Monday, 13th October 2014
Lakshman I.Keerthisinghe LLB, LLM.MPhil, Attorney-at-Law
“Singapore is showing signs that its extraordinary growth of recent years may be reaching an end as it reaches its 50th birthday. Sri Lanka is putting in place a strong foundation upon which rapid economic growth can be achieved. Two island nations with strategic locations and significant Chinese investment but high economic growth is more likely in Sri Lanka over coming years than in Singapore.”
- Fraser Dinnis - Investment Banking and Equity Markets Specialist - ‘Sell Singapore, Buy Sri Lanka’
It was reported that Fraser Dinnis - a renowned investment banking and equity markets specialist in an analytical article on seekingalpha.com titled ‘Sell Singapore, Buy Sri Lanka’ has described Sri Lanka as the new island of growth for Asia and tips the post-war rebounding nation to be the next Singapore and even do better than the region’s city state.
Dinnis makes a compelling case for Sri Lanka and its future prospects. Noting ‘why on earth should any sensible investor consider such a trade recommendation?’ and that it also may be akin to comparing apples and oranges, the specialist gives various insights and explanations backed with recent performance of Lankan economy, plans and policies underway for the future.
Dinnis stated that Singapore is showing signs that its extraordinary growth of recent years may be reaching an end as it reaches its 50th birthday while Sri Lanka is putting in place a strong foundation upon which rapid economic growth can be achieved.
The two island nations with strategic locations and significant Chinese investment but high economic growth is more likely in Sri Lanka over coming years than in Singapore. Singapore is a modern peaceful country envied internationally for many areas from finance to education to logistics. Sri Lanka known chiefly for cricket, tea and a horrid civil war! Surely comparing these countries is like comparing apples and oranges?”, Dinnis said.
Foreign exchange reserves
Colombo Katunayake Expressway
Let's go back to 1956 when the father of Singapore, Lee Kwan Yew first visited Colombo, the capital of Sri Lanka. A mere nine years before Singapore independence, LKY stated that Singapore should aspire to being like Colombo. It had two universities, foreign exchange reserves, a strategically critical location and enviable infrastructure owing to its position as a key Allied HQ during the war compared to Singapore which had been occupied by the Japanese. Step forward to today and it is Singapore that has the foreign exchange reserves, amazing infrastructure, world renowned education and it is Sri Lanka that is recovering from a period of war, a civil war between the Sinhalese majority and the Tamil minority located in the North of the island. However, as any sensible investor knows, in deploying capital, it is not the past that is important, but the future. As Singapore reaches the ripe old age of 50 next year, it seems likely to be Sri Lanka's turn to produce the economic growth over the next 50 years that Singapore has produced since independence in 1965.
In 2015, Singapore will celebrate its 50th birthday unsure whether it is about to endure a major political upheaval. The general election of 2016 has the potential to rock the People's Action Party (‘PAP’), the party of Lee Kwan Yew that has dominated Singaporean politics since 1965.
The last general election in 2011 saw the party lose a General Representation Constituency (‘GRC’) for the first time (to the Workers Party). A GRC is a larger constituency that elects a slate of MPs from the same party. Moreover, the PAP overall share of the vote fell to just over 60 per cent. This was generally viewed as a wake up warning for the PAP, but since then, there are many signs that discontent in the country has increased and economic factors are contributing to build further discontent.
Questions are being whispered as to whether a bigger political avalanche could be coming at the next general election in Singapore in 2016 due to the following reasons:
1. Singapore is now the most expensive city in the world. According to the Economist Intelligence Unit, the cost of living in Singapore has soared. This is felt on a daily basis by locals and expats alike who are paying more for every day expenses from food to travel.
2. Singapore is increasingly crowded. The population has increased from three million in 1990 to its current level of nearly 5.5 million. During that time, the number of foreign permanent residents has increased from 112,000 to 531,000 and the number of foreign employees on a temporary work visa from 311,000 to over 1.5 million.
3. Car ownership in Singapore is now exclusively a luxury. The complex system of ownership now means that if you can afford a car, you may as well buy a luxury car. In 1990, there were five times as many small (under 1,600 cc) cars available for sale as larger ones. Today, bigger cars dominate. The largest selling car brand in Singapore in the first quarter this year was Mercedes Benz with BMW at #3.
The above three factors are contributing to a sense of resentment that ordinary Singaporeans are no longer being placed first by the government. This is undoubtedly the most common coffee shop conversation in the city at the moment. However, it is not just locals that are suffering.
