Singapore is ending the year on a high as lockdown measures are further eased. But the transformation journey in the post-Covid world has only just begun.

No thanks to the Covid-19 pandemic, Singapore is set to end 2020 with its worst recession ever, with official estimates of a full-year contraction at between 6% and 6.5%. However, with local transmission of the disease somewhat under control, Singapore will end this unforgettable year with some cheer. With effect from Dec 28, the republic will enter the so-called Phase Three re-opening, with further easing of restrictions put in place to curb the spread of Covid-19.

However, economists believe that the positive impact of Phase Three will be muted relative to Phase Two, which marked the end of an unprecedented lockdown of nearly two months. For example, while groups of eight now can dine together instead of a limit of five, other restrictions, such as shorter operating hours remain. Large-scale events are still forbidden though. “Most economic
activities had already resumed or were already set to reopen under the first two phases, albeit with notable constraints on capacity,” says Barclays’ economist Brian Tan. The higher capacity limits under Phase Three may give more headroom for growth in 2021, but will not “significantly alter the economic landscape”, he adds.

Maybank KimEng’s senior economist Chua Hak Bin agrees that Phase Three brings “only a small, incremental uplift compared to the move to Phase Two” with effects to be seen in early 1Q2021. He reckons that a bigger uplift will only materialise when national border controls are relaxed significantly and that is probably towards the end of 2021 after more countries achieve herd immunity.

Meanwhile, the government is spending some $1 billion to buy vaccines and will offer them for free to all Singaporeans and long-term residents. Prime Minister Lee Hsien Loong says “vaccines will support [Singapore’s] recovery in more ways than one”. For instance, the borders can reopen more quickly, bringing relief to the hard-hit tourism and hospitality sectors. The complicated logistics of transporting and distributing large volumes of these vaccines will also help reinforce Singapore’s status as an aviation hub.

Barclays’ Tan believes that if vaccines can be distributed quickly enough, his current 4% GDP forecast for 2021 might be revised upwards. According to estimates by economists polled by the government, the economy might end 2021 with a growth of between 5% and 5.9%.

However, CEO of the Singapore Business Federation Ho Meng Kit warns that there remain huge uncertainties in the global economy and a rapid uplift in 2021 should not be taken for granted. “Whilst business sentiment will certainly improve next year, it is important not to get ahead of ourselves and act as if the pandemic is behind us,” says Ho.

Right time to transform
Given the economic uncertainties, Roland Ng, president of the Singapore Chinese Chamber of Commerce and Industry, urges companies to constantly adapt to changes, strengthen their capabilities and look for new growth opportunities and collaborations. After all, companies that cannot adapt risk falling further behind compared to those who can. “The Covid-19 crisis has accelerated many trends that were seen before the outbreak. It has made strong companies stronger while weakening those that have not been doing as well,” Vikram Chakravarty, global strategy leader at EY Parthenon tells The Edge Singapore.

While acknowledging that the priorities of many companies during times of crisis is to survive and maintain their cash flows, Chakravarty encourages those who can take on “short-term pain” to push forward with investments that will put them in a position where they are competitively stronger and have long-term value. “This is the time for them to be bold and transform and transact,” he adds, drawing reference to the portfolio-transforming investments executed during the height of the 2008/2009 Global Financial Crisis (GFC).

According to Chakravarty, while such deals soak up capital and put a strain on cash flow in the near term, both acquirers and divestors eventually gain. According to EY’s study, they enjoyed an approximately 25% increase in total shareholder return between 2010 and 2018, following the deals executed during the GFC, says Chakravarty, who is also EY’s Asean managing partner for strategy and transactions (see Chart 1).

Companies that invest in the right areas enjoy better returns too. Those that are willing to invest more in areas such as digital technologies have been able to enjoy returns of between two and three times the counterparts who invested less, according to EY.

