Singapore Economic Outlook Feb 2018 (By Irvin Seah from DBS)

Economic outlook on Singapore

Better times Irvin Seah Executive Director DBS Group Research Feb 2018

Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.

US: Recovery gaining strength US GDP growth % YoY 2.8 2.6

2.6 2.5

2.6

2.4

2.4

2.3

2.2

2.2 2.0 1.8

1.6 1.5

1.6

1.5

1.4 1.2

1.0 2010

2011

2012

2013

2014

2015

2016

2017f

2018f

2

Eurozone: Stronger than usual EZ: Fundamentals are stronger than usual % YoY, % QoQ saar 3.0 2.5 2.0 1.5

1.0 0.5 0.0 CPI inflation, % YoY

-0.5 -1.0

GDP,% QoQ saar

Latest: 4Q17

GDP, % YoY

-1.5

Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

3

China: Towards sustainable growth China GDP, YoY% 12 11 10 9

8 4Q17: 6.8% 7 6

4

Technical payback after a strong surge â–ª

GDP growth registered 3.6% in 2017 Chart 1: Technical pullback in 4Q17 % YoY, % QoQ saar 13

Latest: 4Q17

11 9

% QoQ saar

7 5 % YoY 3

3.6%

1

2.1%

-1 -3 Mar-14

Sep-14

Mar-15

Sep-15

Mar-16

Sep-16

Mar-17

Sep-17

5

Blip in manufacturing Pullback in manufacturing YoY%

30

Manufacturing ex Biomedical

25

Overall Manufacturing

20

15 10 5 0 -5

Latest: Jan18

-10 Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

6

Normalisation of the electronics cycle Electronics demand normalising % YoY

% YoY 80

30 Semicon billing, 3mma (LHS)

70

60

25

20

Semicon shipments, 3mma

50

15

40

10

30

5

20

0

10

-5

0 Latest: Jan/Feb18

-10 Jan-16

Jul-16

Jan-17

Jul-17

-10 Jan-18

7

Watch China … China is the key driver and key risk %-pt contribution 12

63% of NODX growth driven by China in 2017

10

US

8

EU

China

6 4 2 0 -2

-4 Jul-16

Oct-16

Jan-17

Apr-17

Jul-17

Oct-17

Jan-18

8

Services to pick up the slack Turnaround in the services sector YoY %-pt contribution 5 4

3

Biz services Financial services Tpt & storage Wholesale & retail Others Services growth

2

1 0 Latest: 4Q17

-1 Mar-15

Sep-15

Mar-16

Sep-16

Mar-17

Sep-17

9

Services will become the main growth engine â–Ş

GDP growth to register 3.0% in 2018, from 3.6% in 2017 Services to become key driver of growth % YoY, %-pt contribution

Services Producing Industries Goods Producing Industries

6.0

GDP growth

5.0 2017: 3.6% 2018f: 3.0%

4.0 3.0 2.0 1.0

0.0 Mar-17

Sep-17

Mar-18

Sep-18 10

Labour market has bottomed Services recovery to lift labour market ratio

% YoY 14

Services sector growth (LHS)

12

Job vacancy to unemployed person ratio

1.8

10

1.6 1.4

8 6

1.2

4

1.0

2

0.8

0

0.6

-2 -4

0.4

Latest: 4Q17

-6

0.2 2008

2010

2012

2014

2016

11

Inflation still low â–ª

Inflation to register 1.0 in 2018, up from 0.6% in 2017 Inflation still benign % YoY 2.5

1.5

DBSf

30 yrs historical avg

2.0

Core inflation

1.0 0.5 0.0 -0.5

2017: 0.6% 2018f: 1.0%

CPI inflation

-1.0 -1.5 Jan-16

Jul-16

Jan-17

Jul-17

Jan-18

Jul-18

12

MAS in normalisation mode DBS SGD NEER and policy band 110

Indexed: 1-5 Apr 2013 = 100

108 106 104 102 100 98

Lower limit

96

Mid point

94 92

Upper limit

90

SGD NEER

88 2010

Source: DBS Research

Zero appreciation

2011

2012

2013

2014

2015

2016

2017

13

Budget 2018 Enhancing sustainability

Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.

