Friday, December 9, 2016

3 Reasons 2016 Was A Terrible Year For Money In Singapore

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It seems like 2016 had nothing but bad news for the Singapore economy. Here are three reasons behind the awful economic situation this year. You may have noticed that many Singaporeans are worried that the outlook in 2017 will be similar to 2016. Throughout the year, we’ve read about how jobs, businesses, and property were negatively impacted in 2016. Here’s a quick rundown of why 2016 was a bad year for money in Singapore, and why this will continue to be an issue next year:
 
Reason 1: The Slump in Oil Prices
The fall in oil prices started in 2014, but had an especially adverse effect this year. When oil becomes too cheap, even net importers (countries that import more oil than they export) such as Singapore could struggle. Falling oil prices cause trouble for us, because Singapore has deep penetration into the oil and gas industry. Our biggest businesses, such as SembCorp Marine and Keppel, generate their revenue from selling oil rigs and drill ships. Unfortunately, because the price of oil is too low, many companies that would buy oil rigs and drill ships have cancelled their orders. The highlight this year was the fall of a Brazilian oil and gas company, Sete Brasil. This company owed S$6.2 billion to Keppel, and S$7 billion to SembMarine. When Sete Brasil collapsed due to cheap oil, the damage was passed on to Singaporean companies. The continued slump in oil prices also means that oil companies are also not ordering new equipment. Around S$33 billion in value has been wiped out from Singapore’s oil and gas related companies. Problems in the oil industry will, in turn, affect Singapore’s financial sector. Many oil and gas companies are highly leveraged (they borrow a lot of money). This is because, even before they can extract the first drop of oil, oil companies need to pay significant upfront  costs. They need to pay explorers to find the oil, pay millions of dollars to lay the correct pipelines or delivery systems, hire the relevant crew (you have to pay someone a lot of money to leave home and work on an oil rig), and much more. As such, many oil and gas related industries borrow significant amounts from banks and financial institutions. When these companies go bankrupt or take serious losses, they have to restructure their debts (this often means paying back the banks more slowly, or even paying lower interest), or default (they can’t pay at all). This could lead to banks and financial institutions suffering significant losses, and lead to job layoffs in the industry. Not only are banks affected, investors are too. Many Singaporean investors who bought bonds in Swiber, an oil exploration company, saw losses ranging from several hundred thousand dollars to millions when the company went bust. However, Singapore’s losses are still not as severe as many nations dependent on oil revenue. Venezuela, which derived over 50% of its Gross Domestic Product (GDP) from oil exports, is on the verge of total economic collapse. Likewise, Malaysia has seen its currency plunge as GDP shrink, as they are also major oil exporters. The reason for all this chaos is an oversupply of oil. In the United States of America, companies have found a way to extract oil from shale rock. This new abundance of oil puts them in competition with countries like Saudi Arabia, which want to remain the biggest oil suppliers in the world (for both economic and political reasons). They don’t want other countries to buy from America instead of from them. As such, countries in the Organisation of Petroleum Exporting Countries (OPEC) are waging a war of attrition with the US. They continue to produce oil despite the abundance of it, in order to drive oil prices down (when the supply of a commodity exceeds the demand for it, the price of the commodity falls). OPEC is hoping that, as oil becomes unprofitable, their competition (shale oil extractors) will go bankrupt or give up. However, this has resulted in everyone – including the OPEC countries – losing huge amounts of money. Oil prices are likely to normalise only when one side (OPEC or shale oil extractors) gives up and cuts production. Until then a lot of countries, especially Singapore, will struggle. This is a major cause of our financial woes in 2016, and there is almost nothing Singaporeans can do about it.
 
Reason 2: Economic Slowdown in China
In order to understand this issue, you need to understand what a Purchasing Managers Index (PMI) is. The PMI monitors how much companies are ordering, and is thus a general gauge of whether a particular sector is expanding or contracting. The more orders are being made, the more a given sector is growing. The most closely monitored PMI is the manufacturing PMI, because it is most indicative of a country’s overall growth or contraction (actually some economists will dispute that, but it is a general consensus). Now China’s manufacturing PMI has been terrible this year, at some points falling below a score of 50. Without getting into too much detail, a PMI of 50 indicates there is no change in growth. A PMI below 50 indicates that there is contraction. China’s PMI is a big deal because China imports a lot of raw materials. In particular, China imports a lot of crude oil (which doesn’t help the oil problem, see point 1), and iron ore. Countries that produce these commodities often have their GDPs affected by China, as Chinese companies are amongst their biggest customers. China’s PMI, however, indicates that the country’s growth is slowing. This means they no longer produce as much, and no longer need to buy as much raw material. Furthermore, there are signs that – even if China recovers – their period of explosive growth is over. They will no longer buy in quantities that they used to. Also, a more developed China will also mean an end to cheaply sourced goods in the long run (as a country becomes more developed, the cost of living increases and the prices of goods it produces will also go up). Furthermore, China will not be able to salvage the struggling oil industry, as they are not buying in the same quantities they used to. This is only scratching the surface of the weak economic data coming from China, and we don’t want to end up writing a textbook here; but it’s sufficient to know that, with China not buying as much as they used to, many companies are going to shrink. That will mean layoffs, as well as difficulty in expanding certain businesses.
 
Reason 3: A Growing Resentment Towards Free Trade
Events such as Brexit (the United Kingdom attempting to leave the European Union), and the election of protectionists such as Donald Trump, reflect a growing resentment toward free trade. The most immediate effect of this is the rejection of the Trans-Pacific Partnership (TPP), which Singapore was counting on as a business opportunity for local companies. The TPP would have removed trade barriers, such as import tariffs, that allowed Singapore businesses to operate in other member states. A Singaporean business selling food products, for example, would have been able to market the same product in Peru, the United States, Canada, and so forth. This would have been a major boon to local business, as Singapore’s population is small and the pool of prospective customers within our borders is limited. However, one of the major entities in the TPP, the United States, has pulled out of it. This is out of fear that competing products from other TPP countries would be cheaper, and their domestic companies would lose out. While Singapore already has its own trade agreements with the 11 other nations in the TPP (barring Mexico and Canada), the TPP would have stimulated trade between them. This would have allowed Singapore to benefit. For example, increased trade between Japan and America would see Singapore’s ports rake in more business. Free trade seems to have lost its popularity, with poorer people in various countries accusing it of promoting unfair competition, and concentrating power in the hands of corporations. Should this sentiment continue, it will cause problems for Singapore, as we are an export based economy that needs free trade to thrive. It does not seem likely that all these issues can be resolved by 2017. They are also, for the most part, beyond our control. But remember that, while you cannot control what goes on in the world, you are in control of your own finances. Save conscientiously, and protect your wealth. You can still come out ahead in a rough economy.

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