Economic outlook and Budget 2019 Steering through choppy waters Irvin Seah Executive Director DBS Group Research February 2019 Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.
Key global themes… • Trade war • Brexit • Fed hike 2
Trade war 3
Deciphering the trade war • A global power struggle – economics and geopolitics • A ballooning US trade deficit with China (USD 375bn in 2017, USD 382bn between Jan-Nov18) • To slow China’s ascension in technology − At the core of the rivalry is the “ Made in China 2025 ” blueprint that aims at making China a global superpower in 10 strategic industries, namely: robotics, new-energy vehicles, biotechnology, aerospace, high-end shipping, advanced rail equipment, electric power equipment, new materials (such as those used in screens and solar cells) and new generation information technology and software (including integrated circuits and telecommunications devices), as well as agricultural machinery. • To pressure China towards more economic reforms, i.e. liberalisation . 4
China’s longer term strategies • Accelerate investment into technology and move up the value chain • Acquire technologies and innovative companies from Europe and other parts of Asia • Intensify efforts to promote trade liberalisation and closer economic cooperation with major economies / regions • Liberalise its domestic sectors for foreign investment • Strengthen IP regime and promote domestic value creation 5
Brexit What could happen to Brexit? Brexit Delay Brexit No Brexit (Most likely) (Unlikely) (Improbable) With May’s deal To avert no-deal Revoke Article 50 & maintain status quo Election and/or Without a deal 2 nd referendum The worst-case scenario of a disorderly Brexit is a 25% devaluation that would return the pound to its all-time low of 1.05 in 1985 Bank of England 6
Fed hike on Asian economies Fed tightening cycle. Reserves to Gross External Financing % pa Fed Dot Plot 3.50 THB (Dec-18) 3.00 KRW 10Y 2018 UST 2013 TWD 2.50 PHP 2.00 Market CNY pricing 1.50 IDR 1.00 3M INR Fed Funds Rate - Upper 0.50 MYR 0.00 0 5 10 15 14 15 16 17 18 19 20 21 22 7
Asia currencies Q1 19 Q2 19 Q3 19 Q4 19 Asia currencies 2018 6.90 7.00 7.10 7.05 China % chg Hong Kong 7.85 7.85 7.85 7.84 4.0 72.0 73.0 74.0 73.5 India 14200 14600 14800 14700 1.3 Indonesia 4.10 4.20 4.30 4.25 Malaysia 0.0 53.0 54.0 55.0 54.5 Philippines -0.2 -0.2 1.38 1.40 1.42 1.41 Singapore 1140 1160 1180 1170 -2.6 -2.4 South Korea -4.0 -3.2 -3.2 32.0 33.0 34.0 33.5 Thailand -4.6 23200 23300 23400 23350 Vietnam -5.7 -5.6 -5.6 -6.5 0.70 0.68 0.66 0.67 Australia -8.0 1.10 1.08 1.06 1.07 Eurozone -8.8 111 113 115 114 Japan 1.26 1.24 1.22 1.23 -12.0 United Kingdom INR IDR CNY CNH PHP KRW TWD MYR VND SGD THB HKD JPY Australia, Eurozone and United Kingdom are direct quotes 8
Economic outlook for key markets, 2019 Growth prospects for key markets % YoY US Eurozone China 8.0 6.9 6.6 7.0 6.2 6.0 5.0 4.0 3.0 3.0 2.5 2.5 2.3 1.9 2.0 1.2 1.0 2017 2018f 2019f 9
ASEAN economic outlook, 2019 Relative economic performance map, 2019 Inflation , % Avg growth 5.0 Weak external balances High inflation Size of bubble: real GDP (USD bn) 4.5 PH Red: growth slowdown 4.0 Blue: No change / growth acceleration ID VN 3.5 Stable Avg inflation 3.0 MY 2.5 2.0 SG Weak fiscal 1.5 TH Stable 1.0 Stable 0.5 0.0 2.0 3.0 4.0 5.0 6.0 7.0 GDP growth, % 10
Near term outlook for the Singapore economy Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.
