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Will the upcoming Budget be 'strong' enough to lift Singapore's economy from the doldrums?

Uma Devi
Uma Devi • 5 min read
Will the upcoming Budget be 'strong' enough to lift Singapore's economy from the doldrums?
“When China catches a cold, Asia turns pale,” says DBS analyst Yeo Kee Yan, adding that the impact of the coronavirus on Singapore could be worse than that of the SARS epidemic in 2003.
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SINGAPORE (Feb 10): While it is still too early to tell if the novel coronavirus (2019-nCOV) outbreak has reached its peak, analysts are looking to the upcoming Singapore Budget to deliver some form of relief to the economy.

To be sure, Singapore is just one of the Southeast Asian nations that are closely tied to China. According to DBS senior economist Irvin Seah, the number of Chinese tourists came in at 3.4 million in 2018, a sixfold increase from 568,000 back in 2003.

In a Monday report, analysts from DBS Group Research are quick to stress the level of integration between China and Southeast Asia. “When China catches a cold, Asia turns pale,” says analyst Yeo Kee Yan.

In particular, Yeo notes that the impact of the virus could be worse than the Severe Acute Respiratory Syndrome (SARS) back in 2003, on the back of more substantial ties between the economies of the two countries.

“[We] expect a decline of about 1 million tourists, or about $1 billion of lost tourism receipts for every three months of travel ban,” says Yeo. “Supply chain disruptions will have significant impact on Singapore’s manufacturing sector given China’s 17.3% of non-oil domestic exports (NODX),” he adds.

Maybank Kim Eng Research has lowered its 2020 growth forecast to 1.1% from the previous 1.8% on the back of an expected 1.0% y-o-y contraction in 1QFY2020 for Singapore’s real GDP, with growth rebounding from 2QFY2020 as the virus outbreak is contained.

“With the absence of technical recession, we do not see the Monetary Authority of Singapore (MAS) altering the current slight appreciation stance in its SGD nominal effective exchange rate (NEER) policy,” shares the brokerage’s head of regional macro research Sadiq Currimbhoy.

All eyes on Budget 2020

The virus has been largely compared to SARS in a bid to gauge severity levels, mortality rates and impacts on the economies of countries.

Both Maybank and DBS now anticipate that any relief package doled out at the upcoming Budget on Feb 18 will be similar to the one during the 2003 SARS epidemic.

Currimbhoy expects the annual Budget to contain a relief package of at least $700 million, comparable to the $230 million package delivered during the SARS outbreak in terms of the proportion of the state’s GDP.

“Measures are expected to include property tax rebates for commercial, retail and hotels; lower foreign worker levies for tourism-related sectors; reliefs for aviation, integrated resorts and taxi operators; and bridging loans for SMEs,” says Currimbhoy.

“There might also be some fine-tuning or temporary relaxation of the Dependency Ratio Ceiling (DRC – maximum permitted ratio of foreign workers to total workforce) on services sectors that are hit by the outbreak,” he adds.

Similarly, Yeo anticipates a “strong budget” to be delivered to help both companies and Singaporeans cope with the impact of the virus, tackle PMET retrenchments, enhance capabilities and skills upgrading, as well to set aside funds for an impending GST offset package.

Stocks to watch

DBS advocates a “barbell strategy” for investors amid a climate of uncertainty. The brokerage cautions investors that in the event that the virus worsens, a balance of defensive/yield stocks amid the pullback in 10-year yield, as well as undervalued stocks trading near their historical extremes, would work well for investors. This is largely due to their ability to cushion the adverse impacts should the virus worsen, but yet have the potential to stage a swift rebound once the contagion is under control.

“The 2019-nCOV situation is still evolving,” says Yeo. “Government stimulus and support to help companies cope with the impact of the outbreak should also lend support to the stock market.”

In particular, Yeo identities telco companies such as SingTel and Netlink NBN Trust as defensive names that tend to outperform during uncertain times, especially during this period when online, audio and video conferencing are preferred communication modes.

Yeo has also cited Industrial REITs as a preferred option for investors as they offer a mix of resilience due to their longer weighted average lease expiry (WALE).

“Industrial rental rates are showing signs of bottoming out, especially for those with heavy exposure within the data centres (Mapletree Industrial Trust and Keppel DC REIT), business parks (Ascott REIT) and logistics space (Mapletree Logistics Trust),” says Yeo.

While Genting Singapore and Singapore Airlines are names that are likely to bear the brunt of near-term travel restrictions, Yeo advises that investors focus on the long-term benefits.

“The short-term sentiment for travel-related stocks remains weak,” says Yeo, adding that while the number of new infection cases in China have eased a little over the past few days, this figure is likely to increase on the back of a new testing facility in Wuhan with a capacity of 10,000/day, as well as Chinese workers returning to work from Feb 9.

“However, looking beyond the short term, both stocks should have strong recovery potential once the contagion is controlled,” says Yeo.

“Observations of past epidemics/pandemics show that viral outbreaks tend to weaken and be controlled as temperature and sunlight exposure increases with the approach of summer. Anticipated government support for the aviation and tourism sectors should also lend support to these stocks,” he adds

In terms of investment strategy, Maybank also notes that both the cycle recovery and valuation of the virus are more in favour of Singapore, than other Southeast nations such as Indonesia.

In terms of the benchmark Straits Times Index (STI), Yeo expects the STI to hold at the range of 3085 to 3110 points unless the situation escalates into a pandemic.

“Historically, markets recover once the outbreak shows sign of containment and investors focus on the positive government stimulus and economic recovery,” says Yeo.

“Any signs of improvement in containing the current spread of 2019-nCoV should see a shift away from safe havens back into equities,” he adds.

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