China, wary of social unrest, scrambles to contain food prices

It wants to avoid mistakes of 1988 as inflation hits 10-year high of 6.9%

(HONG KONG) Rocketing food prices in China have sown deep concern among the communist leadership, ever wary of social unrest, as they fumble to control inflation without repeating past mistakes, analysts say.

Overall inflation in China is running at a 10-year high – around 6.9 per cent in November year-on-year, official statistics show.

Inflation is now being driven almost exclusively by increases in the price of food, in particular the staple meat, pork, which has spiked 60 per cent year-on-year.

Prices have faced even greater upward pressure in recent weeks, as severe weather has crippled the transport system at the time demand is greatest over the Chinese New Year.

A report by Credit Suisse said 10 per cent of China’s farmland has been affected by the extreme cold, and one per cent could see a complete loss of crops and vegetables.

Price increases have been seen in food items ranging from cooking oil to apple juice, as China’s growth and global demand creates what economists have dubbed ‘agflation’ referring specifically to rises in prices of agricultural commodities.

Analysts say authorities in Beijing are becoming increasingly concerned about the prospect of food prices getting out of hand, but add that the problem is not yet approaching the levels that led to widespread popular dissatisfaction almost a decade ago.

‘They (the central government) are increasingly nervous about it,’ said Andy Rothman, Shanghai-based China macro-strategist for CLSA. ‘But it is a long, long way from the inflation problems before 1989.’

In January, the National Development and Reform Commission announced tightened supervision of prices for grain, edible oils, meat, poultry, eggs, feed and other items in both wholesale and retail markets. This followed the announcement in late December that from Jan 1 the government would slap taxes ranging from 5 to 25 per cent on exports of a range of products including wheat, corn, rice and soybeans to try and ensure stable food supplies at home.

The actions appeared to be stoked by memories of the widespread protests that resulted from the government’s clumsy handling of food price controls that led to inflation of around 50 per cent in the summer of 1988. Public anger prompted the demonstrations that the following summer morphed into anti-government protests and the death at the hands of the army of hundreds, possibly thousands, of civilians.

Vincent Chan, head of China research for Credit Suisse, cited another change in recent months, saying people were now expecting price rises.

‘If you look at the statistics, then China’s inflation problem is simply a food inflation problem,’ he said. ‘In the past, we have not really had a problem of inflation expectation (but) this year we have already seen that. And that normally means that prices will rise.’

CLSA’s Mr Rothman said pork price inflation is only a short-term problem, and predicted prices will start to fall back later this year.

‘This is a supply problem. In 2006, pork prices had a 10-year low. There was not any incentive for farmers to raise more pigs. This was made worse by blue-ear disease which stopped supply when demand was rising,’ he said.

The other major factor in Chinese inflation, cooking oil, was more complicated, he said, as 60 per cent of it is imported.

‘The major contributor to the rise is US ethanol policy and there is little the Chinese can do about that,’ he said.

Subsidies in the US have seen a major switch in land use to grow crops for fuel, rather than food, prompting worldwide increases in some staple foods.

The UN’s Food and Agriculture Organisation said in October that China was expected to slash its exports of cereals from 7.7 million tonnes in 2006-7 to 6.2 million tonnes in 2007-8. At the same time it would probably increase imports to 10.1 million tonnes from 9.3 million tonnes.

China imported 32.2 million tonnes of oilcrops, including corn and soybeans, in 2006-7, which the FAO said was expected to rise to 37.3 million tonnes in 2007-8, with exports expected to fall to 1.3 million tonnes from 1.5 million tonnes.

Mr Rothman said there had been anecdotal evidence of subsidies to poor rural areas, which if accurate could indicate the government’s willingness to take action to keep a lid on food prices and prevent any hint of social unease.

 

Source: AFP (Business Times 18 Feb 08)

Indian govt struggles to keep food prices down

Surge in global food prices hits millions of people in India

(NEW DELHI) Anand’s restaurant has served flat bread, lentils and vegetables to loyal customers every day for four decades but for the past year he’s been on the receiving end of almost non-stop complaints.

‘They argue because we’ve raised prices. But we had to increase them because everything – wheat, butter and vegetables – has gone up,’ says Sanjay Anand, second-generation owner of the Delhi restaurant.

