RI crisis spells trouble for Singapore firms
RI crisis spells trouble for Singapore firms
S. Anuradha, Dow Jones/Singapore
The dramatic fall in Indonesia's currency and stock market has not rattled Singapore's market, but some analysts warn this lack of reaction smacks of complacency, with contagion a real threat.
Since the start of August the Jakarta Composite has dropped 12 percent, partly because soaring oil prices pushed up the government's subsidy costs and U.S. dollar needs to pay for oil imports.
Singapore's Straits Times Index has lost 2.4 percent over the same period, in line the rest of the region as a result of soaring oil prices while the crisis in Indonesia has had a limited effect on the market.
But analysts said Indonesia is not a neighbor that can be ignored.
For one, in 2004, Southeast Asia's most populous country contributed around 5 percent of Singapore's total trade. Indonesia is Singapore's sixth largest trading partner while Singapore is Indonesia's second largest trading partner. Indonesians own about 6 percent to 7 percent of private property in Singapore, consist 20 percent of all tourist arrivals into Singapore in 2005 so far, and are substantial investors in the stock market and patrons of the country's health care services.
As a result any sustained weakness in the Indonesian economy and financial markets has the potential to jolt Singapore's market.
"Indonesia is like the hinterland for Singapore which provides both the supply of raw material and demand for services," said Teng Ngiek Lian, chief executive of Singapore-based Target Asset Management Ltd.
"Any weakness there, is a long term cause of worry for us," he said.
Analysts said the current Indonesian turmoil could hit Singapore both directly and indirectly.
Not only does Indonesia provide liquidity to asset classes and markets in Singapore, it is also the targeted market for many blue chip Singapore companies like Jardine Cycle & Carriage Ltd., Singapore Telecommunications Ltd. and Parkway Holdings Ltd. Singapore banks DBS Group Holdings, Oversea-Chinese Banking Corporation and United Overseas Bank Ltd. have been also recently increasing their operations in Indonesia.
Although the Indonesian government has stepped in with measures to stem the weakness in the financial markets, analysts said the uncertainty will slow down the inflow of foreign direct investment into Indonesia for at least two to three years.
This in turn could indirectly hurt earnings of Singapore companies with a big presence in Indonesia, which would have also benefitted from foreign fund inflows. Analysts said Singapore banks may also adopt a wait-and-see attitude in the short term before expanding their operations, though their long term growth plans for Indonesia may not be affected.
Some analysts have great faith in the resilience of the Singapore stock market and think the damage won't be severe.
They point out that Singapore is now less dependent upon Indonesia after the recent move to expand economic relations with China and India.
Prabodh Agarwal, head of research at CLSA Singapore said the STI has not been seriously hit so far because "most of the investors perceive the Singapore market to be defensive with lower risk when compared to the rest of the region."
The price to earnings valuations of the Singapore companies covered by CLSA is 12.7 times 2006 earnings against 13.5 for Hong Kong and 13 for Philippines.
The dividend yield of Singapore companies is high at 4 percent against the 2.5 percent to 3.5 percent range for the rest of Asia.
In fact, some analysts think these advantages of the Singapore market will prompt investors including Indonesians to park more money into the Singapore market.
The head of research at a U.S. brokerage attributes the mild reaction of the STI to the fact that few analysts have so far predicted a recession in Indonesia despite the current economic crisis.
But he warns that even a single adverse political or economic event in Indonesia has the ability to throw the Singapore market out of gear.
"After all there were few analysts who predicted the 1997-1998 Asian economic crisis correctly. We could be collectively wrong even this time."