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.

Singapore is stirring a fresh pot. It's too early to know if the concoction, which is one part cuddly capitalism and one part cutthroat, will sate investors. What is clear, though, from the government's annual budget on Thursday is that any mixing errors could ruin the combination.

The quest for a new brew is not surprising, given the ominous signs from global tea leaves. Singapore is an exporting powerhouse in a world where trade has stalled. Naturally, the outwardly focused companies in the city-state are bearing the brunt of anemic global growth, slowing Chinese demand, stumbling commodity prices and vanishing orders for oil rigs, not to mention the rising risks of a U.S. recession over the next year or two. 

But more worryingly, the island's domestically oriented companies -- at least the ones that are publicly traded -- seem to be faring little better. Their revenue expansion is slowing even as their disparate challenges become more acute.

The World's Tough, But Home's No Better
Singapore companies that target the domestic market are faring no better than their more global peers
Source: Bloomberg
*Data for 238 Singapore-domiciled companies, including 123 reporting at least 75% of their revenue from Singapore and 105 disclosing 25% or less revenue from the city.

Genting Singapore, which runs one of the city's two casinos, is ruing the loss of Chinese VIP gamblers; the two predominantly local telcos, Starhub and M1, are staring at stiffer competition from a new player; and subway operator, SMRT, just added a fatal accident to its unhappy record of frequent service breakdowns. Property developers like City Developments, meanwhile, are waiting impatiently for the government to relax some of its mortgage curbs, which have pushed new home sales down to a 14-month low. Almost all businesses are hoping the relentless pressure on them to reduce their reliance on cheaper foreign labor will ease.  

The government's annual budget faced a balancing act: It could have chosen to relax property restrictions and give a further boost to what has already been a sharp uptick in public spending, or it could have let the pain from muted demand and tight controls on supply of overseas workers continue so companies are forced to become more competitive.

Neither option was particularly appealing by itself. While Singapore's avenues for increasing taxes are limited, ageing-related social spending pressures are rising. The fiscally conservative government, which enjoys the highest credit ratings in Asia, will be loath to follow Hong Kong, which had its long-term debt outlook cut earlier this month by Moody's. But if authorities don't lubricate the economy by somewhat liberally spending tax dollars -- as well as contributions to the exchequer from the central bank, sovereign wealth fund, GIC, and state investor, Temasek -- deflation could get entrenched.

The longest streak of consumer price declines since 1977 means companies don't have much pricing power. So instead of making investment in new technologies and markets, they could try to deleverage and shrink. That would be a particularly bad outcome for the island's banks, especially at a time when, as Bloomberg Intelligence notes, competition for deposits is intensifying.

Destroying Shareholder Value
The ratio of return on invested capital to weighted average cost of capital is below 1 in most cases
Source: Bloomberg
*Data for 238 Singapore-domiciled companies, including 123 reporting at least 75% of their revenue from Singapore and 105 disclosing 25% or less revenue from the city. Median values.

In the end, Finance Minister Heng Swee Keat's budget chose to tread the middle ground. Even as he boosted total spending by 7.3 percent or S$5 billion ($3.6 billion), went a little easy on some industries' access to foreign workers, and promised cheaper working capital loans to small companies, Heng refused to open the fiscal taps too wide, or remove the curbs on the property market. Mixing things up is certainly better than either mollycoddling businesses so much that they postpone productivity improvements indefinitely or putting them under so much pain that they break. But it's hard to say if Singapore's solution will work. Hopefully, Heng got the combination right.

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

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Andy Mukherjee in Singapore at

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Katrina Nicholas at