SMU Political-Economic Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PRODUCTION HAPPENING THIS SUMMER WITH SEIC! ISSUE 17 4 JUNE 2012

First ever Community Service Project in Socio-Economics! SIGN UP NOW! - Adjusting to the Risk Level in the Market - Myanmar: Whats Next? - Unsung Heroes

The Fortnight In Brief (22th May to 4th June) US: Cocktails of Signals

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The Good Mays ISM manufacturing index indicated a modest growth with headline PMI at the expansionary region of 53.5 and new orders reading coming in strong. In same vein, new home sales in April improved by 3.3% m/m. The Bad Pending home sales tanked by 5.5% m/m in April and more significantly, as unemployment persists in the US, May nonfarm payrolls came in at 69000, well below consensus expectations of 150,000. The Mixed consumer confidence in May appears to be mixed, with the Conference Board index easing while Reuters sentiment index hiked.

Asia Pacific ex-Japan: Is China losing steam? Figures for Chinas Purchasing Manager Index (PMI) in May fell to its lowest in 5 months, indicating an economic slowdown as headwinds such as the Eurozone crisis continue to bite into the economy. This has caused the Government to prioritize growth and could signal increased fiscal spending. There are already official reports describing accelerated approval for large investment projects such as airport expansions and new steel plants. However, care should be taken to avoid the recurrence of stubbornly high inflation and soaring debt that plagued China after the 2008-2009 stimuli. EU: The Core floats while the Peripheries sink The Greeks are once again, in the spotlight the failure to form a unity government between President Papoulias and the New Democracy, SYRZIA and PASOK parties prompts for fresh elections in June. While a caretaker government is being installed, concerns on potential disorderly default were raised as the possibility of a majority SYRZIA (the party with a firm stance against austerity) coalition government looms ahead. Meanwhile, the Eurozone escaped a technical recession with a flat growth in Q1 2012. As expected, the core has been sustaining the Eurozone, with Germany, Austria and Belgium posting quarterly growth while the peripheries, Greece, Italy, Spain, Portugal and Cyprus slipped further and remains in recession.

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Adjusting to the Risk Level in the Market

By Victor Ong, Singapore Management University

The name Alessio Rastani probably does not sound familiar to many, but what he said in the interview with BBC might ring a bell, 'I have a confession - I go to bed every night and I dream of another recession, I dream of another moment like this. In the interview which went viral online, Mr. Alessio Rastani pointed out that the economic crisis is not over, and by waiting, the crisis will just spread, like cancer. The interview was done in September 2011 and prior to that, in August 2011, the United States credit rating was downgraded by S&P. The downgrade, along with the Eurozone sovereign debt crisis, caused the worlds equity markets to plunge about 15% in a week. Ten months later, in May 2012, speculation over Greeces exit from the Eurozone remains, rating agencies continue their downgrades, and within half a months time, all gains from stock markets in the year of 2012 were erased. Like what Mr. Alessio Rastani pointed out, the crisis is indeed, still growing like a cancer. While economists argue over the causes and solutions, retail investors like us should focus on what we can do during such uncertain times to protect our assets and investments. Risk off Historically, equity investments have provided an average of eleven to 12 percent return which is considered a good hedge against inflation in the long run. On the contrary, when times are bad, the hedge flips and further antagonizes any losses in the shorter term. During down time, investors in the United States have the ability to short1 the market and yield capital gains as prices sink, but in Singapore, shorting of stocks is generally prohibited. Stripping the ability to gain from downturns, value preservation becomes even more important, and this suggests that one should stay away from the market when it is going south. Due to the ongoing Eurozone crisis, the amount of uncertainly in the market now has become unprecedentedly high. Economic and monetary union that involved so many countries has never been achieve before, and never has there been a situation where such union faces the danger of member dropping out. In this economic climate when the risk level rises, investors should rebalance their portfolio to adjust to the environment and their risk appetite. Maybe it is time for some to go for safer investment such as gold and fixed income products. These are generally considered as good hedge against the bearish market. Wait "Throughout all my years of investing I've found that the big money was never made in the buying or the selling. The big money was made in the waiting." Jesse Livermore, early twentieth century stock investor. For retail investors who embark on a long-only2 strategy, the next thing to do will be to wait for the economic condition to improve. However, it is impossible to know exactly when the economy will rebound. Hence in order to know when to enter the market, it will be useful to monitor the following which could potentially represent indications of improvement in the economies: First - the political stability in the Eurozone. The political instability in countries such as Greece only serves to delay the resuscitation process. While the parties struggle for power, national debt remains unattended; interest is still being charged and will not be deferred as elections take place. Every single second spent on the political tug of war is time that could be better spent on addressing the countries mounting issues. It is crucial to have a stable political system before policies can be pushed out to reduce debts and satisfy the requirements for 2 Copyright 2012 SMU Economics Intelligence Club

