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March 18, 2014

Slowdown in Singapore

Economic growth, higher tax revenues and disciplined fiscal policies will help Singapore maintain a budget surplus in coming years.  However figures suggest that as spending on social welfare and healthcare grows and productivity narrows living standards cannot continue to improve at the rate seen in previous years.

 

The ICAEW report Economic Insight: South East Asia is produced by Cebr. Commissioned by ICAEW, the report provides its 142,000 members with a current snapshot of the region’s economic performance. The report undertakes a quarterly review of South East Asian economies, with a focus on the five largest countries; Indonesia, Malaysia, the Philippines, Singapore and Thailand.

 

Whilst Singapore’s public finances shine compared to its neighbours, the low tax rates and government spending are likely to rise to fund social welfare and healthcare requirements. Also, Singapore’s high rates of productivity growth are likely to narrow, meaning standards of living will not continue to improve at rates seen previously.

 

Douglas McWilliams, Chief Economist and Executive Chairman of Cebr said: “ As Singapore has been so far ahead of neighbouring ASEAN countries in productivity, it will be very difficult to sustain these high growth rates, despite government measures to increase output. The outcome is likely to be that Singaporeans will have to get used to less noticeable improvements in quality of life.”

 

Across the rest of the region, demand for energy is growing at a faster pace than domestic production and continued economic expansion may well mean ASEAN economies becoming increasingly dependent upon international energy markets to meet their needs. This will mean countries are vulnerable to unexpected price movements which could have an effect on inflation.  However, expected falling global oil prices between 2014 and 2016 – and the entrance of Iran into the global energy market – should help mitigate inflation in the region.

 

Food price inflation is also expected to rise in countries like Malaysia, Indonesia and the Philippines in light of the devastation of agricultural land in the Philippines because of typhoon Haiyan and the ending of food and fuel subsidies in Indonesia and Malaysia. However healthier global harvests have taken some of the strain off the global supply of food and this should help alleviate some of the food price increases seen in the past two years that have particularly affected the working and middle classes.

 

ASEAN governments are also expected to remain focused on reining in public spending in order to reduce debt levels and boost investor confidence in the region. This is the main reason why countries like Malaysia and Indonesia have progressively cut key subsidies in a bid to reassure investors of their countries’ financial credibility. However this means that there is a realistic risk of tax increases in the short term.

 

Mark Billington, Regional Director, ICAEW South East Asia, said “Responsible public finances, especially where public spending is concerned, is a critical issue for ASEAN governments. This is even more the case now that US monetary policy means nations in the region are competing for capital against developed markets offering better returns.

 

“Though there may be some short term pain, the long term advantage is that by redirecting funds to long term infrastructure and capacity development – for example as in Indonesia – countries will be better prepared for long-term growth and prosperity.”

 

Other findings include:

 

  • Indonesian export ban on unprocessed minerals to impact economy negatively

 

The recent ban on export of unprocessed minerals is expected to have tangible negative consequences on the economy. Due in part to the lack of capacity to refine minerals within the country and possible closure of small mine operators, this is likely to lead to lower exports, lower tax revenues and potentially higher unemployment.

 

  • The Philippine economy to hit high growth of 6.8% in 2014 on back of strong government spending and investments

 

However lack of infrastructure development, high poverty levels and unemployment will hold back growth in 2015 and 2016, particularly as construction and rebuilding activities taper off

 

  • Malaysia to face highest percentage point increase in food price inflation in 2014

 

The abolition of the sugar subsidy is expected to have immediate inflationary consequences along with the impending introduction of a 6% Goods and Services Tax. With the government’s focus on reducing public spending, it is likely that more subsidy cuts or an increase in sales tax will occur, leading to food price inflation.

 

For more information and a copy of the report, please visit ICAEW’s website.

 

 

 

 

 

 

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