Small restaurants like his, as well as hundreds of millions of people across India, have been hit by a huge surge in demand and prices for food worldwide.

The price hikes have triggered government anxiety over whether it can continue to ensure supply of affordable food for the country’s 1.1 billion people.

Analysts say India – which produces most of its own food, exports surplus items such as sugar and heavily subsidises supplies for the poor – has so far managed to avoid severe price shocks.

But it faces the same mix of factors as other nations grappling with rising food prices – higher incomes are boosting demand for protein, surging demand for energy is pressuring oil prices, and diversion of agricultural land to urbanisation and industrialisation, as well as grain production for biofuels, is pushing land values sky high.

‘Of course India is impacted by global events,’ said Saumitra Chaudhuri, economic adviser at Indian credit rating agency ICRA.

‘The question is whether there’ll be a supply response. Better yielding seeds, irrigation, technology and more efficient distribution can and probably will have a major impact. But it will take a little time and we’re likely to see no slack in demand or costs soon.’

The price of wheat on the Chicago Board of Trade more than doubled in the past year to a record high above US $10.60 a bushel for March delivery.

That means India’s government will have to boost the subsidies it pays to wheat farmers – and those extra costs have to be passed on to customers in restaurants like Anand’s.

Government subsidies to feed the poor have more than doubled in the past five years to US$7 billion.

Along with other efforts such as selling transport fuel below market rates to stem inflation, India now spends more than 15 per cent of its budget attempting to control food prices.

‘The government would never scrap food and fuel subsidies. It’s politically impossible and, as we’ve seen, can lead to strikes and protests,’ Mr Chaudhuri said.

Inflation in India, measured by wholesale prices, is running at around 4 per cent. Consumer prices, less widely cited, have gained around 5 per cent.

But for Saba, a housewife from Kashmir, the official figure lags far behind the hikes she has seen in her weekly food budget for staples such as cooking oil and wheat.

‘Prices are going up across the world, but in India they’re rising even faster,’ she said, adding that the prices she pays for wheat and cooking oil have doubled in the past year.

The wide gap between government figures and consumer anecdotes comes amid an unprecedented economic boom in India.

The economy is forecast to grow 8.7 per cent in the year ending March, a slowdown from a torrid 9.6 per cent rate for the previous year.

Rising incomes have created a surge in demand for food supplies from a growing middle class, even as almost two thirds of the country continues to survive on less than US$1 a day.

This has created a dichotomy in supply and pricing, illustrated by the spike in demand created by newlyestablished retail chains using grain and cooking oil to produce ranges of processed foods while the government sells bulk items below cost through its public distribution system for the poor.

‘The Indian government procures wheat and edible oils domestically and offshore and sells below world rates for the poor,’ said Si Kannan, associate vice- president at Kotak Commodity Services in Mumbai. ‘But if they pay the local farmer below global prices, he’s not going to grow the crop unless demand from private companies makes the price attractive.

‘So there’s a structural problem and prices for items like wheat, soy and oils are going to remain high in India like the rest of the world because demand is so strong and supply is limited,’ he said.

Record prices of wheat, soy meal and corn impact economic growth patterns worldwide. In India one outcome is that farmers, like their counterparts elsewhere, switch to high-priced crops and set off a chain reaction for other commodities.

As a result, the government has been forced to sharply raise domestic support prices to ensure production stays high enough to avoid large imports.

 

Source: AFP (Business Times 18 Feb 08)

Price of oil for delivery in 2015 hits fresh high

(LONDON) Oil for delivery in future years is extending record highs, a sign that investors are betting that supply concerns and other factors boosting the cost of crude are unlikely to fade soon.

Oil for delivery in December 2015 set a record high of US$92.50 a barrel last Friday. When oil for immediate delivery hit US$100 for the first time on Jan 2, the 2015 price stood at US$88.33.

‘It’s telling us that the market is still looking for a long-term oil price that works,’ said Kevin Norrish, oil analyst at Barclays Capital. ‘The market believes higher prices are here to stay; the question is, how much higher do they need to be?’

