Neighbors' unrest threatens S'pore

Neighbors' unrest threatens S'pore

By Jerry Norton

SINGAPORE (Reuters): Singapore is experiencing short-term pain but could see some long-term gain from economic and political turmoil in nearby Malaysia, analysts say.

Regardless of the ultimate impact, however, the episode is a reminder of the vulnerability of Singapore -- a tiny island 77 percent of whose citizens are ethnic Chinese -- to events in its much larger Moslem neighbors, Malaysia and Indonesia.

"There is a lot of tension involved with the situation in addition to the normal tensions. Going all the way back, Singapore is predominantly Chinese in a region where Chinese are not popular," said Bruce Gale, Singapore-based analyst for Hong Kong's Political and Economic Risk Consultancy (PERC).

In the first half of the year, it was unrest in Indonesia that shook Singapore and its markets, which until then seemed a rock of stability as economic crisis rolled through the region.

In the last 10 days, it has been draconian moves by Malaysia to batten down its economic hatches against outside interference which have spooked markets and sown confusion in Singapore.

Hundreds queued at brokerages and banks as they sought to close out or convert Malaysian securities and currency holdings. Concern was compounded when Malaysia Prime Minister Mahathir Mohamad dumped his deputy and one-time heir apparent Anwar Ibrahim.

Many Singaporeans faced substantial losses on investments, or the prospect of having to transfer them to Malaysia and, under the new controls, wait until the end of 1999 before they are able to take any profits they might then have.

One estimate put the number of investors in Malaysian shares through Singapore's over-the-counter Central Limit Order Book (CLOB) market at 200,000, and thousands more had ringgit deposits, in a country of just 3 million citizens.

As a direct result of Malaysia's controls, CLOB trading of Malaysian shares will end next week.

"The death of CLOB will...have an impact because it did account for a big share of transactions on the stock market" in Singapore, Paul Schymyck, chief regional economist for the Canadian Imperial Bank of Commerce (CIBC), told Reuters.

SG Research said this week it had cut its growth forecast for Singapore for 1998 and 1999 to one percent and 0.5 percent, respectively, due partly to Malaysia's control measures.

"The commerce and financial services sectors could be most severely hit as entreport activity and foreign exchange transactions decline. And there is a real long-term danger of Singapore's lifeline of a critical mass of skilled Malaysian labor being cut," the SG report said.

"If your clients and those who are taking services from you (are) no longer there, like Malaysia or Indonesia, then obviously your growth takes a hit," SG economist Nilesh Jasani said.

Some analysts also worry about Singapore banks' exposure to Malaysia, where their loans alone total Singapore $28 billion (US$16 billion), according to research house I.D.E.A.

But a major long-run plus for Singapore from Malaysia's steps back from global markets could be enhancement of the city state's position as the main regional base for financial service companies and multinational manufacturers.

"I think 12 months ago there was a big fear...of Singapore losing some of its financial services to Malaysia given the country's rapid development and the huge turnover on the Malaysian stock market," said CIBC's Schymyck.

Now, he said, "I think there's no danger of that given what Malaysia's done. They've basically handed it back to Singapore on a silver platter."

A Western diplomat agreed, calling Malaysian plans to be an international financial and technical hub "dead in the water". But other consequences depended on how successful Malaysia's policies were in reviving its moribund economy, how long capital controls lasted, and whether there were more restrictions to come, the diplomat and other analysts said.

SG's Jasani said the political battle between Mahathir and Anwar was unlikely to help in that regard.

For controls to work, "you need all the bureaucratic and administrative resources that you can manage...if at such time you have political troubles, political turmoil, then bureaucratic and administrative attention gets diverted."

Despite the direct effects of the Malaysian moves, Singapore political leaders have thus far had little to say about them. Malaysia does not take kindly to outside criticism, and with relations already at a low ebb due to a series of recent spats, Singapore comments on the economic measures would likely have minimal impact or if anything aggravate tensions.

Singapore is in a quandary in that it is "less than enthusiastic about financial policies enacted in both Jakarta and Kuala Lumpur but is expected to help support those policies to be a good ASEAN neighbor", said PERC's Gale.

He said the end of CLOB Malaysian share trading should help relations as it was always seen as an irritant by Malaysia.

But that still leaves unresolved disputes over Malaysian supply of water to Singapore, Malaysian efforts to make more shippers use its ports instead of Singapore, and customs and immigration facilities, among others.