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Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

The external threats facing Singapore's trade-dependent economy are undoubtedly daunting. But from an investor perspective, the internal challenge of boosting the city-state's competitiveness may be no less so.

The latter doesn't get nearly as much attention as the risks from slower Chinese demand, tighter U.S. monetary policy, weaker energy-related investments, and a smaller global banking industry. But undecided questions about Singapore's infrastructure landscape -- like whether there's space for a fourth telecom operator on the small island, or if its publicly owned subway network should be nationalized -- are also emerging as major headwinds.

Shareholders in the country's government-linked companies, which pay some of Asia's juiciest dividends, ought to be mindful of the perils closer to home:

Six Out of 10
A majority of the top dividend-paying stocks on the Straits Times Index are government-linked
Source: Bloomberg

Take Temasek, which owns roughly 21 percent of Keppel Corp., a conglomerate that controls the world's largest maker of oil rigs and has a 19 percent interest in M1, the smallest of the nation's three telcos. Keppel also owns a little less than 45 percent of Keppel REIT, a big office landlord. The state-owned investment company has discussed internally about the possibility of Keppel exploring a sale of its M1 holding and also paring its REIT stake, according to an article by Bloomberg News reporters Joyce Koh and Kyunghee Park last week. 

From Temasek's standpoint, it would be reasonably sensible advice to give Keppel's board. Singapore's rig builders are bracing themselves for a multi-year order drought as well as the grim prospect of cancellations in Brazil, where key customer Sete Brasil Participacoes is embroiled in a corruption probe. The more cash Keppel can raise from its non-marine businesses, the less the risk of existing shareholders getting diluted -- or their dividend incomes drying up.

M1 Feels the Heat
Source: Bloomberg

However, this is where Singapore's compulsion of boosting domestic competitiveness threatens to queer the pitch. The government is drafting rules for a spectrum auction this year, in which part of the airwaves will be reserved for a fourth carrier. Among the incumbents, SingTel has significant international operations, and both SingTel and StarHub have customers locked into their pay television offerings. M1, as a largely Singapore-focused voice and data carrier, has the most to lose. M1 shares have slumped almost 40 percent over the past year. Even then, at an enterprise value of almost 7.4 times Ebitda, only a brave buyer would want to purchase the telco.

Competition's also intensifying in transportation. SMRT, the city's biggest subway service provider, just had a bumper quarter with profit expanding 64 percent from a year earlier. Yet the 35 percent gain in the stock since August is making analysts cautious. Smaller rival SBS Transit opened a new downtown line last month, which might squeeze ridership for SMRT. Meanwhile, Singapore's transport minister wants the reliability of the city's disruption-prone rail network to improve to a level nearer Hong Kong, which will mean higher maintenance expenses and greater capital expenditure. Already, SMRT's dividends have shrunk by more than 23 percent annually over the past three years, Bloomberg data show. With rising U.S. rates pushing Singapore's borrowing costs higher, SMRT's payout is no longer a big draw.

Fading Advantage
SMRT's dividend yield is falling as borrowing costs rise
Source: Bloomberg, Association of Banks in Singapore

Investors are hoping that the government will eventually buy the trains, leaving SMRT and SBS to just operate them. Pending such a lifeline, shareholders (including Temasek) remain on the hook for boosting the city-state's transport competitiveness. Should Keppel put M1 on the block and not find a buyer,  its shareholders (Temasek again) may have no option but to shoulder the burden of faster and cheaper mobile data packages.  Similarly, an office property glut while helping lower business costs makes this a bad time to be a landlord.

Had the external environment been kinder to Singapore, internal competitiveness challenges would have been more tolerable. But with both biting at the same time, investors are sure to feel the pinch.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net