Singapore's economy grew at an annualized rate of 26 percent in the second quarter, a blistering pace that may moderate for the full year to 15 percent, the top-of-the-range estimate for many economists. That should be enough to overtake China as Asia's fastest-growing economy this year, increasing the attractiveness of the city-state's stocks and putting pressure on policymakers to check inflation with a stronger currency.
Even as Goldman Sachs (GS), BNP Paribas, and Macquarie Group have cut 2010 growth estimates for China to at most 10.1 percent in recent weeks, Singapore has surprised investors recently with its vigor. A long-standing policy to lure pharmaceutical factories to Singapore with tax breaks, special research and development facilities, and worker training has paid off spectacularly. Pfizer (PFE), Sanofi-aventis, Roche, and other drug giants have picked Singapore as a key operations base for Asia because they need facilities that can pass rigorous inspections by regulators and produce huge volumes of pharmaceuticals. Pfizer, Roche, and GlaxoSmithKline (GSK) have all expanded in Singapore this year.
The city-state has also dropped a 45-year ban on gambling in a drive to double tourism revenue by 2015. Two casinos, one run by Genting Singapore and the other by Las Vegas Sands (LVS), have attracted about 3 million to 4 million visitors since they opened earlier this year, according to Jonathan Galaviz, a gambling industry consultant. The casinos, located in lavish hotel and shopping complexes, may add almost a full point of growth to 2010 gross domestic product, says Song Seng-Wun, an economist at CIMB Research in Singapore.
Finally, there is Singapore's drive to become a financial center serving clients in India, China, and the Middle East. Its bank secrecy laws remain intact, unlike Switzerland's, and the supply of potential customers is rising rapidly as newly minted millionaires proliferate through the region. Singapore's assets under management grew 40 percent last year, to $871 billion.
Faster growth may prod the Monetary Authority of Singapore to do more at its next policy review in October, according to Kit Wei Zheng, an economist at Citigroup (C) in Singapore. Wage pressures are increasing, and inflation may reach 5 percent by the end of 2010, up from 3.2 percent in May. The central bank manages the Singapore dollar instead of interest rates to contain inflation. It has already signaled that it wants the currency to appreciate, which it has—slightly—against the U.S. dollar.
The bigger risk is how Singapore handles a global slowdown in the second half. Casinos can empty out pretty fast if people feel poor. Whatever happens, growth feels better than the opposite: Singapore's economy contracted last year.
The bottom line: Singapore's economy is outpacing China this year, thanks to thriving pharmaceutical and financial-services sectors and new casinos.