Singapore: An Island Fortress It Isn't

As regional woes bite, Singapore's economy looks shaky

The Singaporean real-estate broker looks back fondly on the days, not too long ago, when an Indonesian supermarket owner bought three apartments for $8 million--before they were even built. "He said he wanted to put his money in a safe place," she recalls.

That was last September, but already it seems like ancient history. No longer do Southeast Asians have big bucks to park in Singapore. Now, the fear is that Indonesians must dump their Singapore holdings to raise cash. Such fears are helping drive down the stock and property markets just when electronics exports are hitting a rough patch. As a result, Singapore's economy will just skirt recession this year, growing 1% or less compared with 7.6% last year.

POLITICAL TEST. The government is trying to cushion this fall by loosening up the financial system. In mid-January, Deputy Prime Minister Lee Hsien Loong, the son of Senior Minister Lee Kuan Yew, said the government would "study" the idea of lifting a 40% limit on foreign investment in local banks to strengthen them. The emergence of the younger Lee as economic policy czar is also important politically. "If Lee handles this well, people will see him as a senior leader in his own right rather than living in the shadow of his father," says Bruce Gale, regional manager of Political & Economic Risk Consultancy. Lee declined to be interviewed.

But with its economy closely tied to its Asian neighbors, Singapore faces a tough task getting back on its feet. A fourth of Singapore's trade is with debt-plagued Indonesia, Malaysia, the Philippines, and Thailand. Singapore banks have $23 billion in outstanding loans to those four countries as well as South Korea. Officially, 3.2% of those loans are now nonperforming, and analysts worry the banks are dragging their feet on reporting all their bad debt. Over the last six months, these concerns have helped knock 50% off the shares of Development Bank of Singapore, Oversea-Chinese Banking Corp., Overseas Union Bank, and United Overseas Bank.

Investors also fret about the 20% drop in property prices since June. First Capital Corp., a heavily leveraged developer, has had to slash prices on its lavish May Springs condominium complex. The share price of real-estate conglomerate Wing Tai Holdings Ltd., which is more than $1 billion in debt by most analysts' estimates, has fallen 75% on rumors that its bankers refuse to back its commuter-train project in Hong Hong. A Wing Tai spokesman says the banks are still studying the project.

Singapore's electronics industry also is taking a licking because of a contraction in prices for key components. Disk drives make up one-quarter of Singapore's electronics exports, which in turn represent 17% of gross domestic product. But drive prices tanked with the advent of below-$1,000 personal computers. Now, Seagate Technology International is laying off 1,800 workers at its Singapore disk-drive plant.

RICH RESERVES. Retailers are gearing up for hard times too. Office equipment czar Y. Y. Wong says he will depend on "defensive income" from leasing photocopiers and supplying toner cartridges while he figures out how to keep his electronics stores afloat. Hewlett-Packard Singapore's computer equipment sales could tank if the Singapore dollar depreciates much further than its current level of 1.8 to the greenback. "If it goes to 2 Singapore dollars, we'll be in trouble because our products are valued in U.S. currency," says Philip Chua, HP general manager for commercial channels. Future layoffs in electronics, finance, and retailing could double unemployment, at 2% now.

Fortunately, Singapore has cash reserves of some $80 billion to help it through the downturn. And some investors are still coming in. Lured by tax breaks and good infrastructure, Lucent Technologies Inc. just announced plans to build a $1 billion plant. But it will be a long time before deep-pocketed Indonesians and Malaysians come shopping again. Without that fast money, Singapore must dig itself out on its own.

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