Investors will wake up to ERC final report in due course
Short-term concerns rule over 15-year vision and road map, for now
By Mano Sabnani, Business and Financial Consultant
First published in TODAY
8-9 Feb 2003

What an anti-climax it seems to be. The markets and investors have given a muted response to the ;high-powered Economic Review Committee (ERC)'s road map to transform Singapore into a dynamic global city over the next 15 years.

If successfully implemented, the strategies will result in an economy which is globally connected, entrepreneurial, and diversified away from its traditional reliance on MNC manufacturing exports. The target is a GDP growth rate of 3 to 5 per cent, which is significantly lower than the 7.5 per cent growth achieved since 1985, but compares well against other mature economies with a
similar GDP per capita as Singapore.

A near-200 page report has been produced, for submission to the Singapore Cabinet for review and endorsement. It contains details of the strategies and recommended changes in policies, and together with the earlier reports of seven sub-committees and numerous working groups, took more than a year and the active inputs of more than 1,000 people to produce.

Assuming each of the 1,000 people devoted about an average 100 hours each to the
discussions and meetings held over 14 months, and their time cost an average of $200 an hour, the vision and road-map now presented to all Singaporeans cost tax payers in the region of $20 million! A not insignificant, but bearable amount, considering the import of the vision and road map.

So, naturally, I was taken aback when my Friday lunch companions showed little interest in the report. The group of businessmen, civil servants and professionals indicated more interest in the US-Iraq standoff and conversations centred on whether there would be a war in the Middle East and when it would commence. Whenever I surfaced the issue of the ERC report, the repartee was that its vision and strategies were not all new.

Some in the group argued that Singapore has been working to make itself globally
connected, competitive, diversified and entrepreneurial for some years. The current difficulties relate to the global downturn and the high cost of doing business in the island republic. Is enough being done to deal with the latter problem, in particular the high land costs?

One skeptical friend pointed out that what is new in the report is the management of expectations. Singapore has to adapt itself to slower growth, smaller budgetary surpluses, delayed CPF employer contribution rates and continued structural unemployment. In short, the report serves as a means to get people to digest more gloomy news and lower their expectations.

But at least the pathfinders are being frank. It is accepted that Singapore is going through a major economic transition, possibly the most far reaching since Independence in 1965. The economy is maturing. The external environment has changed radically. Globalisation, the emergence of China and the problems in Southeast Asia all affect Singapore. In addition, the country has not fully recovered from the 2001 recession.

The ERC has thus proposed strategies to remake Singapore into a globalised, knowledge economy, together with more immediate measures to maintain Singapore's cost competitiveness in services and manufacturing. Notably, the government has swiftly accepted and implemented several earlier ERC recommendations, including restructuring the tax regime and the CPF system.

The other myriad recommendations will have to be worked out in detail and
carefully implemented, taking economic conditions into account.

For businesses and the market, some benefits are immediate while many others will only be felt in due course. For example, the effects of the corporate tax cuts and simplified treatment of dividends have been immediate. Consolidation of group companies, for tax purposes, will also have a quick, significant effect on the bottomline of large companeis such as Keppel Corporation and Fraser & Neave.

Most listed companies which have positive earnings, tax credits and loss-making subsidiaries stand to benefit from the tax changes mentioned, in one or more ways. Longer term, the projected 3 to 5 per cent economic growth means well-run companies could be doing much better, recording 20 to 25 per cent growth per annum. But more of them need to move into the new growth sectors like biomedical sciences, photonics and nanotechnology. They also need to move more strongly into services like education and healthcare, which have growth potential.

The Singapore market is generally pleased with the ERC recommendations but it is currently focused on the global economic concerns and the US-Iraq standoff as well as the tension on the Korean peninsula. According to DBS Vickers, the market's current price-to-earnings ratio of 12 factors in a long-term growth rate of 4 per cent for the economy, which is within the targeted 3 to 5 per cent.

Which means the market is not expensive and could rebound once the situation in the Middle East is more settled and investors turn their attention to companies and industries which are positioned to benefit from changes in the policy environment and opportunity mix.

Watch for this delayed reaction. As sentiments keep improving, it could even border on euphoria.