The rise in long-term prices comes as a growing number of industry officials are questioning mainstream oil supply forecasts, underscoring the challenge of meeting ever-rising world demand for fuel.

‘We are experiencing a step-change in the growth rate of energy demand due to rising population and economic development,’ Royal Dutch Shell chief executive Jeroen Van der Veer said last month. ‘After 2015, easily accessible supplies of oil and gas probably will no longer keep up with demand.’

The International Energy Agency, adviser to 27 industrialised countries, warned last year that a supply crunch in the period to 2015 could not be ruled out. Among the factors driving long-term prices are falling production in some areas outside Opec as well as rising demand led by countries such as China.

‘The fundamental influences at work on the curve are strong demand growth and the poor performance of non-Opec supply,’ Mr Norrish said.

The rising price of oil for future delivery also reflects higher costs and the changing nature of production.

Oil industry costs have surged in recent years due to rising raw material prices and as oil companies tackle more complex projects in more remote locations, such as beneath deep water.

In addition, a growing portion of future supply is expected to come from so-called unconventional sources, such as by squeezing crude from tar sands in Canada, which need a higher oil price to make money.

‘The long-dated price is supposed to represent the marginal cost of extracting a barrel of oil,’ said Harry Tchilinguirian, senior market analyst at BNP Paribas. ‘Up until 2003, that long-dated price was relatively stable, around US$22 a barrel, but it is now as volatile as the prompt price.’

 

Source: Reuters (Business Times 18 Feb 08)

Sales activity surges to 42 disposals, buying falls to 79 purchases

INSIDE MARKETS

Fund manager sentiment turns negative, while companies’ buybacks stay sluggish for third straight week

THE buying was low while the sales activity by directors and substantial shareholders was high last week, based on filings on the Singapore Exchange from Feb 11 to 15. A total of 26 companies recorded 79 purchases versus 16 firms with 42 disposals. The buy figures were down from the previous week’s two-and-a-half-day totals of 33 companies and 83 purchases, while the sales were up from seven companies and 21 disposals.

The fund manager sentiment was negative last week with 10 asset managers that posted 33 disposals against nine institutions with 18 acquisitions. The figures are a sharp turnaround from the 12 institutions that recorded 41 acquisitions and seven asset managers that posted 18 sales in the previous week.

The buyback activity was also low last week with only three firms that recorded 13 repurchases worth $18.9 million. That was the third straight week of low buyback activity by listed firms. An average of only 1.4 companies and 2.5 trades were recorded per day since Jan 28, versus the daily average of 7.1 firms and 11 buybacks from Jan 7 to 25. Overall, a total of 33 repurchases worth $55.9 million were recorded in the past three weeks versus 165 trades worth $74.5 million in the previous three-week period.

The most active firm in the past three weeks has been United Overseas Bank (UOB) with 2.5 million shares purchased worth $44.3 million at an average of $17.65 each. That brought its buybacks since January to 5.14 million shares worth $91.2 million. Investors should note that UOB has cancelled more than 1.1 per cent of its issued capital since it started its second buyback programme in June last year.

There were several significant trades in the market last week. On the buying side, the chief executive officer (CEO) of Hiap Seng Engineering recorded his first buys since 2002 following the 61 per cent fall in the share price.

Meanwhile, Tembusu Growth Fund acquired more shares of Hongwei Technologies at below its subscription price.

Lastly, there was a rare buy by substantial shareholder Lim Eng Hock in FJ Benjamin Holdings which boosted his stake by 17 per cent. On the negative side, Cohen & Steers recorded its first sale in Fortune Real Estate Investment Trust at below its purchase price.

Hiap Seng Engineering

Purchases by chairman and CEO Tan Ah Lam in mechanical engineering firm Hiap Seng Engineering from Jan 21 to Feb 11 totalling 1.8 million shares accounted for nearly 7 per cent of the stock’s trading volume. The acquisitions, which were made at 39 cents to 34 cents each, boosted his direct holdings by 153 per cent – to 2.98 million shares or 0.98 per cent of the issued capital. Mr Tan also has deemed interest of 70.1 million shares or 23.1 per cent.

The purchases in the past month were made on the back of the 61 per cent drop in the share price since the last week of September 2007, from 94.5 cents. The counter is also sharply down since mid-July 2007, from $1.22.