4. Foreign businesses and business people are leaving Singapore. Despite official statistics, expats in Singapore will assure you that people are leaving Singapore at a much higher rate than ever before. The evidence comes from their professional lives but more importantly from their children's schools and social activities that are experiencing unparalleled turnover. One relocation agency reports a three-fold increase in business supporting departing families in June 2014 compared to June 2013. There is also plenty of anecdotal evidence that foreign companies are struggling to attract senior foreign talent to locate in Singapore.
The real estate market, a key barometer of sentiment across Asia, is also showing concerning signs.
5. Housing rental yields are collapsing. Whilst official figures point to a ‘softening’, the specific evidence is of rentals being offered 30-50 per cent lower than two years ago.
6. House prices are falling. Official figures show three consecutive quarters of decline. So far in 2014, prices have fallen 1.1 per cent in Q2, and 1.3 per cent in Q1. Whilst not dramatic, once again, specific evidence is that sellers that need to sell are having to accept much more dramatic reductions and even new condos are being offered at discounts in excess of 10 per cent.
7. The ‘Chinese factor’ of buying properties for investment but leaving them empty is resulting in a large stock of housing that lies empty. This is all potential supply that still has to be launched into a declining rental or sale market.
Singapore government policy
This last point about the ‘Chinese Factor’ is a key issue. In the past, expat talent was largely productive, attracted by jobs or the opportunity to build businesses in a key economic hub. This lay at the heart of Singapore government policy. Such expatriates are being replaced by mainland Chinese investors whose primary focus is moving portfolio investment offshore and hence is less accretive to the economy.
8. Volume on the Singapore Stock Exchange has collapsed to around $1 billion, over 40 per cent down year on year and Moody's continues to warn of pressure on the credit ratings of Singapore banks.
So the big question is whether Singapore has reached the peak of its potential, at least for the time being? Has being declared the most expensive city in the world heralded a ‘top’ for Singapore that is now about to be followed by a period of consolidation or even decline.
It is this correspondent's belief that the growth story of Singapore has ended and investors need to look for its successor. The answer seems to lie across the Indian Ocean in a country that showed such promise 50 years ago.
Sri Lanka's was nicknamed the ‘Teardrop Isle'. For many years, this was appropriate not just because of its shape, but also because of the tears shed during a brutal civil conflict that lasted from 1983 to 2009. However, over the past five years, a transformation has taken place around a country which promises so much due to the following reasons:
1. Sri Lanka occupies a strategic location adjacent to the main East-West sea lane. Literally every oil tanker and container vessel travelling from Europe and the Middle East to East Asia (and back) has to pass within a few kilometres south of Sri Lanka. The country is planning to take advantage of this strategic location by expanding its Southern Port at Hanbantota and at the capital city of Colombo.
2. The country has built new expressways linking Colombo with the key tourist destinations of the South and on to Hanbantota as well as with the international airport. Further expressways are planned linking Colombo with the North and East.
3. Power generation has been expanded with the building of two coal powered stations (900 MW in total) and a 150 MW hydro project.
4. Over 450 acres of land is being reclaimed from the sea adjacent to downtown Colombo to created ‘Colombo Port City’ in a $15 billion project.
5. The enormous tourism potential of the country is being supported by new hotel. Amongst international brands opening in Sri Lanka Shangri-La Hotels are building two hotels totaling 800 rooms, Hyatt is opening a 550 room hotel, Marriott is building a 200 room hotel and Crown Casino will open a 450 room integrated resort (another 800 room casino linked resort being built by John Keels). However, this is only a small portion of the expansion of Sri Lanka's tourism sector which counts local and regional brands as well as a wealth of boutique and villa hotels.
Tourist numbers are increasing by over 20 per cent per annum and the national airline has recently joined the One World Alliance. The international airport at Colombo is being upgraded and a new international gateway in the South of the island was recently opened.
6. Sri Lanka is the world's second largest tea exporter and the fourth largest producer of tea. However, a lack of branding has left profits lying in international hands. Moreover, its variety of climates from the tropical coasts to the cooler highlands permits many other agricultural products to be grown.
7. Sri Lanka enjoys a wealth of natural resources. Minerals include mineral sands deposits of the North and some of the best large flake graphite so critical for the new super nano-material known as graphene to a multitude of gems, most notably sapphires which are reputed to have the best colour and clarity of any found in the world. A Sri Lanka Sapphire was featured in Kate Middleton engagement ring that was previously owned by Princess Diana.
8. Sri Lanka has identified offshore resources of oil and gas which is now attracting interest from exploration and production companies.
9. Whilst the low paying garment and textile industries remain strong in Sri Lanka, the higher value software and business processing industries are expanding strongly with export revenues in this area up from $213 million in 2007 to $600 million in 2013 and having a target of $2 billion by 2030.