more help from regulating body such as the European Central Bank and the International Monetary Fund. So until the stability in the political scene is re-established, it is unlikely that there will be progress made in resolving the Eurozone crisis. While the political instability lingers, market sentiments will likely remain dampened. Second - stock markets performance. The value of a stock is arguably derived from investors expectation of the future. News and expectation of improvement in economic climate is often almost instantaneously priced in by the equity markets. Hence it could be argued that stock market can be seen as a proxy for investors confidence. This makes the stock market one of the indicators of economic development. Indices3 such as Dow Jones Industrial Average, S&P 500, Hang Seng Index and FTSE 100 are a few respected indices to watch out for. Figure one below illustrates the historical performance of S&P 500 as compared to the United States GDP the positive sloping regions coincides with economic booms and recovery, vice-versa.

Figure 1: Ratio of S&P to GDP Source: Shiller and FRED

In conclusion Looking at the current political uncertainty, the scale of the Eurozone crisis and the pace of which it is being tackled by the different countries, it is expected that risk level in the market will stay high in the near future. As the saying goes, crisis breeds opportunity. With all the uncertainty in the market, it is best to stay out of the volatile market, and watch for signs of economy recovery before making any investment.

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The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.
1

An investment strategy that involves only the purchase and holding of assets and gains to be made only upon sale of existing holdings (i.e. does not involve short-selling) and relevant dividends.
2

A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it.
3

Sources: BBC, Bloomberg, Businessweek, Reuters, Investopedia, Yahoo Finance

Myanmar: Whats Next?

By Andrew Tan, Columbia University
Myanmar (Burma) has undergone significant changes in the past year since the nominally civilian, military-backed, USDP (Union Solidarity and Development Party) was installed. In March 2011, newly appointed President Thein Sein announced a move towards economic liberalisation. Significant events ensued: Appointment of a US special envoy Derek Mitchell, President Thein Sein halting Chinese Dam-Building activities on the Irrawaddy River, new legislation governing foreign investment, by-elections in April 2012 which increased opposition party representation, and lifting of several Western sanctions on trade in May 2012. These moves are promising. Myanmar, which borders economic titans China and India, has vast untapped economic potential. Annual GDP growth estimates (based on current trajectory) are 5.2% in 2012-13, 6.4% in 2014-2016, and 7.7% from 2016-2020. Such high growth is certainly possible Vietnam, a neighbouring country with similar beginnings, has continued to grow at such rates since economic liberalisation in 1986 and then again, to a much larger extent, in 2000. From a macroeconomic perspective, recent capital inflows have caused the local currency, the Kyat, to appreciate, and this looks set to continue. Foreign investment and import growth currently far exceed export growth, leading to a capital account surplus and a negative trade balance. Looking at her fiscal position, the government will continue to run a fiscal deficit given high infrastructure spending and low tax revenues. Recent increases in petrol and electricity prices (more than 30% each), coupled with greater domestic demand and deficit monetisation1, is likely to result in inflation. The Economist Intelligence unit estimates inflation to be 6.2% from 2013-2016. Figure one below captures past macroeconomic trends for Myanmar.