Despite the fall in the share price, the CEO resumed buying at sharply higher than his previous purchase price based on the 150,000 shares that he acquired in February 2002 at 17 cents each. Hiap Seng announced its H1 results in November 2007 with net profit after tax down by 47.9 per cent to $3.90 million for the six months to Sept 30, 2007. The stock closed at 38.5 cents on Friday.

Hongwei Technologies

Tembusu Growth Fund Ltd has acquired more shares of polyester differential fibres manufacturer, Hongwei Technologies, at below its subscription price in May last year. The group picked up 800,000 shares on Feb 6 at an estimated price of 25 cents each. The fund manager previously acquired 794,000 shares on Jan 23 at an estimated price of 21.5 cents each.

The trades in the past month totalling 1.6 million shares have increased its direct holdings by 14 per cent – to 12.8 million shares or 5.7 per cent. Prior to those acquisitions, Tembusu Growth Fund subscribed for an initial 11.3 million shares or 5 per cent in May 2007 at 33 cents each. The stock has fallen sharply since October 2007, from 38 cents to 26 cents on Friday.

FJ Benjamin Holdings

Substantial shareholder Lim Eng Hock recorded a rare buy in fashion retailer and timepiece distributor, FJ Benjamin Holdings, with 10.9 million shares purchased last Monday at an estimated price of 59.5 cents each, which increased its holdings by 17 per cent to 75.9 million shares or 13.4 per cent. That was his first acquisition since September 2006. He previously sold 4.5 million shares in March 2007 at an estimated price of 70 cents each.

Prior to that sale, Mr Lim bought nearly three million shares in September 2006 at an estimated price of 49 cents each and 1.5 million shares in January 2006 at an estimated price of 37 cents each.

Investors should note that Lloyd George Investment Management (Bermuda) Ltd ceased to be a substantial shareholder on Jan 24 following the sale of 1.7 million shares at an estimated price of 61 cents each, which reduced its deemed holdings to 27.9 million shares or 4.9 per cent. The fund manager previously reported an initial filing on Aug 1, 2007, of 2.4 million shares at 84 cents each, which raised its interest to 5.4 per cent. The stock closed at 60 cents on Friday.

Fortune Real Estate Investment Trust

Cohen & Steers Inc recorded its first sale in Fortune Real Estate Investment Trust since it became a substantial shareholder in February last year, with 4.1 million units sold last Monday at an estimated price of $5.20 each. The trade reduced its deemed holdings by 7 per cent – to 52.9 million units or 6.5 per cent.

The group previously acquired 16.7 million units from February to July 2007 at $5.73 to $6.30 each. Cohen & Steers reported an initial filing on Feb 8, 2007, of 641,000 units at HK$5.90 each, which raised its interest to 5 per cent. The stock closed at $5.28 on Friday.

The writer is managing director at Asia Insider Limited

 

Source: Business Times 18 Feb 08

Investors looking for some clarity on the economy

WALL STREET INSIGHT

Focus on consumer price report, results of retail giants

AFTER somewhat of a comeback week for US stocks following the previous week’s heavy losses, investors will be forgiven if they feel as though they’ve got no idea what’s coming next.

Indeed, the events of the past week alone would normally be enough to keep Wall Street talking for a month: Yahoo’s rejection of Microsoft’s unsolicited takeover offer, Warren Buffet’s offer to assume US$800 million of bond liabilities from the three major bond insurers, Fed chief Ben Bernanke’s dour outlook for the economy, and the lowest consumer sentiment reading reported by the University of Michigan since February 1992.

‘I wouldn’t read very much into last week’s gains insofar as what it means for how the stock market is going to be trading in the coming week,’ said Joe Battipaglia, chief investment strategist at Ryan & Beck, who attributed most of the week’s advance to buying into an oversold market.

‘I see stocks bouncing up and down like they’ve been doing until we get some clarity on the economy and on how much more in writedowns are still to come from the financial sector,’ he said.

The uncertainty over the economy’s fate was mirrored in several reports last Friday, two of which pointed toward a recession, the other showing the economy holding up. In addition to the slump in consumer sentiment, Wall Street got the lowest reading in the Empire State manufacturing survey since May 2003.