One key area drawing much recent interest is that of artificial intelligence (AI). To be sure, AI has existed in various forms for years. Now, with more powerful computing capabilities, wider availability of data and use cases, the adoption of AI is seen to accelerate. Famed serial entrepreneur Mark Cuban goes as far as to describe the world as shaping up into two halves: Those with AI and those without. 

$25-billion research boost

According to the theory of economics, private money belonging to the likes of Cuban should automatically flow into sectors with the best-perceived returns. However, the Singapore government is not going to leave it all to Adam Smith’s “invisible hand”.

On Dec 11, it announced a record $25-billion package for the coming five years to develop technological capabilities that can benefit the wider economy. “Science, technology and innovation will be critical to overcome Covid-19 and in enabling us to emerge stronger,” says Deputy Prime Minister Heng Swee Keat.

The so-called Research Innovation and Enterprise (RIE) plan 2025 is equivalent to around 1% of Singapore’s GDP and is in line with the investment budget other small advanced economies such as Sweden and Denmark. Under the previous RIE plan which spanned between 2016 to 2020, some $19 billion were allocated.

Key focus areas for RIE 2025 include broadening Singapore’s base of scientific capabilities, expanding the scope of RIE to drive economic growth post-pandemic, and strengthening enterprise innovation capabilities.

Research on AI, cybersecurity, trust technologies, communications and connectivity, and quantum computing feature prominently in the plan. Key areas of focus include 5G applications as well as future communications technologies that have the potential to scale into commercial applications. “All of these [technologies] will undergird the next bound of economic growth, in the near term as well as in the medium to long term,” notes S Iswaran, Minister for Communications and Information.

The technologies will not just be developed for their own sake, but with a clear eye on wider applications. For instance, AI and 5G will help transform manufacturing, healthcare and transportation through smart factories, telemedicine and autonomous vehicles, he adds.

While much of the RIE budget goes towards sustaining the momentum of Singapore’s capabilities in scientific research, a third of the money is to be channelled into supporting basic scientific research where significant discoveries can hopefully be made.

However, the scientists will not have free rein to cannot do whatever they want. There has to be a certain level of market discipline. According to the National Research Foundation, the body administering the fund, the research money should increasingly be used to support “investor-led grants to encourage bottom-up ideas and shift funding from large centres towards medium-sized grants that continue to bring capabilities together”.

Manufacturing makeover
Even as the make-up of Singapore’s economy becomes more service-oriented and digital, manufacturing is still seen to remain a key pillar, partly because of its high spillover effect on other parts of the economy. Besides contributing 20.9% of 2019’s GDP, the sector also employs 13% of the workforce.

Trade and Industry Minister Chan Chun Sing advocates wider adoption of robotics and automation, which will go towards improving the sector’s long-term competitiveness and ability to generate higher growth.

Under the RIE plan, there is a clear strategy to make manufacturing a more valuable and relevant economic activity. One way of doing so is to beef up advanced capabilities such as those in microelectromechanical systems used in building sensors, actuators and process-control units. Manufacturing is framed as an economic activity that is integral to all economic sectors including logistics and trade.

The hopes pinned on manufacturing partly stems from its resilience shown early this year. When the pandemic caused other sectors to crash, the production of semiconductors and biomedicals remained strong. Selena Ling, who heads the treasury research and strategy department of OCBC Bank, says it is a good idea to further develop this sector, especially since the current
engines of growth within the sector are likely to keep running. 

The semiconductor industry has had a stand-out year as demand skyrocketed for video streaming, online gaming, software as a service, cloud computing and virtual meetings — all of which are powered by chips and integrated circuits. The biomedical space, on the other hand, will benefit from high demand for instruments and test kits, as well as critical supplies such as masks and medical equipment, notes Ling.

Douglas Foo, president of the Singapore Manufacturing Federation, expects growth in the sector to come from lean manufacturing and the adoption of new business models that make better use of technology. The federation’s target is for the sector to account for 30% of Singapore’s overall GDP by 2030. To achieve this, Foo acknowledges that the scope of the manufactuing sector has to be given a broader definition through the inclusion of non-traditional segments such as agriculture which has been tapping on the latest manufacturing technology to improve production levels.