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Figure 1: Macroeconomic Trends Source: IMF Article IV Consultation

Rapid Growth Rapid industrialization, driven by Foreign Direct Investment (FDI), will be the main driver of economic growth. New legislation allowing foreign firms to own a 100% stake in businesses in Myanmar alongside tax holidays granted for the first five years after start-up encourage FDI activity. In addition, there is a vague guarantee that the government will not nationalize2 private firms, and if it does, that there will be market-priced compensation. FDI also results in a transfer of technical know-how. This increases workers productivity, and subsequently helps the transition into a more advanced economy. In April 2012, Multilateral Financial Institutions (MFIs) pledged developmental support and the IMF assisted with reforming the multiple exchange rates into a managed floating regime. These policy changes will attract foreign involvement and investment. Myanmar, with a current nominal GDP per capita of USD$900, lags far behind other South East Asian economies Vietnams GDP per capita is USD$1500, and neighbouring Thailand is USD$5000. This results in an abundant supply of low-cost unskilled labour. This is conducive for the labour-intensive industrialization that will take place initially. However, to sustain this largely export-driven growth, domestic investments are also very important. In the 1970s and 1980s, the four Asian Tigers averaged 32 per cent (of GDP) gross domestic investment. Myanmar has taken several right steps in this direction educational spending will be doubled and healthcare spending quadrupled in this years budget. The industry that will probably experience the greatest growth is the textile industry. Prior to a 2003 US ban on imports, there were an estimated 300 factories in operation. Given the lowcost of labour, this industry is likely to be quickly revived. A 12% growth in textile exports is predicted. Myanmar has long been a member of ASEAN and the WTO, which should facilitate trade with regional partners. Currently, natural gas is Myanmars largest export. Several new natural gas fields are due to begin production, and coupled with on-going development of LNG plants/terminals, exports look set to increase. Natural gas pipelines are also being built to transport gas to Chinas Yunnan province. Regional trade within the GMS (Greater Mekong Sub-region) is another growth opportunity. The ADB (Asian Development Bank) has assisted with GMS programs, funding transportation infrastructure development. This has created trade corridors such as the Northern Economic Corridor connecting Yunnan, Laos, and Thailand. Participating in GMS-wide transport 5 Copyright 2012 SMU Economics Intelligence Club

agreements will facilitate easier trade, and consequently, greater growth. Establishing ports in Myanmar is also an attractive prospect. This will enable Chinese and Thai exports to bypass the Malacca straits. Domestic Services Apart from investments in the resource sector, there are many opportunities for domestic growth. Given the low GDP per capita, proportionally large increases in income could spur demand for consumer goods such as electronics. At the same time, large-scale infrastructure upgrades, particularly in the transportation sector, are likely to take place. Other potential growth areas are tourism, and telecommunications mobile-phone penetration is currently lower than North Korea. However, some doubts over Myanmars promise remain. One often overlooked factor is Myanmars ethnic diversity it has more than 50 different ethnic groups. When compared to the other Asian Tigers the NIEs3 (newly industrialized economies) of the late 20th century Myanmar is far less socially and culturally homogenous. The ASEAN Economic Bulletin reported that productive resources and institutional energies had been devoured by national integration efforts. Today, there is political strife between different ethnic groups, and there exists a large body of ethnic refugees and prisoners. Several prominent groups have also resisted government efforts at integration. In the case of the other Asian Tigers, homogeneity made it possible to mobilize national consensus and social harmony to maximise efforts in economic development. Then there is the question of the junta. US sanctions still forbid economic dealings with the military. Outside of the large cities, the military still controls large swaths of the economy. Army Battalions are required to feed themselves and pay their own wages, which drives them to control farms, plantations, local economies, and prices. These military groups are also involved in illegal logging and smuggling activities. In the larger cities, SOE (State Owned Enterprises) prevent market-forces from acting and directs profits to a select few. These are exciting times for Myanmar. Are its early attempts at democracy merely a means to secure international legitimacy and lessen Chinas influence? Or will there be real, structural change? Hopefully, it will learn from the four Tigers and Vietnams example; creating favourable economic conditions through encouraging FDI and providing strong support for infrastructure, training, and education.

