Mega projects in Singapore may not to be enough to offset external slowing

Mega projects like the Marina Bay Integrated Resort and the upcoming Formula One race are expected to present a substantial boost to the Singapore economy.

Some analysts expect the approximately S$120 billion worth of projects in the pipeline to support the economy until 2015.

But others warn this may not be enough to offset external slowing, especially if the global economy worsens further.

Construction works have been going on almost non-stop at the Marina Bay Integrated Resort.

Besides the obvious boost to the construction sector, the spillover effects to the economy from the project are expected to be large.

Leong Wai Ho, associate director/ regional economist, Barclays Capital, said: “There are about S$120 billion worth of projects around. This is possibly the largest building boom in Singapore’s history, so it will go a long way in cushioning growth.”

But as the global economy slows, some have started to question if large projects like these are enough.

Irvin Seah, economist, DBS Bank, said: “Although such mega projects – which are domestically-driven – will provide some buffer for the economy, at the end of the day, I do not think it will be enough to counter balance or offset the greater impact of the slowdown in the global environment.

“(For) such domestically-driven projects, or domestic stimulants, the effect is usually temporary, short term. If the global environment continues to remain unfavourable for growth for Singapore, then it is unlikely we can continue to pump prime the economy is such a manner.”

Mr Leong said: “The mega projects will offer some respite to growth, but it will not completely offset the effects of slowing external demand. It is really a question of how much more downside there is in external demand.

“Another factor that could dampen the growth contribution from mega projects is if the Singapore dollar is allowed to weaken too much in a relatively short space of time.”

This will reduce the ability of the construction sector to generate value-add, as costs go up and margins shrink.

But analysts said that Singapore has been pursuing new, higher value-added industries. Some, like water management – have taken off, but others might need a longer gestation period.

Mr Leong said: “We have to understand these types of initiatives have long gestation periods, so it will take some time before it comes to fruition, before we see its actual critical mass. But in the meantime it will incrementally deliver growth points each years.”

Some have said that Singapore should also look to upgrading human capital, on top of pursuing new businesses.

Mr Seah said: “We need to continue to enhance the quality of human capital in Singapore. We have to continually upgrade the skillset of our labour and continue to attract foreign talent into the economy and complement the indigenous labour force.

“At the end of the day, we cannot compete on a cost basis, so it is important that we provide a very attractive value proposition for foreign investors.”

Barclays said another risk to Singapore’s growth is the cost of talent.

The bank is betting that the government might take action if the environment worsens, possibly through lowering employers’ contribution rate to the national savings scheme, or CPF.

Mr Leong said: “The largest business cost component has always been wages in Singapore. Wage containment policies are very important.

“The most powerful fiscal policy instrument the government is reserving for leaner times is a reduction in the employer’s contribution rate to the CPF. Traditionally when job losses are imminent in Singapore, past growth cycles have shown that the government will use this tool.”

The government has cut the employer’s contribution rate to the CPF twice in the past 10 years.

Source : Channel NewsAsia – 12 Sep 2008

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