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."