Markets

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's policy makers have a fondness for boats. Or so it seems from recurring images of "a small vessel in choppy waters" in their descriptions of the island's economy during turbulent times.

The market could do with a reminder of that metaphor. In the pre- and post-Brexit tumult, Singapore has emerged as a haven of stability. During the past month, six out of 10 major world currencies have fallen between 1 and 11 percent against the Singapore dollar, while a seventh -- the U.S. dollar -- has held steady. Closer to home, the Chinese yuan has weakened almost 2 percent against the city-state's currency.

Nothing wrong with being a sturdy ship, except that Singapore would rather not be seen as one -- not now, not with exports floundering, and labor too expensive. A stronger home currency at this juncture could become a serious handicap for Singapore Inc.

Perils of Strength
The Singapore dollar is appreciating at the wrong time for the island's exporters
Source: Goldman Sachs estimates, Bloomberg

For now, equity investors' focus is on Singapore companies that could bear the brunt of the business uncertainty created by Britain's decision to leave the European Union. Ascott Residence Trust, which has four serviced residences in the U.K., has seen analysts prune its annual per-share earnings estimate by 3 percent over the past month. With Brexit being viewed as bad news for global energy demand, earnings downgrades have also hit rig builder Sembcorp Marine, which is grappling with a 1980s-style global oversupply in vessels used to drill for oil. 

However, if the "haven effect" keeps pushing the local dollar toward what analysts believe to be the top end of the central bank's undisclosed tolerance range, Singapore's languishing export industries may start to share the misery. The last time electronics exports grew for three straight months was in the summer of 2012. Anemic world demand is only one part of the story. A comparison with Vietnam's much smaller -- and far less sophisticated -- electronics industry shows that Singapore's cost structure may be increasingly uncompetitive for manufacturers.

Vietnam Trumps Singapore
Electronics exports from the city-state have struggled to grow
Source: International Enterprise Singapore, General Statistics Office of Vietnam, Bloomberg

No doubt, the illusion of stability in a topsy-turvy world brings Singapore the benefit of a capital glut and lower interest rates. While that might offer some relief to overstretched mortgage borrowers who are getting squeezed by falling property prices, Natixis is right to conclude that the pain of a stronger currency outweighs the gain.

In April, Singapore took the rather unusual step of seeking a pause from a stronger currency. That was before Brexit. The message that Singapore doesn't want to be a haven needs some reinforcement. And to make sure the market takes their intent seriously, it might be time for policy makers to give that boat-in-a-storm parable another outing.

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

  1. "Think of Singapore as a small speedboat out in open sea," then Senior Minister Goh Chok Tong said in a speech at the peak of the 2008-09 financial crisis. "There are also other ships out there like container ships, bulk carriers and supertankers. When the sky is clear and the sea is calm, we can easily outrun the larger ships and tankers. But when the winds rise and the waves are high, we have to slow down or seek shelter in the nearest harbor."

    Prime Minister Lee Hsien Loong told CNN journalist Fareed Zakaria in a 2012 interview: "What worries us in Singapore is not that the world will not prosper, but in the ups and downs of the world, a small boat like Singapore with not very much room to maneuver, can you make sure that every time you catch a wave head on and you are not flipped over? Because once you're flipped over, that's it." 

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

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net