Thoughts on the S pore 2018 Budget: Selena Ling Global Treasury Research & Strategy OCBC Bank 22 February 2018 1
Spore: economic scorecard GDP growth - Manufacturing - Finance & Insurance - Construction - Wholesale & Retail Trade - Accommodation & Food Services 2017 2018F 3.6% 10.1% 4.8% -8.4% 2.3% 1.2% 2-4% 4.9% 5.1% -1.2% 2.1% 0.3% Headline CPI 0.6% 0.8% Core CPI 1.5% 1.5% Unemployment rate 2.2% 2.0% Productivity growth 3.8% - NODX 8.8% 5.0% Bank loans growth 6.1% 4.0% USD-SGD 1.335 1.282 3-month SIBOR 1.50% 1.55% 3-month SOR 1.11% 1.50% Source: CEIC, MTI, OCBC 2
Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 Aug-17 Nov-17 Singapore: more balanced growth in 2018 Our 2018 growth forecast is 2-4%. MTI now tips growth slightly above the middle of its 1.5-3.5% forecast. Support from: Manufacturing, especially electronics and precision engineering. Externally-oriented services: finance, transport & storage, wholesale trade. Domestically-oriented services: retail and food services amid stable labour market. Construction and marine & offshore engineering: outlook is still challenging. 56 55 54 53 52 51 50 49 48 Singapore PMI Singapore Whole Economy PMI Electronics Manufacturing Source: CEIC, OCBC 3
Budget 2018: Together, a Better Future Three major shifts: 1. Shift in global economic weight towards Asia. 2. Emergence of new technologies. 3. Ageing. Budget 2018: Vibrant and innovative economy. Smart, green & liveable city. Caring & cohesive society. Fiscally sustainable and secure future. Source: MOF 4
Source: MOF 5
In the spirit of the Dog Year: now and future? Source: google images 6
Surprise number 1: Size of fiscal surplus in FY2017 FY2017 budget surplus came in at $9.6bn (2.1% of GDP), five times the originally budgeted $1.9bn and higher than our estimate of $5.4bn. Largest in 3 decades, but not a structural surplus. The FY2018 budget remains mildly expansionary at $0.6b deficit (0.1% of GDP), assuming $5b for a new Rail Infrastructure Fund and $2b for Eldershield Review. Expenditure will rise 8.3% while operating revenue will shrink 3.3%. Special transfers to increase 46.2% to $9.11, while NIRC will grow 8.5% to $15.85b. SG Bonus of $100-300, costing $700m. Recall Growth Dividends of $100-800 in 2011. Source: CEIC, OCBC 7
A give-and-take approach: for businesses Enhance CIT rebate to 40% (capped at $15,000) in YA18 and 20% (capped at $10,000) for YA19. Tax deduction for qualifying R&D performed in S pore: raised from 150% to 250% for staff costs and consumables. Tax deduction for IP costs: extend from YA20 to YA25 and raised to 200% for first $100k for each YA. Double Tax Deduction for Internationalisation: raise from $100,000 cap for claims without prior approval to $150,000 per YA. One-year deferral of FWL for marine & shipyard sector. Productivity Solutions Grant (PSG), Enterprise Development Grant (EDG), Infrastructure Office, PACT, Open Innovation Platform etc. Carbon tax: $5 per tonne for 2019-2023 and $10-15 by 2030. 8
Surprise number 2: GST announcement with 3-7 year lead Long planning horizon: 2% hike in GST between 2021-2025. GST Announcement Implementation 3% 1993 1 April 1994 4% 6 December 2002 1 January 2003 5% 29 August 2003 1 January 2004 7% 15 February 2007 1 July 2007 9% 19 February 2017 2021-2025 To mitigate regressive nature of GST: Source: MOF, OCBC 9
Opening the GST tap bigger over time: $m % yoy Source: CEIC, MOF, OCBC 10
Looking ahead: Healthcare expenditure (as % of GDP) S pore: to hit 3% of GDP over next decade Assuming S pore lags behind Japan by 2 decades. Source: CEIC, MOF, OCBC 11
Where are the revenue sources: Immediate: Buyer s Stamp Duty: to be raised to 4% from 3% to apply to all residential properties with value in excess of $1 million. Tobacco Tax: 10% increase in tobacco excise duty. Medium-term: GST for imported goods and services: GST on imported services will take effect from 1st Jan 2020. GST on imported goods are still under review. GST Rate: to be raised by 2% points to 9% sometime between 2021 2025. Longer-term: Other options are still on the table. Source: OCBC 12
Fiscal position: Total expenditure will rise 8.3%, driven by both Operating Expenditure (+2.8%) and Development Expenditure (+25.4%). Ministries block budget growth pace will be further pared from 0.4 to 0.3 times of GDP growth. Source: MOF 13
4 questions: Food for Thought 14
1. US trade protectionism on the rise again? US recently imposed import tariffs on solar panels and washing machines. Look out for any broadening of scope for new import tariffs or retaliation. While trade protectionism may affect Asia disproportionately, the impact may not be as significant as before. ASEAN countries trade with the US as a % of total have halved over the last 20 years, with China replacing it as a key global trade partner. Source: CEIC, OCBC 15
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 US$ trillions China s outlook: still decelerating China has seen a soft landing and benefited from the synchronised global recovery. However, financial deleveraging and environmental protection policies may weigh on growth going forward. China s trade surplus with the US reached another record high of US$277.97 billion in 2017. 300 250 200 150 100 50 0 China's trade surplus with US Source: CEIC, Bloomberg, OCBC 16
Geopolitical risks are here to stay: Politics to drive economics? Source: Google images 17
2. What more to aid SMEs innovate & internationalise More than 50% of local corporates are still looking to expand further within the region, even as local SMEs already have a significant footprint in ASEAN. Main challenges are informational lack of understanding in taxation and compliance matters, and in securing trusted local partners. Singapore as the ASEAN Chair in 2018 may be a good platform to address many of these challenges. Source: SBF 18
Industry Transformation Maps (ITMs): 21/23 Awareness can be improved. Trade Associations & Chambers have room to step up. Source: MTI 19
Spore: MAS policy to also normalise? MAS may tweak policy in 2018 even if core inflation remains stable in 1-2% range. Source: OCBC 20
3. Digital Competitiveness: how to stay ahead The IMD World Digital Competitiveness ranks a country s ability to adopt and explore digital technologies leading to transformation in government practices, business models and society in general. Source: 2017 IMD World Digital Competitiveness Ranking 21
Digital Evolution: S pore in Stand Out camp now The DEI 17 is a data-led evaluation of digital development across 60 countries rooted in four key drivers: Supply Conditions; Demand Conditions; Institutional Environment; and Innovation & Change Source: 2017 Digital Evolution Index, by Fletcher School at Tufts University in partnership with Mastercard. 22
23 Source: 2017 IMD World Digital Competitiveness Ranking
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 4. The tough conversation on foreign manpower: The United Nations projects Singapore s old age dependency ratio at 61% in 2050. Singapore s labour productivity has lagged wage growth from 2011 2016. Old Age Dependency Ratio 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Non-resident population is climbing over the many years Source: CEIC, OCBC Non-resident - Resident Population Ratio 24
Thank you 25
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