Singapore has a reputation for adapting its economy and business sector to new trends with fiscal measures. With an ageing population weighing on its budget, however, it is more important than ever that it gets value for money.

SINGAPORE (Feb 26): Joshua Chiang, head of design and illustration firm Cerealbox Studios, recalls a trip seven years ago to the Gwanju Asia Content and Entertainment Fair in South Korea. Many of his fellow attendees, upon learning that he was from Singapore, were eager to ask him the one question, Chiang tells The Edge Singapore.

“What schemes does your government provide?”

Singapore’s willingness to provide funding for fledgling media ventures was legendary at the time. In 2000, the government had introduced the Media 21 master plan, which sought to create 10,000 new jobs and double the media industry’s contribution to GDP, from 1.56% at the time to 3%. For more than a decade after that, a host of government initiatives helped spawn many new start-ups specialising in digital animation that combined artistic creativity and IT-savviness.

But even as Chiang was fielding questions in South Korea, the funding was already being scaled back amid lower-than-expected returns. Today, the digital animation industry has lost much of its buzz. Some players downsized; some turned to producing corporate videos; others merged, or simply called it a day.

Singapore has not lost its appetite for identifying new growth industries to help its economy adapt to shifting global trends, though. On the contrary, it has moved on to encourage its key industries to embrace rather than become victims of technological disruption. Yet, the outcome of these efforts remains uncertain as ever. Meanwhile, Singapore’s ageing population is weighing heavily on the government’s budget, forcing it to hunt for new revenues and make tough trade-offs on spending.

Fortunately, it has been a good year for the taxman. On Feb 19, Finance Minister Heng Swee Keat said the government would end its fiscal year (FY) to March 31, 2018 with an overall budget surplus of $9.6 billion, or 2.1% of GDP. This surpasses the $1.9 billion, or 0.4%, of GDP forecast a year ago. “This increase of $7.7 billion is mainly due to exceptional statutory board contributions of $4.6 billion, primarily from [the Monetary Authority of Singapore], and increased stamp duty collections of $2 billion, owing to the recent property market pickup,” Heng said in his Budget speech. “We do not expect either to occur every year. It is not a structural surplus.”

Thus, the government is not letting up on its efforts to expand its revenues. While it has announced a one-off SG Bonus costing $700 million, which will see all Singaporeans above the age of 21 receiving between $100 and $300, it also said it would hike the rate of the Goods and Services Tax from 7% to 9% between 2021 and 2025. In addition, it has announced an increase in the top marginal rate of buyer’s stamp duties to 4% from 3%. This will apply to properties valued at more than $1 million, and is widely seen as a tax aimed at wealthier Singaporeans.

In his speech, Heng highlighted three key trends that will shape Singapore’s future and its budget needs: a shift in global economic weight towards Asia; an emergence of new technologies that will create new kinds of economies and reshape jobs; and an ageing Singapore population. These trends will interact with each other, creating new opportunities as well as problems, he said. “Preparing for longer-term shifts will require more resources — to take care of our families, keep our people safe, invest in capabilities and develop new infrastructure. And we must do this amid a period of greater geopolitical uncertainty and increasing tax competition. It is therefore our duty and responsibility to plan ahead and ensure that we have enough resources to do all that we need to do,” he added.

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For FY2018, the government expects to collect revenue of $72.68 billion, down 3.3% y-o-y. It expects to spend a total of $80.02 billion, up 8.3% y-o-y. The increased spending will be led by a 52% jump in budgeted expenditure at the Ministry of Transport to $13.7 billion, largely for the renewal of existing and ageing MRT lines, and for building new ones. The Ministry of Social and Family Development will also see a 16.6% rise in budgeted expenditure to $3.1 billion. This is to fund higher levels of spending on community programmes and early childhood education.

The Ministry of Health, which has seen its spending soar over the past decade, is budgeted to spend only $10.2 billion in FY2018, down from $10.5 billion in FY2017. This was because of lumpy development expenditure for major projects that are near completion. Meanwhile, the Ministry of Defence, which still has the largest expenditure among the ministries, is budgeted to spend $14.8 billion, up 4.2% y-o-y.

Despite the growing need for spending on transport, healthcare and defence, the government is also allocating large amounts of money to supporting businesses. The Ministry of Trade and Industry is budgeted to spend $4.4 billion, up 18.2% y-o-y. Some of the increased spending will go towards the Economic Development Assistance Scheme, which will be administered by the Economic Development Board, whose core function is to make it more attractive for companies to operate in Singapore. Other schemes that are also meant to help companies include $250 million for the Productivity and Innovation Credit, which will end this year; and $625 million for the Wage Credit Scheme, which is designed to help companies defray certain manpower costs as jobs are redefined and reshaped.

