The Pattern Trader

THE LIFE OF A PROFESSIONAL TRADER. HIS MOTIVES, INSPIRATION AND VISION.

Singapore’s Economic Strength – Blessing or Bane?

Last week on 30 August, I wrote a small comment in my August Review that brought on quite a few queries by readers (via email) wanting to know more about why I brought this up;

Should the U.S. dollar continue its rot, it is also likely that the SGD may well become the preferred regional currency. (Think about this for a bit … can you name me another regional currency that is stronger and more reliable than the SGD apart from the AUD? Even the AUD tanked below the SGD just months ago) Just another similar pattern that led the U.S. into its mess.

Firstly, allow me to state something I didn’t mention in that post – I am not favoring this scenario. It would be the worst outcome for our tiny economy and that is definitely not in my personal interest. Everything here is hypothetical, of course, and meant to jog the imagination and create discussion.

However, it also serves as a reminder that what we have in our exceptionally strong and stable economy should never be taken for granted. Sometimes, when we think we’re safe, that is exactly where the weakness will be. Our faith in the Nation’s strength is where the hurt will come from.

THE CURRENT AFFAIRS

We are in a very unique time in history as the world turns and churns and only God knows how this will end, when it will end and what will end it. At that end, we are likely to see a new global economy emerge. Whether America continues to be the financial capital of the world remains to be seen. Whether the once super rich European countries avoid bankruptcy also remains to be seen. We won’t know if the Arabs or the Russians will have more muscle in the oil trade after the dust settles. So where does all this place Singapore in the interim?

Right now, as the future of the US dollar remains doubtful, confidence in that currency is waning as investors and businesses look for an alternative way to benchmark their businesses’ financial value. Companies would also prefer to peg their long term trade contracts to a currency of better standing. In the west, the obvious alternative is the Euro or the Pound. But even as the European community struggles to come to grips with their own problems against the backdrop of an over-influential American economy, here in East Asia, a quiet and obvious shift is taking place.

While everyone was looking towards China for regional strength, doubts prevailed about their regulation – or lack thereof – of their currency and commercial practices. These doubts put China on the back foot of ever becoming a regional financial powerhouse as faith and confidence in a country’s financial system are always first considerations for business and trade. Furthermore, China’s economic strength has come from their unrivalled ability to sell and become the region’s biggest seller. For China to become a real regional financial and business center, it will have to restructure its infrastructure to buy as much as they sell. And therein lies the problem – faith and confidence in doing business with an economy that is unregulated or at best, poorly regulated. Why would any economy want to sell to a country whose currency is not regulated?

Imagine agreeing to sell something to China in their currency only to have their government devalue their currency tomorrow. Because they are the buyers, they will do the deal in their currency.  This is how America achieved their “global dominance”. But back then, the USD was worth something as it was back by a gold standard and after 1974, oil. What is the Yuan worth? Or maybe you should ask whether its worth will be the same if not better by next week.

How about the other economies? Let’s cut straight to the chase. This is not a question with a distant answer. The answer is right here on the shores of the Little Red Dot. Our economy has proven itself time and again in every recession that the world has thrown at us while we have never created a recession on our own. Our currency has stayed stronger and more stable than any other regional currency at every recession. Even Australia has proven itself fallible less than six months ago as their currency fell below the SGD to a low of 0.9064 in spite of declaring their recession much later than Singapore’s.

Singapore’s financial system is a world class one and one that many other nations trust. In a sense, our modeling of the Swiss system has made Singapore the Switzerland of the east. Our country is run like a successful cash-rich business. Yes we do cop some losses (including some highly questionable ones) but if you make a global comparison, our report card is rather outstanding. The government’s quick response at the outset of this recession was, in hindsight, a visionary one. It also served to advertise to the world how well our reserves are doing.

I take back what I wrote in a post last year where I thought the government had made a knee jerk reaction by pulling on our reserves too soon. Could it have been better managed with other means than our reserves? We’ll never know but what we do know now is that it was a stroke of genius.

We’ll need that genius again if we are to avoid my hypothetical scenario.

THE HYPOTHESIS

Now consider this …

As the USD continues its weakness, economies and businesses will look for an alternative benchmark for their deals. It is not entirely impossible that the SGD becomes an alternative regional reserve currency. As it stands now, businesses are already making such deals and considering alternatives that will ensure stability in their contracts and trades.