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To convert government debt from interest-bearing securities into money through central bank ownership instead of private ownership of securities. Although both the securities and the money are considered government debt, the latter can be used to purchase goods and services. Thus, monetizing the debt is considered an inflationary process and although it may temporarily depress interest rates, it is likely to result in higher interest rates and lower bond prices in the long run.
1 2

To take an industry or assets (held by the private sector) into government ownership.

3 Economies

with a lower GDP relative to the developed world but still with healthy levels of GDP growth. Newly industrializing economies are characterized by a great deal of industry and/or international trade. Newly industrializing economies have relatively (though perhaps not entirely) stable governments. Some newly industrializing economies have a great deal of government intervention while others have virtually none. Sources: Economist Intelligence Unit, International Monetary Fund, ASEAN Economic Bulletin

Unsung Heroes
By Timothy Ong, Singapore Management University
This essay looks at the contributions of foreign workers and their impact on Singapores social fabric and its economy.

We know theyre there. We know they exist. Weve seen them on our way to work, to school, or even while waiting at the bus stop. Yet, did we ever pause for a moment to wonder about the lives they lead; let alone acknowledge the existence of men so near to us but who seem to live in a completely different world? These men otherwise known as foreign workers are the unsung heroes contributing to our countrys growth and progress in the shadows, employed in jobs that few Singaporeans would even consider. Besides being an extremely vulnerable group with a stifled voice, these men are also reliant on their employers for food and shelter. While many are generally satisfied and content with their lives here, there are still some who remain exploited by their employers and subjected to extremely poor living conditions. All of this is further compounded by the prejudice that many Singaporeans bear towards them. And yet, though they are faced with many hardships, foreign workers are still an integral part of society and will benefit the whole of Singaporean society with what they do. Within a fenced-up area that marks the end of our world and the beginning of theirs, these foreign workers toil every day of the week from dawn till dusk. Without them, the construction industry would almost surely grind to a halt. In times where the government has large infrastructure projects or plans for redevelopment, the supply of foreign workers as a form of cheap labor plays an instrumental role. Instead of hiring local workers who generally demand a higher wage, a company that hires foreign workers will become more competitive and thus more profitable. Being easily managed and compliant is also a boon to employers.