The government is also budgeting support for some new technology-oriented initiatives. For example, $250 million will be invested in sustainability research, which will look into three main areas — waste management, deve­loping more efficient energy grids, and sustainable urban development. To drive digital technologies in automation and robotics and apply them to the transport sector, up to $500 million has been allocated to R&D under the Aviation Transformation Programme and the Maritime Transformation Programme.

Are these spending programmes spawning companies of the future? Or are they just creating a temporary boom in some segments that ultimately goes nowhere?

More data needed Some observers say there is a need to monitor the effectiveness of grants and subsidies, as well as initiatives such as the new carbon tax, which will result in higher costs for companies and their customers. “It is good to have more accountability; there’s a bit of grey area here,” says Lock Chee Wee, partner of professional and business services at RSM Chio Lim.

Boh Wai Fong, a professor at Nanyang Business School, says local businesses do indeed want the support of government subsidies and grants, though there are grouses about implementation issues. This finding is based on her research on the reaction to these initiatives. Boh looked at responses from about 350 entrepreneurs, paying attention to keywords they used. The more common positive responses contained keywords such as “helpful”, “thankful” and “supportive”. The negative responses included keywords such as “complicated”, “inflexible”, irrelevant” and “paperwork”.

Boh says more insight on the effectiveness of government schemes could be gleaned if more information were made available to researchers. According to her, much of the relevant data falls under the Statistics Act, which limits circulation. “There is, however, scope to provide researchers with access to such data on an anonymous basis, as they can then help to undertake a more systematic and thorough analysis of the data, using tools like statistical and text analysis methods,” Boh says.

The need for more information is underscored by the fact that ground-breaking innovation in fields such as fintech now stems from very small and young companies. On the other hand, the larger players with legacy processes and systems are struggling to adapt to everything that is being made possible by new technologies. “The big boys are trying hard to participate, trying to catch up,” observes Tan Bin Eng, partner for business incentives advisory at EY.

Moreover, it is precisely the kind of disruptive innovation that comes from small companies that has the potential to reshape Singapore’s economy, which is already relatively mature and no longer cost competitive. “Innovation can serve as the catalyst for the development of new products, services and business models, which is an important differentiating value proposition in today’s business world,” says Chiu Wu Hong, head of tax at KPMG.

So, are the various grants and schemes actually delivering value? Chiu says it is too early to comment on the impact of any specific grants and schemes. But the general direction of the new measures announced in Budget 2018 for supporting start-ups and enterprises is encouraging. It is also positive that the government is itself trying new things. Notably, it is allowing the broad-based Productivity and Innovation Credit Scheme to lapse, following reports of abuses and questions about its effectiveness. In its place, it is introducing new schemes that are more targeted and sharply focused on supporting innovation and digitalisation.

“Businesses should welcome the enhanced tax deductions for local R&D expenses, licensing payments and intellectual property registration costs. In addition, the streamlining of various productivity and capability development schemes presents a more focused and holistic way to support local enterprises across their lifespan,” says Chiu.

‘Whole of society’

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But will even the most effective budget measures be enough to help Singapore cope with technological disruption and an ageing population? The projections are daunting. According to a recent report by UOB economist Francis Tan, 2018 marks the first time the proportion of Singapore’s population aged 65 and above will match the proportion aged 15 and below — each will account for 14% of the total resident population. By 2030, people aged 65 and above will account for 27% of the total population, and those aged 15 and below will account for 11%.

Technology is changing things at an even faster pace than demographics. Last year, only 10% of Singapore’s GDP was related to digital products and services, including the use of digital technologies such as cloud computing and Internet of Things systems. By 2021, 60% of GDP will be derived from digital products and services, according to a study done by IDC and commissioned by Microsoft.

Adrian Kuah, senior research fellow of the Future Ready Singapore Project at the Lee Kuan Yew School of Public Policy, says the national budget has its limitations in addressing these challenges. “The Budget deals with disruption through primarily economic instruments, such as skills development and incentives to promote innovation.” He adds that, with the government having spoken of adopting “whole-of government” and “whole-of-society” approaches, issues of social justice should be put “front and centre”, with the acknowledgement that unfavourable demographic trends cannot be avoided. “Ultimately, we are not simply dealing with the future of the Singapore economy, but what the multi-dimensional Singapore will look like: economics, politics, identity — warts and all,” says Kuah.

