The STI index has dipped approximately 1.6% since the election held last Friday and investors will be watching the FOMC rates announcement this coming Thursday. Macquarie Equities Research (MER) issued a report on the Singapore elections and its potential impact on the economy on 15 September. Read on for more excerpts from the report…
 
Singapore’s ruling People’s Action Party (PAP) won an electoral landslide in the General Election held on 11th September – winning a vote share of 69.9%, its highest since 2001, and strongly reversing the erosion in its vote share in the last 2 general elections (2006 and 2011). Consequently, the PAP regained 1 seat from the main opposition Workers’ Party (WP), won the 2 new seats available in this election, and increased its seat tally to 83 (out of 89) in the new parliament, from 81 (out of 87) in the outgoing one. WP will remain the only opposition party in parliament, as 3 of its losing candidates are likely to be non-constituency MPs (for seats reserved for the highest-polling losers).
 
Impact
The ruling PAP had been expected to gain a sympathy vote (after the death, on March 23rd, of its founding PM Lee Kuan Yew) and benefit from the feelgood effect of the SG50 celebrations. But these had been expected to slow the erosion of its vote share, not overturn it, so the electoral outcome was a positive surprise. PM Lee Hsien Loong and the PAP leadership, however, emphasized that the win resulted from the PAP responding effectively to the people’s grievances. Thus, major changes in policy direction are unlikely.
 
The opposition parties were unanimous in their anti-immigration stance. The PAP’s more nuanced view – reducing the intake of foreign workers, but emphasizing their crucial contribution to Singapore’s economy – appears to have gained the support of the “silent majority”. In the first half of 2015, Singapore’s employment growth (2.5% YoY) was its slowest in 5 years. MER expects this to be quietly eased, with employment resuming 3.5-4% annual growth instead.
 
MER’s meetings with senior economists at Ministry of Trade and Industry (MTI) and MAS during its ASEAN conference (end-August) suggested that the government’s modest recent income support for the lowest-40% of the income distribution (and the “pioneer generation”) is likely to be widened to eventually include the middle 50% of the income distribution that still feels it is falling between the cracks. There is ample room for more fiscal stimulus this year: in the second quarter of 2015, the fiscal surplus was 4.8% of GDP (only 0.3pp of GDP lower than in 2Q 2014), so a spending surge is needed to turn this into a deficit over the next 3 quarters.
 
Private residential property prices have declined merely 6.7% from their peak in the third quarter of 2013 (and are down 0.6% since the 2011 election). The stringent property curbs are likely to remain in place until prices fall further – but the measures are likely to be eased slightly over the next 2-6 quarters.
 
Outlook
Singapore continues to have ample room for policy manoeuvre in the face of cyclical headwinds. The current account surplus was 25.4% of GDP in the first half of 2015, and the Singapore dollar Nominal Effective Exchange Rate (S$NEER) was still up 0.4% YoY in August 2015 (despite CPI inflation of -0.4% YoY in July).
 
As policy restraints on foreign labour, fiscal spending, and the S$NEER ease, MER expects real GDP to accelerate to 2.8% YoY growth in 2015 and 2.9% in 2016. With inflation normalizing at 1.2% in 2016, MER expects the Singapore dollar to rebound next year. MER remains bullish about Singapore equities – which provide shelter from a regional storm.

Source: Macquarie Research - 16 Sep 2015