes for a further reopening of borders.
    • The alleviation of shortages, especially in the electronics and tech sector, should lift the currencies of exporters with a footprint in tech. In this vein, the Korean Won, Singapore Dollar and even the Taiwanese Dollar could come under appreciation pressure as well.

What could jeopardise our hitherto optimistic scenario lies in 1) an aggressive tightening effort by the Fed that entails gyration in financial markets as debt servicing costs soar and 2) the new variant turns out to be more transmissible (which appears likely) and is able to evade the antibodies induced by the vaccines (which is unclear at the moment). Note that both are tail events, for now, but the risk calculus is very fluid and in flux as new information comes in.

Look past the recent currency weakness: fundamentals are sound, alongside strong buffers

Besides the headline currency weakness, the reserve accumulation by central banks and the external imbalances point to the solid fundamentals that underpin Asian economies and their respective currencies. As such, there is less room for concern over the uncertainty from the Fed’s plans for tightening vis-à-vis 2013’s taper tantrum, which threw many EM currencies into a tailspin.

    • In terms of reserve accumulation, the MAS (61.3%), Vietnam (28.1%) and the RBI (40.1%) leads the pack. MAS’ seemingly aggressive reserve accumulation comes as no surprise, given the managed float framework, as is the case for the interventionist State Bank of Vietnam (SBV). As for India, it is likely the RBI was sterilising inflows of portfolio investments that propelled the BSE to stratospheric levels stemming from optimism over India’s upbeat near-term growth prospects.
    • Other East Asian economies have also seen a moderate uptick in reserves under the central bank’s belt, which includes the likes of Taiwan (14.1%), Korea (10.8%), the Philippines (21.9%), Malaysia (8.9%), Indonesia (7.7%) and China (3.3%). Given the stellar and resurgent export receipts, central banks were turning to currencies as a shock absorber, as opposed to running down reserves to prop up the domestic currency, which explains the seemingly disjointed picture involving reserves and currency weakness. Only the Bank of Thailand (-5.7%) has expended some of its reserves, and even so, the weakness in the Baht indicates that the currency would have been much lower if not for the BoT’s intervention.
    • Insofar as fundamentals are concerned, the conducive external environment has been a blessing for this part of the world. Rising commodity prices have translated into a positive terms-of-trade shock for net energy exporters, such as Malaysia (+3.8%) and Indonesia (+0.2%). Depressed investments help explain why the same phenomenon has not led to a widening current account deficit in the case of India (+0.5%). Moving forward, still-stirring export strength and the revival of tourism will provide another layer of insulation for Asian economies, particularly in the case of Singapore (19.4%) and Thailand (-2.3%) where the sizeable leisure and hospitality sector has been in deep-freeze for close to 2 years after the border closures. Vietnam (-2.2%) booked a rare current account deficit, as Covid-19 has hit the goods trade, which is the key plank of Vietnam’s external accounts. That should normalise once Covid-19 comes under control in 1H22.

chart-5In terms of the output gap, the recovery across East Asia continues to lag the developed markets. Singapore’s stellar management of Covid-19 meant that output has finally converged with pre-pandemic levels, though the labour market recovery has been largely uneven. The rest of Southeast Asia is still plotting a recovery underpinned by widespread vaccination rates and the continuing imposition of social distancing measures that will keep the retail sector under a cloud.

    • The Indonesian Rupiah, where inflation has been persistently lower than target, could be an outperformer in 1H22, particularly if commodity prices remain elevated. BI’s insistence on tightening ahead of the Fed should preserve yield differentials vis-à-vis the US.
    • The Thai Baht should start making up for lost ground as borders are opened to facilitate regional travel. As the laggard in the region, the recovery momentum should perk up in the coming quarters, and the revival of tourism will nudge the current account back toward the black.
    • Political uncertainty in 1H22 meant that the Indian Rupee, Korean Won, the Philippine Peso and the Malaysia Ringgit may still trade sideways and remain range-bound, despite the fact that all three have come under depreciation pressure over the course of the year. Even this will pass however, once the respective national elections (Uttar Pradesh state for India) conclude in earnest by 2Q21.

key-metricsBottom line

    • Putting it altogether, the SGD, VND and TWD have been the outperformers in the region as Covid-19 comes under control, and export strength feeds into the currency. The alleviation of shortages should help the VND find its footing in the near-term, as is the reopening of borders and tourism for the SGD.
    • The Ringgit, Thai Baht, Korean Won and the Chinese Yuan have been middling through, according to our Z-scores. Given the backdrop of China’s draconian zero-Covid measures and financial explosions in the property sector, sustaining the CNY strength will hinge on the opening of the monetary spigot by the PBoC with more rate cuts. A robust external sector, particularly in commodities (for MYR) and tourism (for THB), should undergird the respective currencies.
    • As we have noted in previous weeklies, the Rupiah, Rupee and the Philippine Peso are notable laggards when it comes to external imbalances. But here, we should see a divergence, between the IDR and both the INR and PHP. An improving external position and a hawkish BI should lend support to the Rupiah. As for India and the Philippines, political temperatures are set to rise sharply ahead of the looming Uttar Pradesh and Presidential elections, respectively. Investors will parse the results with an eye on any possible loosening of fiscal purse-strings, which cannot be ruled out if the incumbent BJP loses momentum in UP, or Bongbong Marcos, who favours fiscal injections, sweeps the presidential polls.