EY’s Chakravarty sees further potential from 3D printing where customised, high-value parts or entire products can be “printed” — a stark contrast to the mass assembly lines that are already the forte of other low-cost economies but not Singapore. He envisions the setting up of “dark factories” or fully-automated industrial production sites that operate without any human intervention. This will complement the republic’s capabilities in manufacturing, he adds.

Where next?
Other key research areas laid down under the RIE 2025 blueprint include urban solutions and sustainability. By doing so, Singapore can perhaps better address challenges such as climate change, decarbonisation, and the creation of healthy cities and
built environment. This theme has also been gaining traction on a micro-level as more businesses explore ways to be sustainable, observes EY’s Chakravarty. The way he sees it, a simple goal of cutting hydrocarbons from say 70% to 50%, will require businesses to tweak their financial models. With Singapore’s research expertise and presence of financial models such as green bonds that address this theme, Chakravarty believes the little red dot can be a hub facilitating knowledge-sharing on this with other countries.

Interestingly, there is also a growing push to grow more of its own food in land-scarce Singapore. That is where AgriTech comes into play, with high-tech farms being set up to yield more vegetables and protein sources with the same givespace. In 2019, the government announced the so-called “30 by 30" plan where 30% of the country’s total nutritional needs is produced domestically by 2030 — up from less than 10% now. In April when the Covid-19 lockdown disrupted food supply chains that have been taken
for granted, the 30 by 30 plan took on a new and real urgency.

Meanwhile, Singapore is known to be strong in many areas and it is to the republic’s advantage that it protects its lead in these areas. Some of these specific niches include developing world-class infrastructure, financing, and mediation and arbitration which are all part of the broader offerings in legal and financial services for regional economies and business partners around the world.  And with the country having earned a name for itself for managing the spread of Covid-19 ef- fectively, Png Cheong Boon, CEO of Enterprise Singapore has reason to think that its global hub status is here to stay. “People would want to put their money in places that they can trust, so countries that have come ahead in their pandemic management [will have greater appeal] in the eyes of investors,” he tells The Edge Singapore.

For this to happen, Irvin Seah, senior economist at DBS, stresses the need for the country to deepen its linkages with its Southeast Asian neighbours, because given the rate at which some of them are growing, Singapore may soon no longer be the
favoured destination to do business, he cautions. To avoid this, he suggests the republic should “be out there and invest more heavily in Asean so that we can benefit directly”. 

Singapore, the proverbial “red dot”, seems to be making headway in this, particularly through its participation in the Regional Comprehensive Economic Partnership (RCEP) agreement signed among Asean counties, Australia and New Zealand. This will give local businesses a boost as it facilitates a more seamless movement of goods and services, mulls Iain Morrison, head of global trade and receivables finance at HSBC Singapore. He notes that “every free trade agreement that Singapore signs means more market access for local firms and commercial activity for Singapore’s ports”.

Meanwhile, the republic’s diversification into various areas like digital technologies, manufacturing and services can help soften the impact of downturns as different industries run on different cycles. However, OCBC’s Ling warns there is a risk of spreading itself too thinly. “We have to diversify smartly because we are a small country and there can only be so many buckets to put your resources in,” she cautions.

Businesses too have to be mindful of diversifying their resources in terms of their supply chains which were badly disrupted by the US-China trade war and the pandemic. This means there is greater interest on “suppliers of suppliers” as businesses realise that they are only as strong as their weakest link, HSBC’s Morrison tells The Edge Singapore.

In any case, in the face of this unprecedented economic crisis, the worst thing is not over-doing but doing nothing. The year 2020 has taught Singapore and businesses here invaluable lessons on the need to keep up with the global economy to stay relevant. While the road to transformation may not be easy, the first step will be for Singapore and its businesses to stay flexible enough to adapt to changing circumstances.