Yet, it is perhaps exactly in the face of these realities that Singapore needs to adopt the hard-nosed, numbers-driven nature of a national budget to prepare for its future. “Look at all the fiscal requirements, the expenditure requirements — it is what it is… and that’s what the government is doing,” says EY’s Tan. “It is also about trying to make sure the revenue side of it continues to be robust, and to make sure that the engines that grow the revenue side continue to be strong.”

<h2>Stocks to ride the budget measures</h2>

It is that time of the year again. Immediately after every Budget speech, analysts scramble to translate the slew of adjustments to taxes and government schemes into fresh views on the economy, specific industries and individual stocks.

This year was no different. The budget announcements that drew the most attention were the $700 million SG Bonus that will put $100 to $300 into the pockets of every adult Singaporean, the extension of the wage credit scheme that keeps lots of workers employed, and the two percentage point increase in the Goods and Services Tax being pushed to 2021 or beyond. Naturally, most analysts said these budget measures would be positive for consumer stocks. But their recommendations were quite varied.

Consumer plays DBS Vickers Securities said Genting Singapore, which was earlier weighed down by worries over the GST hike, “should see a good rebound”. Other consumer-oriented plays on its buy list were grocery chain operator Sheng Siong Group and restaurant operator Jumbo Group. It also said the support that the job market would get from the wage credit scheme would be positive for recruitment firm HRnetGroup.

UOB Kay Hian also likes Sheng Siong and Jumbo, but added retailers Courts and FJ Benjamin to its list of consumer stocks to buy. Over at RHB, Sheng Siong was a favourite, along with BreadTalk and catering firm Neo Group.

Doing things a bit differently was CGS-CIMB, which said the way to play the boost to consumer spending from the SG Bonus was through real estate investment trusts that own shopping malls. In general, retail REITs have been under pressure over the past year on concerns about the impact of e-commerce. But CGS-CIMB figures that Mapletree Commercial Trust and Frasers Centrepoint Trust are trading at sufficiently attractive valuations.

On the topic of REITs, some brokers were heartened by the tax transparency that has now been accorded to exchange-traded funds that focus on these instruments. REITs deliver a significant portion of their total return via cash distributions. With more REIT ETFs likely to be formed, demand for REITs could rise. RHB’s top picks in the REIT universe include Ascendas REIT, OUE Hospitality Trust and Manulife US REIT.

Stamp-duty hike One budget measure that caught many analysts off guard was the rise in the top marginal buyer’s stamp duty rate to 4%, from 3%, for residential properties worth more than $1 million. The move effectively raises the transaction costs for properties worth more than $1 million. Most analysts acknowledge this could be negative for property developers, but go on to say that the impact is unlikely to be significant.

Credit Suisse says a price correction in leading property developer stocks could be a good buying opportunity. Among its top picks are City Developments, which is trading at just 1.2 times its book value, versus a historical average of 1.8 times. It is also positive on UOL Group, which is trading at 0.79 times book value.

RHB highlighted CapitaLand as the property stock to buy in the wake of any sell-off on the stamp duty hike. It also noted that looser requirements for “proximity housing grants” would help support HDB resale transactions, which would be positive for APAC Realty, which owns the local ERA property brokerage franchise.

Rail opportunity? Another theme that analysts are talking about is infrastructure. The big jump in the Ministry of Transport’s expenditure budget to expand the MRT system and build rail links to Malaysia could be good news for local construction players.

CGS-CIMB figures that Yongnam Holdings is the one way to play this theme, whereas UOB Kay Hian prefers KSH and Hock Lian Seng.

If blue-chip stocks are more to your taste, DBS Vickers says ST Engineering will be a key beneficiary of Singapore’s rail infrastructure projects. The company could also do well on the back of the Smart Nation projects, according to RHB.

Blue chips Finally, Credit Suisse says Singapore’s robust economy — which helped the government achieve a surprisingly big surplus for its fiscal year 2017 — is likely to be positive for the local market.

It also notes that, as the government increasingly leans on the returns from its reserves to fund its future budgets, Temasek Holdings-linked companies such as DBS Group Holdings and Keppel Corp could become more generous dividend payers in the future.

In fact, DBS declared a special dividend of 50 cents a share for 2017, bringing its total dividend to $1.43 for the year. It also promised to pay an annual dividend of $1.20 a share from this year, which is twice what it paid in 2016 and 2015.

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