Singapore: stars are aligned for new policies in 2022

Unless the omicron variant proves to be far more horrible than we expect, three factors are shaping up to produce a series of important policy changes in 2022: (a) The economy is not just steadying but is poised for a strong recovery in 2022, making the coming year a propitious time to make big changes; (b) from the perspective of the political timetable, it also seems to us that 2022 might be the right time for important policy initiatives; and (c) Singapore’s economic restructuring in response to trends in the global economy, delayed for two years by the pandemic needs to be stepped up. In other words, 2022 could be a year when there could be greater policy clarity on some issues that have hung over the economy for some time such as the timing of the GST hike and there could also be more substantive measures to ready the economy for the post-covid future.

1. The economy is gathering strong momentum

The estimate for 3Q21 GDP growth was revised up to +7.1% y/y from the advance estimate of +6.5% y/y given in October, signalling the upbeat trajectory in the economy. Sequentially, the economy expanded at a relatively robust clip (+1.3% q/q), which is a reversal from the contraction of 1.4% q/q in the previous quarter. A number of features of the economy are worth emphasising:

Good chance of sharp spurt of activity in some sectors: Barring unexpected shocks, prospects for 2022 are good as the global economy recovers and domestic activity revives as covid-19 related restrictions are eased. We estimate that 17.% of GDP is in sectors where output is substantially below pre-pandemic levels and which can snap back sharply if cross-border travel revives and domestic consumer spending returns to normal.

Current indicators show strong growth:
Industrial production surged 16.9% y/y in October, rebounding from a contraction of 2.2% y/y in September. The expansion was led by growth in the biomedical manufacturing sector (+56.1%), while growth in the electronics sector (+6.5%) and precision engineering sector (+9.1%) eased slightly. When biomedical manufacturing is excluded, overall IIP grew by 9.7% y/y. The chemicals sector (+15.3%) and transport engineering sector (+35.3%) displayed marked improvement as well.

Leading indicators are mostly positive: The composite lead indicator fell by 0.1% q/q in 3Q21, after rising 0.9% in 2Q21. This suggests some moderation in growth in the next two quarters. Similarly, the Economic Development Board’s survey of manufacturers showed a net weighted balance of 16% of manufacturers expect conditions to improve between October and March next year, a little below the 20% net weighted balance in 2Q21. However, the mood in services is brightening with the Department of Statistic survey of service sector businesses showing that net weighted balance of services firms expecting a more favourable business outlook rose to 19% from 11% in mid-year.

The net effect of the above factors is that the economy has a very good chance of a rapid return to trend levels, such that the output gap could turn positive sooner than expected, by the middle of the year.

Stability indicators also point to policy change

A positive output gap would raise inflation risks: Indeed inflation is already rising, coming in at +3.2% y/y in October, up further from +2.5% y/y in September. Core inflation continued on its ascent (+1.5%), rising to its highest in 3 years. The surge in prices was mainly driven by private transport (+1.6%) and housing (+2.7%). Recreation (+2.1%) and education (+1.6%) also saw a notable uptick, while food prices (+1.7%) increased marginally. In addition, as the economy reopens, higher airfares and holiday expenses have driven up the price of services too (+1.6%). The persistence of global inflationary pressures and the rising likelihood of the

The largest current account surplus in five years could suggest that the exchange rate needs to appreciate: The current account surplus soared to 21.6% in 3Q21 (2Q21: 20.8%). The increase was driven by an overwhelming surge in the goods balance, which more than offset the moderation in the services account as remittances and repatriation of profits.

2. The political calendar also suggests that 2022 could be the time for policy moves

Over the weekend, Prime Minister Lee Hsien Loong indicated that the next generation of leaders will need more time before they settle on a successor to him. Although this has increased uncertainty about the succession process, our take is that the succession will be decided sooner rather than later, given the political timetable:

  • The ruling People’s Action Party (PAP) holds its leadership elections for its Central Executive Committee (CEC) every two years. That means that the next opportunity to restructure the party’s leadership will be some time around November 2022. It would make sense to have a new leader announced by then so that the new CEC composition reflects the new leadership team.
  • The next presidential election is slated for around August or September 2023. Although the office of the president does not carry much political power, the president does have significant powers over key appointments in the civil service and judiciary as well as a say over how the country’s gargantuan financial reserves are deployed. It would be neater for a new prime minister to be in place before there is a change in the presidency.
  • The term of the current parliament ends around October 2023 by when a general election has to be held.