Whilst the potential of the country is clearly high, it may come as a surprise that so much has been achieved in such a short period of time since the end of the civil war? The answer is the China Factor! Whilst Chinese investment may be one of the factors now hurting Singapore, it has certainly propelled Sri Lanka and looks destined to continue to support the island's expansion.
China recognised the strategic importance of Sri Lanka and has been the largest investor in its infrastructure expansion. Of course, this has led to tension with India, for whom Chinese influence is less attractive. However, the Sri Lankan government of President Rajapaksa has embraced Chinese investment whilst trying to reassure India that its intentions are not inconsistent with maintaining close links to its neighbour. It isn't just money that is flowing from China either, tourists from China increased 137 per cent in the first half of 2014 to over 52,000.
In the meantime, to help understand what Sri Lanka needs to move to the next level, the Institute of Certified Management Accountants of Sri Lanka (CMA) conducted its annual conference under the theme ‘Sri Lanka 2.0 and Beyond: Fast-tracking Economic Development 2020’.
The event which featured as Chief Guest Senior Minister Human Resources D. E. W. Gunasekera, and as keynote speaker National University of Singapore (NUS) Department of Accounting Head Prof. Ho. Yew Kee, presented a total of 36 speakers to share their views at the two day conference.
At the inauguration session held, US Prof. Kee has stated that if Sri Lanka is looked at as a small nation when taking into account its size, Singapore in that same view will be non-existent. While the latter has a GDP of $ 276,520 comparing to Sri Lanka’s GDP of $ 59,423, Kee noted that the nation, which has been through three decades of war, is now growing at a much faster economic growth rate. “The point I want to make is that Singapore is much smaller, so it is much easier to manage compared to Sri Lanka, which is larger; the economic miracle we had was very specific. We (Singapore) are small,” he said.
To follow in the steps of Singapore, Prof. Kee opined that Sri Lanka needs to open up and exploit the international market. Sharing what Singapore was some decades ago, Kee said: “Singapore was a fishing village and a land with no natural resources. We had to innovate in order to survive. It was essential. It was a land that had many immigrants. We are a multi-ethnic country and we acknowledge that we need harmony and cooperation. It was the immigrants who brought the best of ideas for us to develop.”
“When I look at Sri Lanka, I note there is tremendous optimism since the country has immense opportunities. You are where Singapore was at some point in time. The future depends on how you crop your destiny. As long as Sri Lanka has the right passion, it will reach for success,” he told audience.
Highlighting the possible causes of Singapore’s success, Prof. Kee noted that the prime reason was the country having a stable and efficient government very early on.
The second possible cause he said was that advancement and promotion was based on meritocracy. “This means that if you are smart, good and capable, it doesn’t matter what your colour, religion, and who your parents are, it depends on what you have done with yourself and education,” he said. Another cause Kee said was having a market-driven economy. At one time Singapore was considered a hot house for production in the South East Asia since it was cheap. Today it hardly has any manufacturing plants since it has moved away from low tech to higher tech and value-adding industries.
He noted that pursuit of excellence was another reason. “We gave everyone the chance to do their very best. Looking at Singapore, we were nothing but a piece of rock. If we had no excellence, we would not have been able to reach where we are today,” noted Prof. Kee.
Moving on to lessons learnt over the years, Prof. Kee pointed out that Singapore learnt a great deal from international experience. Also, when adapting international lessons to local context, it ensured that only the best practices, knowledge and technology were selected.
Furthermore, it ensured that there is continuous improvement and international benchmarking. “We must set excellence as the benchmark. We teach our younger generation to never settle for a ‘no’ or ‘cannot be done’. This helps us to think out of the box and push the boundaries continuously. We keep asking ourselves if we are a timekeeper or a clock builder. We aspire to be the latter. This we inculcate in our young people and aim for the system to remain,” shared Kee.
While stressing on the need to invest in local talent, Kee said that as a developing economy, Sri Lanka will lose the best of its young people. To retain them, he emphasised on the need to create opportunities and train locals.
“Send them overseas and give them a good education. Create opportunities for them to contribute to the local economy and manage local talent. You have to identify the best of the young people.
If they are overseas, make sure they come back. The world understands talent and they will keep them away from you. The system has to be patient and must make them leaders,” said Kee.
In conclusion, it must be stated that despite adverse criticism by disgruntled elements, as the above experts have indicated due to the far seeing vision of the present regime under the guidance of President Rajapaksa our motherland Sri Lanka has achieved the position of the fastest growing economy in Asia.