Committee for Future Economy

Urban development and infrastructure

Connectivity

Committee For Future Economy

Future growth industries and market

Corporate capabilities and innovation

Jobs and skills

Budget 2018 • • •

Overall budget deficit: SGD 0.6bn Primary deficit: SGD 7.34bn Govt expenditure up 8.3%

CIT: Corporate Income Tax S&CC: Services and Conservancy Charges WCS: Wage Credit Scheme

Near term measures (e.g., CIT rebate, WCS, SG Bonus, U-Save, Edusave, S&CC rebate, enhanced housing grant)

ITMs: Industry Transformation Roadmaps PSG: Productivity Solutions Grant EDG: Enterprise Development Grant DTDi: Double Tax Deduction for Internationalisation NRP: National Robotic Programme

TeSA: Tech Skills Accelerator GST: Goods and Services Tax BSD: Buyer Stamp Duty

Companies Transform local companies via innovation, capability development and internationalisation

Smart and sustainable city (Carbon tax, Energy grid 2.0, Smart Nation, Infrastructure Development Fund)

Budget 2018

Medium term restructuring (e.g., ITMs, PSG, EDG, DTDi, NRP, tax deductions for R&D and IP, TeSA)

Singaporeans Promote inclusive growth, deepen skills

Fiscal rebalancing (GST hike, BSD adjustment, financing infrastructure development by borrowing)

Sources: DBS Research 16

The GST hike •

The GST rate will be raised by 2%-pts to 9% between 2021-2025. It was last adjusted in 2007, from 5% to 7%.

GST, VAT rates for some regional countries UK France Germany China New Zealand Philippines Korea Indonesia Australia Japan Singapore Thailand Malaysia

•

20% 20% 19% 17% 15% 12% 10% 10% 10% 8% 7% 7% 6%

Govt Operating Revenue, FY2016 Total operating revenue Tax Tax: Income: Corporate Tax: Income: Personal Tax: Income: Withholding Tax: Contributions By Statutory Boards Tax: Assets Taxes Tax: Customs & Excise Duties Tax: Goods and Services Tax: Motor Vehicles Tax: Betting Taxes Tax: Stamp Duty Tax: Others Fees & Charges Fees & Charges: Vehicle Quota Premiums Fees & Charges: Others Other Receipts

SGD mn 67,969.40 57,803.60 13,396.70 10,190.60 1,456.10 779.60 4,380.70 2,843.20 10,841.30 2,111.70 2,693.00 3,091.80 6,018.90 9,439.00 6,271.90 3,166.70 727.00

% share 100.0 85.0 19.7 15.0 2.1 1.1 6.4 4.2 16.0 3.1 4.0 4.5 8.9 13.9 9.2 4.7 1.1

Every one percentage point hike in the GST will add about SGD 1.6-1.8bn to the fiscal position, about 0.7% of GDP.

Sources: DBS Research 17

A rapidly aging population SG: An aging population million pax 7.0

Zero growth from here on Total population

6.0 5.0

4.0

Total population ex immigration

3.0 2.0 1.0 0.0

Sources: UN, DBS 18

Rising median age SG: Median age will continue to rise yrs old 60

50 40

37.3

40.0

42.5

44.9

47.0

51.7

53.0

48.8

50.3

2035

2040

2045

2050

30 20 10 0

2010

2015

2020

2025

2030

Sources: UN, DBS 19

A shrinking workforce ‌ SG: Workforce will shrink from 2025 onwards % chg

million pax

25.0

4.5 Labour force

20.0

4.0

3.5

15.0

3.0 2.5

10.0

2.0 5.0

Labour force growth rate

1.5

1.0 0.0 0.5 -5.0

0.0

Sources: UN, DBS 20

Rising financial burden SG: Old age dependency ratio will keep rising Ratio 70

60

Ratio of population aged 65+ per 100 person

54.8

57.4

50.3

50

44.1 37.7

40

30.1 30

20

23.0 17.6

10 0 2015

2020

2025

2030

2035

2040

2045

2050

Sources: UN, DBS 21

Rising social expenditure Rising social expenditure SGD mn 2.0

Social expenditure

1.8

4 per. Mov. Avg. (Social expenditure)

1.6 1.4 1.2 1.0 0.8

0.6 0.4 0.2 1999

Latest: 3Q17

2002

2005

2008

2011

2014

2017

Sources: Department of Statistics, Singapore 22

Fiscal sustainability is key!

Primary and basic deficits deepening SGD bn

Special trans fers ex top-up to endownment & trust funds Primary surplus/deficit

10

Basic surplus/deficit

5

0

-5

-10 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 Sources: DBS Research 23

Primary deficit deepened further in YA18 Singapore's overall fiscal position

Operating revenue Less: Total expenditure Operating expenditure Developmental expenditure Primary surplus/deficit Primary balance as % of GDP Less: Special transfers Add: NIRC Overall surplus/deficit Overall balance as % of GDP

Revised FY2017 SGD bn 75.15

Estimated Chg over FY2018 FY 2017 SGD bn % change 72.68 -3.3

73.92 56.10

80.02 57.67

8.3 2.8

17.82

22.35

25.4

1.24

-7.34

0.29

-1.66

6.23

9.11

46.2

14.61 9.6 2.1

15.85 -0.6 -0.1

8.5

Primary Deficit: SGD7.34bn

Special Transfers: +46.2% Overall Deficit: SGD0.6bn

Sources: DBS Research 24

Contribution from NIRC has its limitation SG: Limited upside to NIRC contributions SGD bn

16

14 12 Contributions from NIRC

10

Inclusion of Temasek into NIRC framworks

8 6 4 2 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Sources: DBS Research 25

Key points • Resources is limited, hence there is a need to keep a tight rein on spending • Reserves is about inter-generation transfers. The more we spend today, the less we have for tomorrow • Prudent fiscal planning is key!