Given this time table, our guess is that the PAP would want a successor to Prime Minister Lee announced before the end of 2022 and in place soon after.

Why do we think this is important for policy making? One reason is that Lee had indicated in the past that he saw it as his duty to bring in difficult policy changes before he left office, rather than burden his successor with such decisions. Given our guess as to the succession timing, then it follows that Lee would want to clear the decks by introducing big changes before he leaves office. Moreover, Lee may want to cement his legacy by introducing necessary changes as well.

All in all, the political dynamics point to 2022 being a consequential year for policy changes.

3. The need to respond to global trends

Even before the pandemic, it was clear that Singapore needed to adjust its growth model in view of geo-political and technological shifts in its environment and to address domestic weaknesses such as weak productivity growth and rising inequality. There had been attempts such as the Emerging Stronger Task Force and the Committee for the Future Economy to address these issues but these left many observers dissatisfied. Now that the pandemic has accelerated some of the trends in the global economy, the need for more thorough-going strategic responses has become clearer. Our impression is that the Singapore leaders appreciate this and are keen to re-focus their attention on these structural issues and not be distracted by the management of the pandemic.

So, what should we expect?

Further monetary tightening in 2022

The latest figures for Singapore came in stronger than expected, where growth was not only led by a strong performance in the manufacturing sector but was also supported by construction and services. In addition, overall exports remained buoyant as growth came in at 22.7% y/y in October, up further from +18.6% in September. As such, we expect recovery to continue through to 2022 on the back of resilient exports and manufacturing. Furthermore, as the country approaches an endemic equilibrium, domestic demand is expected to catch up, further boosting growth in the process.

With recovery well underway, we reiterate our expectation that the Monetary Authority of Singapore (MAS) is likely to tighten monetary policy again in April next year by allowing the Singapore Dollar Nominal Effective Exchange Rate (SGDNEER) to appreciate at a faster pace as inflationary pressures mount in both external and domestic settings.

Fiscal policy changes

The Finance Minister will deliver his Budget 2022 in February. We expect a number of important changes to be set out:

  • First, the increase in the goods and services tax (GST) rate from 7% to 9%, which the government has been signalling for a long time. In a speech in October, the Finance Minister noted that the rate increase would be made sooner or later but more likely sooner. We think that was a hint that the GST rate hike will be announced this coming February, for implementation in January 2023. Aware of rising prices eating into the spending power of Singaporeans, particularly, lower income ones, the government will combine the GST adjustment with substantial measures to alleviate the impact on the lower income groups. This will take the form of GST vouchers and other transfers.
  • Second, the government is conscious of the need for more measures to tackle inequality and to assist the disadvantaged segments of society. Both the Prime Minister and the Finance Minister have flagged the need for some kind of wealth tax. But both leaders have also acknowledged the difficulty of designing a wealth tax that achieves its purpose without damaging Singapore’s position as a wealth management hub. We suspect that no hard decision will be made but that a number of ideas will be floated – such as an enhanced property tax – for further study.
  • Third, the government probably recognises that Singapore is not where it should be in terms of carbon pricing. More fiscal measures to further the process of decarbonisation are likely.
  • Fourth, the government is likely to set out how it proposes to respond to global efforts at a minimum corporate tax. Singapore has long used tax incentives to attract multinational enterprises to locate in Singapore – as such tax incentives come under greater scrutiny, other measures might be needed to maintain Singapore’s attractiveness to global corporations.

Growth model: expect tweaks, no fundamental overhaul

Government efforts to promote Singapore’s continued development have had their share of success. Despite the pandemic, Singapore has become a centre for start-ups with many young companies which started in regional countries finding Singapore a good base to relocate to, to raise capital and find talent as well as to leverage off its extensive free trade agreements to expand into other markets. There has been particular success in the fin tech space, where the Monetary Authority of Singapore’s carefully balanced strategies have succeeded in an eco-system that has spawned a number of potential unicorns.

Singapore has also benefited from more business and financial operations being relocated to Singapore. Some of this has come from Hong Kong but Singapore’s success goes beyond just Hong Kong’s political misfortunes. Singapore has built a critical mass of interlocking activities in its global hub which makes it highly competitive.

However, we believe that the growth model is not up to the task of addressing significant weaknesses in the domestic economy – weak productivity growth, insufficient entrepreneurship including an indigenous corporate sector that appears to have lost its dynamism and an inadequate capacity to turn largescale mobilisation of inputs for innovation into actual innovation outcomes. So far, we have seen little hint in ministerial pronouncements of an appetite for fundamental changes to address these flaws.

Political reforms likely 

The Prime Minister’s speech over the weekend repeated themes that many senior leaders have been raising over the past year, reflecting a concern over social harmony. There has been much focus on racial discrimination and the role of the minorities, for example. We believe that new legislation will be brought in to update existing laws to preserve ethnic harmony. The Prime Minister also mentioned the need for more efforts at women’s empowerment.

In short, we expect 2022 to be a year when important policy changes will be introduced as a prelude to the political succession.