Stagflation
Storm signals up
But Singaporeans who are addicted to the good life seem oblivious to the danger. By Seah Chiang Nee.
May 24, 2008

AFTER several years of explosive growth and a red-hot property market, Singaporeans are facing the prospect of stormier times ahead.

The party spoiler is the prospect of a combined sharp slowdown and high prices spilling over here.

Supported by strong reserves and a diversified economy, the state would likely emerge from the crisis without serious damage, but the same cannot be said of the fate of ordinary workers and elderly citizens.

Except for the wealthy, people are already bearing the brunt – a drop in living standards and savings and assets being valued lower.

To say that the government is worried about a world recession visiting here – or even stagflation, a rare combination of slow growth and rising prices – is an understatement.

Once brimming with optimism, some senior economists have turned cautious about prospects for the next two years.

It is a grim reminder to Singaporeans that – despite becoming a First World economy – their island-state remains a ship in a stormy sea.

The difference is that it is now no longer a “sampan” tossing about in a turbulent South-East Asia as described by then Prime Minister Lee Kuan Yew in the 1960s.

Today, it has become a large vessel that sails international waters – but nevertheless a ship it remains.

It is vulnerable because of its size and its dependency on the world for all its daily necessities, including oil, food, and trade, to survive.

Some gloomy developments include the following:

> The huge jump in the price of oil, so crucial for its existence, to a record US$135 (RM437) a barrel with no signs of a let-up;

> The prices of imported staple foods, such as rice (50% costlier here) could stay high for the next three years, says a World Bank official, hindering the battle against inflation;

> Inflation has risen to 6.7%, a 26-year high, and may take an economic downturn to control;

> A slowdown in the housing market has prompted two banks to predict a dramatic plunge in home values of up to 40% in the next two years. This is bad news for nine-tenths of Singaporeans who own property;

> The government forecasts a sharp drop in economic growth this year to 5.6% – sharply down from the booming 2007 (7.7%) and 2006 (8.8%); and if the US goes into recession, it could fall to 3%;

> Respected former deputy prime minister Dr Tony Tan said that – in the worst case scenario – the world could be hit with its worst recession in 30 years; and,

> The values of a portion of the tens of billions in Singapore’s assets invested strategically in foreign banks and properties have been wiped out, leading to fears of higher indirect taxes here.

However, judging from the booming shopping plazas and restaurants and the jump in credit card usage, it appears that many people are shrugging away the gloomy signs.

The more cautious – usually older, crisis-hardened people – are opting to prepare for trouble, skimming a little here and there, like packing meals from home or cutting down on outings.

But for the bulk, it is business as usual. They continue to shop, eat and travel abroad for holidays.

One retired accountant said: “Many people are spending past savings because their earnings are not enough to cope with inflation.”

He believes the splurge could be due to two factors: one, insufficient awareness of the seriousness and, two, “a younger set being too addicted to the good life to be able to rein it in”.

Prime Minister Lee Hsien Loong thinks that some Singaporeans are spending beyond their means.

“We often see families who have over-committed themselves financially – for instance, extravagantly doing up their homes with renovation loans, or buying expensive furniture or large-screen TV sets on hire purchase,” Lee recently said.

“The ones with the most serious problems have bought homes which are larger than they can afford, and taken mortgages which they are then unable to pay off.”

The apparent unconcern could be due to a mistaken belief that the financial problems of America and Europe would not affect Singapore too badly, now that it is tied to China’s strong economy.

“We’re okay. What has America’s banking problems got to do with us?” is a frequent comment I hear.

After an age of stability and prosperity and media hype that plays up the good news and plays down, or avoids, the bad, many Singaporeans have been lulled into a sense of invincibility about their country and its leaders.

They believe that if things go wrong, the government can be relied on to put it right.

“Well, we are not invincible,” Minister Mentor Lee Kuan Yew told his people following blunders that allowed top terrorist suspect Mas Selamat Kastari to escape from detention this year.

All this will not undermine fundamentals that include a diversified economic base and strong reserves, an efficient infrastructure and large overseas investments that will continue to support the future.

Almost a year ago, before the world crisis became apparent, Lee senior sketched a rosy picture of a golden era and a vibrant Singapore in five years’ time, if it played its cards right.

It is not known if he feels the same way now, but I believe his general optimism still remains.

Singaporeans can only hope that this vibrancy, when it happens, will be reflected in their individual lives – not just in the state’s GDP.

(This was first published in The Star, Malaysia, on May 24, 2008)