What goes beyond hiking taxes or cutting subsidies?

• Growing the pie • Cost management • Better return from investment of the reserves

Sources: DBS Research 26

Thank you

Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.

GDP & inflation forecasts GDP growth, % YoY

CPI inflation, % YoY, ave

2016

2017e

2018f

2019f

2016

2017e

2018f

2019f

China Hong Kong India* Indonesia Malaysia Philippines Singapore South Korea Taiwan Thailand Vietnam

6.7 2.0 8.0 5.0 4.2 6.9 2.0 2.8 1.4 3.2 6.2

6.9 3.7 7.1 5.1 5.9 6.7 3.6 3.1 2.9 3.9 6.8

6.4 2.5 6.6 5.3 5.0 6.7 3.0 2.9 2.8 4.0 6.4

6.2 2.5 7.2 5.4 5.0 6.7 2.7 2.9 2.4 4.0 6.6

2.0 2.4 4.9 3.5 2.1 1.8 -0.5 1.0 1.4 0.2 2.7

1.6 1.7 4.5 3.8 3.8 3.2 0.6 1.9 0.6 0.7 3.5

2.1 2.0 3.7 4.0 3.5 3.6 1.0 1.8 1.0 1.5 3.6

2.2 2.5 4.6 4.5 3.0 3.8 1.8 1.8 1.0 1.5 3.8

Eurozone Japan United States**

1.8 0.9 1.5

2.5 1.6 2.3

2.2 1.1 2.6

2.2 0.9 2.5

0.2 -0.1 1.3

1.5 0.5 1.6

1.3 0.6 1.8

1.4 1.0 1.8

* refers to year ending March ** eop for CPI inflation

28

Interest rate and FX forecasts Policy interest rates, eop 4Q18 1Q19

1Q18

2Q18

3Q18

China* India Indonesia Malaysia Philippines Singapore** South Korea Taiwan Thailand Vietnam***

4.35 6.00 4.25 3.25 3.25 1.40 1.50 1.38 1.50 6.25

4.35 6.00 4.25 3.25 3.50 1.65 1.75 1.38 1.50 6.25

4.35 6.00 4.25 3.50 3.75 1.90 1.75 1.38 1.50 6.25

4.35 6.00 4.50 3.50 4.00 2.15 2.00 1.50 1.50 6.25

Eurozone Japan United States

0.00 -0.10 1.75

0.00 -0.10 2.00

0.00 -0.10 2.00

0.00 -0.10 2.25

2Q19

3Q19

4Q19

4.35 6.25 4.75 3.50 4.25 2.15 2.00 1.50 1.75 6.50

4.35 6.25 5.00 3.50 4.50 2.40 2.25 1.63 2.00 6.50

4.35 6.50 5.00 3.50 4.50 2.40 2.25 1.63 2.25 6.75

4.35 6.50 5.00 3.50 4.50 2.65 2.25 1.75 2.50 6.75

0.00 -0.10 2.25

0.00 -0.10 2.50

0.00 -0.10 2.50

0.00 -0.10 2.75

* 1-yr lending rate; ** 3M SOR ; *** prime rate

Exchange rates, eop China Hong Kong India Indonesia Malaysia Philippines Singapore South Korea Thailand Vietnam Australia Eurozone Japan United Kingdom

Q1 18

Q2 18

Q3 18

Q4 18

Q1 19

Q2 19

Q3 19

Q4 19

6.39 7.82 64.7 13,596 3.95 52.6 1.32 1,082 31.8 22,745

6.49 7.83 65.9 13,747 4.08 53.3 1.35 1,121 32.8 22,832

6.60 7.83 67.0 13900 4.20 54.0 1.38 1160 33.9 22920

6.56 7.82 67.2 13,960 4.18 54.4 1.37 1,148 33.6 22,970

6.52 7.82 67.4 14,019 4.16 54.8 1.37 1,136 33.3 23,020

6.48 7.81 67.6 14,079 4.14 55.2 1.36 1,124 33.1 23,069

6.44 7.81 67.8 14,140 4.12 55.6 1.36 1,112 32.8 23,120

6.40 7.80 68.0 14200 4.10 56.0 1.35 1100 32.5 23170

0.78 1.23 108 1.39

0.76 1.19 112 1.37

0.74 1.16 116 1.35

0.75 1.17 115 1.37

0.76 1.19 114 1.38

0.76 1.20 112 1.40

0.77 1.22 111 1.41

0.78 1.23 110 1.43

Australia, Eurozone and United Kingdom are direct quotes

29

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