External demand slipping PMIs down across the board Global electronics cycle heading south Index % YoY Singapore 80 62 EZ 70 Semicon billing, 3mma (LHS) 60 China 60 Semicon shipments, 3mma US 58 50 40 56 30 54 20 10 52 0 50 -10 Latest: Jan19 Latest: Dec18 -20 48 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 12
Services feeling the drag Services sector easing YoY %-pt contribution 5 Biz services Financial services Tpt & storage Wholesale & retail 4 Others Services growth 3 2 1 0 Latest: 4Q18 -1 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 13
Slower growth ahead ▪ GDP growth to register 3.0% in 2019, and 3.2% in 2018 Slower growth ahead Services producing industries % YoY, %-pt contribution Goods producing industries 7.0 GDP growth 6.0 2018a: 3.2% 5.0 2019f: 3.0% 4.0 3.0 2.0 1.0 0.0 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 Sep-19 14
Inflation creeping up ▪ Inflation to rise to 1.8% in 2019 Inflation creeping up % YoY 2.5 30 yrs historical avg 2.0 1.5 Core inflation 1.0 2018: 0.4% 2019f: 1.8% CPI inflation 0.5 0.0 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 15
Budget 2019 Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.
Budget 2019 PIT: Personal Income Tax S&CC: Services and Conservancy Charges • Overall budget deficit: SGD 3.5bn WIS: Workfare Income Supplement • Primary deficit: SGD 5.4bn SEC: Special Employment Credit PSG: Productivity Solutions Grant • Govt expenditure up 1.6% EDG: Enterprise Development Grant ASP: Automation Support Package Near term measures EFS: Enterprise Financing Scheme (e.g., Bicentennial Bonus – PIT rebate, PCP: Professional Conversion Programme CPF & Medisave top-up, Edusave; S&CC CSP: Career Support Programme rebate, road tax rebate, WIS, SEC MGP: Merdeka Generation Package CHAS: Community Health Assist Scheme LTCSF: Long Term Care Support Fund Companies Singaporeans Deepen capabilities and Budget 2019 Promote inclusive growth and encourage strengthen social support internationalisation Medium term Sustainability Is this an election (Carbon tax, diesel excise duty structural measures budget? hike, borrowing to fund (e.g., DRC reductions, PSG, EDG, SME infrastructure development) Go Digital, ASP, EFS, Scale-up SG, SME Co-Investment fund, PCP, CSP, MGP, Enhanced CHAS, LTCSF) Sources: DBS Research 17
Deepening enterprise capabilities • Double down on restructuring − Instead of more new policies, many of the existing measures were extended or enhanced ▪ e.g., Automation Support Package, Enterprise Development Grant, Productivity Solution Grant, SME Go Digital Programme • Enhance policy effectiveness − Streamlining of the policies ▪ e.g., Enterprise Financing Scheme (EFS) − Government to undertake higher share of the risk (from 50% to 70%) − More resources for trade associations (TACs) • Pain points − Reductions in foreign workers Dependency Ratio Ceilings (DRCs) − Hike in diesel excise duty 18
Productivity growth still weak SG: Productivity growth still low % chg 12.0 10.0 8.0 6.0 4.0 Avg: 2.4% Avg: 1.6% 2.0 0.0 -2.0 -4.0 -6.0 Latest: 2018 -8.0 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 19
A rapidly aging population SG: An aging population Zero growth million pax from here on 7.0 Total population 6.0 5.0 4.0 Total population ex immigration 3.0 2.0 1.0 0.0 Sources: UN, DBS 20
A shrinking workforce … SG: Workforce will shrink from 2025 onwards % chg million pax 25.0 4.5 Labour force 4.0 20.0 3.5 15.0 3.0 2.5 10.0 2.0 5.0 1.5 Labour force growth rate 1.0 0.0 0.5 -5.0 0.0 Sources: UN, DBS 21
Trade war … a threat to the rules -based global trading system • Tariff on US$12.8bil of US imports takes effect on 1 July in retaliation to US tariffs on steel/aluminium • 10% tariff on US$ 200bil worth of Chinese goods. The proposed increase to 25% is now on hold as a result of a 90 days trade truce. • 25% tariff on US$50bil worth of Chinese goods • 25% tariff on steel and 10% tariff on aluminium imports from China, Canada, Mexico and EU • Tariff hikes on USD 60bn of US products at 5% and 10%. • Retaliates with 25% tariff on US$50bil worth of US imports effective 6 July that includes soybeans and electric vehicles • Up to 25% tariffs on 128 US food imports, valued at up to US$3bil, in retaliation to US tariffs on steel/aluminium • US$241mil • 25% tariff on €2.8bil worth of US retaliatory tariff imports effective 22 June in hike on 30 US retaliation to US tariffs on products steel/aluminium 22
Trade dilution versus trade diversion Trade dilution Asia ex China 23
Diversification and regionalisation 24
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