Why Singapore’s Financial Sector Is An Unsustainable Bubble? In cheap credit-driven bubble economies, the financial sector is always one of the largest beneficiaries. As Singapore’s bubble economy inflated in the past half decade, its booming financial sector earned the country the nickname “The Switzerland of Asia.”
Singapore’s financial services industry grew 163% between 2008 and 2012. After construction, financial services have been the second most important driver of Singapore’s economic growth in recent years (light green line):
Singapore’s services sector, which is heavily weighted toward financial services, has been responsible for generating the majority of the country’s employment and wage growth in recent years. Finance professionals from all over the world have been clamoring to work in Singapore’s booming financial sector, which has contributed to the island’s population explosion that will be discussed in greater detail later in this report.
Singapore’s financial sector is now six times larger than its economy, with local and foreign banks holding assets worth S$2.1 trillion (US$1.7 trillion). The Singaporean financial sector’s assets under management (AUM) have increased at a 9 percent annual rate from 2007 to 2012, but surged 22 percent in 2012.
The primary reason for the country’s rapid AUM growth is its growing role as a banking hub in Asia, especially in booming Southeast Asia. A full 70 percent of assets managed in Singapore were invested in Asia in 2013, which is up from 60 percent in 2012. Rather than a reason for optimism, I view this fact as a reason for alarm and more proof that Singapore’s financial sector and overall economy are experiencing a bubble because Malaysia, Thailand, the Philippines, and Indonesia are all experiencing economic bubbles (including asset bubbles) of their own that are creating false prosperity in the region.
As Asian economies have bubbled up since the global financial crisis, Singapore developed a reputation as a safe-haven and tax-haven that is posing a threat to Switzerland’s dominance as a banking center. While Singapore is to be commended for its low tax rates and low corruption, its money management firms are naively investing their clients’ wealth in regions that have massive economic bubbles, and will be responsible for significant investment losses when the Chinese/emerging markets bubble truly pops.
As discussed early, Singapore’s banks are also exposed to the ultimate popping of the country’s property bubble because they hold almost half of their credit portfolios in local property-related loans, with residential mortgages accounting for nearly a third of their overall loan portfolios – a record high. Approximately 70 percent of Singapore’s mortgages have floating interest rates and almost a third of Singapore’s mortgages are used for speculative property purchases.
After three years of 18 percent annual mortgage loan growth, total outstanding mortgages rose from 35 percent of Singapore’s gross domestic product (GDP) to 46 percent, which poses a significant threat to the country’s banking system. To make matters worse, bank loans for building and construction combined with total outstanding mortgages surged from 62 percent to 79 percent of Singapore’s GDP in the past three years.
Like U.S. and Icelandic banks during their countries’ housing bubbles of 2003 to 2007, Singapore’s banks are experiencing good times as the bubble inflates, but are heading for a crisis when interest rates eventually rise. Singapore’s government is limited in its ability to bail out its financial institutions due to its significant public debt, which is one of the world’s highest at over 110 percent of the city-state’s GDP – a figure that is worse than the U.S.’ 106 percent public debt to GDP ratio. While most of Singapore’s public debt is owed to its own citizens as part of a mandatory savings-funded pension and healthcare plan, it still impairs the government’s ability to backstop the country’s highly-leveraged financial system.
As one of the 25 financial centers that the IMF regards as systemically important, a financial crisis centered in Singapore would put the entire global financial system in jeopardy.
Singapore’s Sovereign Wealth Funds Are At Risk
Singapore’s government runs two large sovereign wealth funds for the purpose of managing and investing its foreign reserves: Government of Singapore Investment Corporation, or GIC, and Temasek Holdings, which have U.S.$285 billion and U.S.$173.3 billion in assets under management respectively.
GIC and Temasek Holdings’ assets under management have risen considerably in recent years as many Asian financial markets climbed to new heights. Singapore’s sovereign wealth funds invest heavily in Asia, with nearly three-quarters of Temasek’s portfolio invested in Asian equities. The growing bubbles in China and emerging markets (as well as other bubbles) are a major reason for the strong performance of Singapore’s sovereign wealth funds since the global financial crisis, which means that these funds are exposed to the eventual popping of these bubbles as well.
Singapore’s sovereign wealth funds experienced severe losses in the Crash of 2008: Temasek’s portfolio plunged by S$55 billion ($U.S. 43.4 billion) or about 40 percent by March 2009, while GIC lost S$59 billion ($U.S. 41.60 billion). Temasek and GIC were able to recoup their losses quickly, however, when the world began inflating a series of new bubbles in an attempt to grow its way out of its last bubble-induced crisis.