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Undoubtedly, there will also be economic and social costs involved. Over-dependence on cheap foreign workers may result in lower productivity and reduce incentives for companies to innovate. While the company may enjoy short-term benefits in terms of lower costs and greater output, their over-reliance on foreign workers will not be sustainable in the long run. Foreign workers also contribute to depressed wages for lower-skilled jobs, leading to locals perceiving them as either a threat or a form of competition. The influx of foreign workers in recent years has also raised concerns of overcrowding and xenophobia, inadvertently affecting the social fabric of Singapore. With each foreign worker, the negative externalities generated gradually began to outweigh the positive benefits and this may even translate to political costs for the government. Singapores dependence on foreign labor is also currently the highest among East Asian economies1. Taking all these into consideration, the Government seeks to reduce the reliance on foreign workers. This can mainly be done through either tightening the foreign worker quota by reducing the Dependency Ratio Ceilings1 (DRCs) or by raising Foreign Worker Levies2. In the Singapore Budget 2012, the manufacturing and services industry will take a five percent cut in DRC to 60 per cent and 45 per cent respectively. Foreign worker levies may also be raised from July 2012, depending on the rate of growth of the foreign workforce in the coming year. In the construction sector, the Man-Year Entitlement (MYE) Quota3 for new projects will be reduced by 5 percent in Jul 2012 while foreign worker levies for basic skilled workers hired outside these MYE quotas will be raised2. Ultimately, this means that there would be an increase in costs for any businesses employing foreign workers. It may also create undue stress on small and medium-sized enterprises (SMEs). A company would have to hire lesser foreign workers or more locals from July onwards to stay within the DRCs. Through this tightening of foreign labour, the government hopes to spur greater innovation and productivity in the economy. From a utilitarian perspective, foreign workers have an indispensable role in building our society for tomorrow, hence contributing to the improvement of our country. It is imperative then for the government to ensure the well-being of foreign workers and prevent them from being exploited by their employers. Naturally, this does not imply that the needs of local Singaporeans are not met, especially the low-skilled and low-income. It should be a two-pronged approach where neither group is left in the lurch. Over the years, the issue of foreign workers has taken on socio-economic dimensions with some political effect. On the economic side, the government has to weigh its goal of short-run economic growth against that of productivity and innovation, both of which are significant factors in determining long-run economic growth. On the social side, the government has to consider the impact of its foreign worker policy on the social fabric and note the growing dissent over the number of foreign workers. The inter-connections between economic and social will also determine the peoples support for the government and its policies, hence a political effect. Ironically, while many recognize the important contributions of foreign workers, the general attitude towards them is still one of scorn and disdain. Perhaps this disparity is due to 8 Copyright 2012 SMU Economics Intelligence Club

conceitedness or a lack of understanding on our part. After all, it is only natural for these men to seem alien to us as we live our sheltered lives, leaving us oblivious or apathetic to the sacrifices they have made to come here or to the life they had left behind. Prejudice and intolerance of any form should not be welcome in Singapore. We should also keep in mind that every action, no matter how small, will have consequences that go beyond our comprehension. Ultimately, it may do us some good to ask ourselves this question: What kind of people do we want to be known as?
1Dependency

Ratio Ceilings: Specifies the maximum proportion of foreign workers to the total workforce that companies in various industries can hire
2Foreign

Worker Levy: The levy that a company pays to the Government for each S Pass or Work Permit holder it hires. It is a pricing mechanism to regulate the number of foreign workers in Singapore.
3Man-Year

Entitlement: Reflects the total number of Work Permit holders a main contractor is entitled to employ based on the value of projects/contracts awarded by developers/owners Sources: Channel News Asia, Singapore Budget 2012 Group

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The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large- cap common stocks actively traded in the United States. It has been widely regarded as a gauge for the large cap US equities market The MSCI Asia ex Japan Index is a free float-adjusted market capitalization index consisting of 10 developed and emerging market country indices: China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand. The STOXX Europe 600 Index is regarded as a benchmark for European equity markets. It represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Correspondents Shane Ai Changxun (Vice President, Publication) changxun.ai.2010@smu.edu.sg Singapore Management University Singapore Herman Cheong (Vice President, Operations) Wq.cheong.2011@economics.smu.edu.sg Singapore Management University Singapore Fariha Imran (Marketing Director) Farihaimran.2010@economics.smu.edu.sg Singapore Management University Singapore Randy Lai (Editor) Tw.lai.2010@smu.edu.sg Singapore Management University Singapore Victor Ong victor.ong.2010@accountancy.smu.edu.sg Singapore Management University Singapore Timothy Ong Tyong.2011@economics.smu.edu.sg Singapore Management University Singapore Ben Lim (Vice President, Publication) ben.lim.2010@smu.edu.sg Singapore Management University Singapore Tan Jia Ming (Publications Director) jiaming.tan.2010@smu.edu.sg Singapore Management University Singapore Vera Soh (Liaison Officer) Vera.soh.2011@economics.smu.edu.sg Singapore Management University Singapore Seumas Yeo (Editor) Seumas.yeo.2010@smu.edu.sg Singapore Management University Singapore Andrew Tan Andrewtan89@gmail.com Columbia University United States of America

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