The internet has been a good indicator of this trend as more regional marketers move from transacting in USD and shift to SGD. On our own shores, international operators prefer the SGD for current deals over the USD. Those who continued to do business in USD late last year and early this year already understand the risk of making their deals in USD. There is a great fear of the USD tanking to 1.34 against the SGD like it did in April and June last year. Should America do a double dip, this fear will drive more demand to the SGD as more people question the worth of the USD against its multi-trillion dollar debt. Questions will also rise about America’s ability to pay up what it owes without devaluing its currency.

Let’s talk about a Credit Crisis. A small credit crisis is when you can’t pay for the debt you’ve built up. This will affect not just you, but your family too. A bigger credit crisis is when one man shorted and cornered the palm oil market not too long ago and defaulted on his margin calls. This one man in an ill-liquid market (back then) crashed the entire palm oil trade and caused an embarrassment to the industry players.

So what if America, the worlds #1 buyer, walks into China and Japan today and tells them that they can’t pay? Now that is a Credit Crisis of major proportions and one we’d rather deny will happen.

Note that we haven’t even brought up America’s massive fiscal problem which is growing exponentially whose grandchildren may end up paying for their grandparent’s greed.

So while this tea cup brews up a storm, one tea leaf remains sturdy and brighter than most – Singapore.

If there is one really bright spot in our economy, it has to be its residents’ ability to make money in a country with very limited opportunities and no real resources against a highly competitive business environment in a region with massive growth potential. Singapore’s businesses have reached out all over the region and have operational centers and branches in every country across East Asia. In almost all these countries, the locals would rather do business with a Singapore based firm because they value the strength and security of doing so. Our currency is also widely accepted in all East Asian countries.

Where did this strength and security come from? Good government and good corporate governance. It also came from the one resource that has made most Singaporeans wealthier than their regional neighbors – home ownership. On an island where land is scarce, property has become a limited resource which most locals have made money from. More than 90% of working Singaporean families are home owners. Out of that amazing return, a fair percentage own more than one property and it is my belief that this multiple-property ownership amongst ordinary citizens (not in the property business) is amongst the highest in the world.

Thus, if the financial institutions of America were the main driver (and dearth) of America’s wealth (and greed) in the last decade, then Singapore’s equivalent for the future could be the Property Moguls?

Keep that in mind for now.

So back to the SGD … as trade and business continue to pick the SGD as the currency of choice, questions arise about the liquidity of the currency. Will Singapore be able to monetize all the business deals and trades should the region continue this trend? Does Singapore have enough dollars to support this trade? Is it in Singapore’s interest to become a reserve currency in the absence of a strong USD?

I hope not.

Such a scenario will only drive up inflation. Sure it will be good for the property moguls, multi-property and home owners but you only have to look at Japan to know how ridiculous property prices can become. In Singapore, it can become more ridiculous given the scarcity of land here. Governmental measures can only do so much as greed precedes governance as evidenced in the U.S. Again, look at what it did to the Japanese economy and currency to put it where it is today.

Financial Institutions will also ride that inflationary bandwagon up and reap in massive profits from continued business in the property market. Loan rates will drive up as demand exceeds expectations in a dwindling supply line.

What happens thereafter is that the rich really get much richer and poor will start to include those middle income earners who didn’t go north with the rich. Class diversification will become a factor.

I trust that our government will not allow Singapore to decline into such a state. Amongst the faithful and loyal citizens, we know it will never happen.

But there is exactly where we will be hit – in our confidence. Such a mindset, that it will never happen, is one of complacency and arrogance. Our faith in our good government will be our undoing because history has recently proved that nothing is too big to fail. Even the financial heaven of Switzerland went through a hell of sorts and they’re still sorting it out now.

Failure of any kind always starts where safety is assumed. It seldom hits hard where you expect it to hit. Confidence in the Chinese market is seeing it capitulate now. Confidence in the American stock market hit it hard in the 30s, 2002 and today. Confidence in ourselves always sees us let our guard down and be exploited. It is the level of confidence that is the leading indicator to capitulation.

There is little anyone can do if businesses choose the SGD for its deals and trades. In the long term, should this trend continue, what sort of inflationary factors will our children and their children be facing? I certainly do not want Singapore to become a Japan.

SUMMARY

I’m no economist and I have no statistics at my disposal. All I have is a feel of the street. And the confidence on the streets of Singapore is so high while the rest of the world’s talk of recovery turns into talks of a double dip. Will the strength of the Little Red Dot’s economy be enough to ride out the storm in a global tea cup?

I say yes but there is where the problem will start.

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