Singapore Has A Wealth Bubble
As Singapore’s economic and asset bubbles inflated in recent years, its citizens’ wealth has soared like Icelanders’ and Americans’ wealth in the mid-2000s. After rising 8.7 percent y-o-y by mid-2013, the country’s total wealth hit a record U.S. $1.1 trillion (S$1.37 trillion) or an average of U.S.$282,000 per adult. Over 183,000 or approximately 1 in every 30 Singaporeans is a now millionaire – a figure that roughly doubled from 2008 to 2012.
Singapore currently has the highest number of millionaires per capita in the entire world, and mainstream analysts – who are not aware of Singapore’s dangerous economic bubble – are predicting even more growth of the millionaire population in the next few years. Of course, the assumption that Singaporean citizens’ wealth will continue to grow at high rates requires further inflation of the country’s asset bubbles, to say nothing of the very real risk that these bubbles will pop and cause wealth to decline significantly.
Singapore Has As Population Bubble
Singapore’s high cost of living and extremely competitive education system has helped to push birth rates down to one of the lowest in the developed world – 1.20 children per woman, which is well below the 2.1 children per woman replacement rate required to maintain the native population. Fearing a demographic crisis, Singapore’s government opened up the floodgates to immigrants, which caused the country’s population to grow by more than 1.2 million to a total of 5.3 million people in the past decade. Approximately 2 million people or just under 40 percent of Singapore’s current population are foreign residents.
Foreign workers in Singapore fall into two primary categories: semi-skilled or unskilled workers who commonly work in construction or domestic service, and highly-paid professionals who tend to work in the financial services sector.
According to the chart below, 21 percent of immigrants are S Pass and Employment Pass holders, who are members of the professional class, while 59 percent of immigrants are semi-skilled or unskilled workers:
Despite a roughly 25 percent increase in Singapore’s population in the past decade, the country’s ultra-low unemployment rate of 1.8 percent means that many new jobs were created to employ the sudden influx of immigrants. Here’s where Singapore’s bubbles come into play: most of the new jobs that were created are in sectors that are experiencing bubble-driven growth, namely construction and financial services.
In mid-2013, there were 306,500 construction workers on work permits in Singapore, hailing from countries such as Bangladesh, China and Myanmar. The growth of Singapore’s domestic servant population – which includes maids, chauffeurs, and private cooks – is a byproduct of the country’s soaring wealth, which is due in large part to the inflating economic bubble.
Singapore’s population increase of the past decade is essentially a bubble in its own right because it requires a continuation of the past decade’s economic trends – from rapid financial services sector growth to high rates of construction activity – in order to keep the country’s foreign workers employed. The continuation of the past decade’s economic trends requires further inflation of Singapore’s asset and credit bubble, which is ultimately unsustainable with property prices and household debt at such high levels already, as well as the perpetuation of the current abnormal low interest rate environment.
Rather that addressing the sustainability of its large existing immigrant population, Singapore’s government published a white paper in 2013 that detailed a plan for increasing the country’s population to 6.9 million by 2030. Contrary to the Singapore government’s hopes and expectations, the city-state may actually see a decrease in population when the bubbles in financial services and construction finally pop, leading to the loss of many bubble-era jobs that were created in those sectors.
How Singapore’s Bubble Economy Will Pop
Singapore’s bubble will most likely pop when the bubbles in China and emerging markets pop and as global and local interest rates continue to rise, which are what inflated the country’s credit and asset bubble in the first place.
It is important to be aware that Singapore’s bubble economy may continue inflating for several more years if the U.S. Fed Funds Rate and SIBOR continue to be held at such low levels. Also, while I compared Singapore’s bubble economy to Iceland’s bubble economy before its collapse, I am not implying that these two bubbles are exactly alike or that their crises will play out identically. My argument is that both countries had or have finance and real estate-heavy island economies that were seen as safe-havens while their bubbles inflated and created an illusion of economic vitality.
As I’ve been saying even before this summer’s EM panic, I expect the ultimate popping of the emerging markets bubble to cause another crisis that is similar (though not identical in every technical sense) to the 1997 Asian Financial Crisis, and there is a strong chance that it will be even worse this time due to the fact that more countries are involved (Latin America, China, and Africa), and because the global economy is in a much weaker state now than it was during the booming late-1990s.
We will end this report with a relevant quote from economist Ludwig Von Mises:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”