However, let’s put this into some perspective – last year’s Singaporean growth was a very healthy 7.5% and so a slowdown from that is not wildly surprising and the government is planning for a figure of anywhere between 4.5% to 6.5% for 2008. This is still a very respectable figure for a still young but maturing economy. Singapore after all is not an emerging nation, rather it has already emerged as a very successful island city state, and shown itself not just to be a key area of dynamism in this emerging part of the world, but more importantly a stable, well organised, structured and vitally, well regulated economy.
Of course Singapore has seen slowdowns before, as in 2001, but it has been able to adapt and redevelop itself away from economic fashion fads into a more diverse economy. The 1990s saw the technology revolution, more recently the pharmaceutical industry has developed and along with further leisure and casino operations have all helped to broaden its capabilities. However, these figures do show that Singapore is not sheltered from the global slowdown and I suspect there may well further negative impacts to come over the next few months. This pocket of dynamism will not be alone.
The other regional economies which geographically dwarf the island dynamo will also feel the effects of global economic cooling as well. Malaysia and Indonesia are very different with huge industries related to commodities especially palm oil. However, their burgeoning broader industrial base along with their increasing strength of consumer spending is seeing them also change their style and development. Over the next few months I would thus expect to see similar headlines for these nations as well from the fall out in the USA. For investors such a tale actually may not be quite so negative.
It may well provide opportunities for a far better moment to invest in these economies but at investment prices which more correctly reflect better value for your money.
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The next stage and effect of the credit crunch will start to unfurl over the next few months and it should probably cover those highly geared companies who over the past few years were able to obtain cheap finance on sometimes quite astonishing terms. You may recall my worrying about the “cov-lite” (or deals with weak legal covenants) agreements where often poorer quality businesses have been able to extend borrowings on less than water tight deals and requirements. Now in a growing and confident environment (or even complacent - as this time last year) these could be rolled over and probably carry on. Now with credit becoming a rarer commodity, the bankers are going to be far less generous in their flexibility, and thus refinancing for many may well become a significant issue. There will be tears here soon, as expressed by the forecasts for corporate bond defaults which have now risen from their recent record low levels (from under 2% in 2007) to nearly 6% by 2009.
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So it’s the first interest rate decision of the New Year for the Bank of England this week, and it will be fascinating to read their notes and comments in a fortnight’s time.
This is going to be a crucial tipping point. Do they continue to cut rates to support and underpin the weakening growth trend, or do they hold the line against inflation? The betting is currently on the former, but they should be aware as last week’s Npower move in raising power charges by a double digit percentage as this is another indicator of rising inflationary pressure. Wage rises have crept up to 4% and as the headlines shouted last week oil was over $100 a barrel – add to that the Chinese export inflation and the list of inflationary pressures is extending and made worse by the potential in further falls in the pound.
Listen carefully therefore to the words of Alistair Darling (and come to that Mervyn King as well) – which route does he go down – fighting inflation or sustaining growth! This will be a key message for the Monetary Policy Committee and their adherence to their Treasury masters instruction to keep CPI at or around 2%.
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And finally………..news of police action on cattle rustling in South Africa. Apparently the local police were able apprehend the reprobates after some keen eyed detective work. It would appear that they were caught trying to cram in two goats and a pair of cows into a Fiat Uno – I assume one of them had a licence?
Have a good week,
Justin A. Urquhart Stewart
Director
Seven Investment Management Limited