But the January industrial production report showed a rise of 0.1 per cent putting it back to the record level hit in September, hardly a sign of recessionary contraction.

‘Most people believe that we’re either already in a recession or that a recession is an inevitable occurrence, but we’re still getting enough contradictory evidence to support an argument that we might not slump into negative growth,’ said Joel Naroff, president of Naroff Economic Advisors, who believes that the chances of a recession are now better than 50 per cent. Perhaps that signal that a recession is not necessarily such a foregone conclusion is what enabled the S&P 500 to eke out a 1.13 point, or 0.1 per cent gain, to 1,349.99 points.

However, the Dow Jones Industrials did not fare as well, slipping by 28.8 points, or 0.2 per cent, to end at 12,348.212. The Nasdaq Composite also finished in the red, giving up 10.74 points, or 0.5 per cent, to 2,321.80.

All three indexes registered gains for the week. The Dow and the broader S&P 500 advanced 1.4 per cent each while the Nasdaq was up 0.7 per cent.

The ongoing credit crisis and the recession fears that continue to dog the stock market will make a repeat performance difficult.

Meanwhile, crude oil has been on a comeback of its own of late, gaining 4.1 per cent last week to US$95.50 per barrel, its biggest weekly gain since November.

The US stock market will be closed on Monday for the President’s Day holiday, so investors will only have four days of trading to decide on whether stocks will rise or fall this week.

With signs growing that consumer spending, which is responsible for 70 per cent of the US economy, is waning, Wall Street will be keeping a close eye on fourth-quarter earnings reports from JC Penney and retailing king Wal-Mart Stores for further indications of a slowdown.

Wednesday’s consumer price report will also be under the investor spotlight, as inflationary pressures have been rising, which could further weaken consumer spending.

Reports from the beleaguered housing sector, which Fed chief Ben Bernanke noted remains the key to just how bad the US economic slowdown will become, are due tomorrow. Investors will hear more from the Fed on Wednesday when minutes from its most recent meeting will be released.

Wall Street also will get a look on Friday at the Philadelphia Federal Reserve’s manufacturing survey, whose poor showing last month set off alarm bells to many on Wall Street that recession was on its way.

On the fourth-quarter earnings front, tech heavyweight Hewlett-Packard also reports this week, as do Whole Foods, Newmont Mining, PG&E, Trump Entertainment and MGM Mirage, amongst others.

But earnings reports from several foreign banks could draw the most interest from investors, who are on high alert for more sub-prime mortgage related write-downs. Barclays, UBS and Societe Generale, whose US$7 billion trading scandal erupted two weeks ago, are due to report.

 

Source: Business Times 18 Feb 08

Signs of US stagflation will pass off, say economists

Weakening demand will eventually cool inflation, they say

(WASHINGTON) A clutch of distressing US economic data on Friday rekindled fears of 1970s-style stagflation, but the current bout of slow growth and rising costs should be short-lived.

While there is little hope of a quick reprieve for US consumers coping with petrol around US$3 per gallon and rising costs for groceries ranging from soup to diapers, the good news is that conditions are unlikely to worsen, and slackening demand will eventually cool inflation.

‘We’re about to find out if high prices are their own cure,’ said Citigroup economist Steven Wieting, adding that higher prices have already eroded real wage gains and put a damper on consumers’ discretionary purchases.

Mr Wieting and other economists argue that higher prices will inevitably curb demand, and as demand slows, companies will end up absorbing more of the pricing pressure. While energy costs may not fall dramatically, they probably won’t rise as fast as they did last year. In January, petroleum import prices jumped 67 per cent on a year-over- year basis, Mr Wieting noted.

Friday’s economic data showed manufacturing growth in New York fell to its weakest since April 2003, import prices rose much more sharply than anticipated, and the Reuters/University of Michigan Surveys of Consumers index hit a 16-year low while inflation expectations spiked.

‘The latest set of US numbers will play to market talk of stagflationary tendencies,’ said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Still, former US Federal Reserve chairman Alan Greenspan said on Thursday that stagflation was ‘too strong a term for what we are on the edge of’, adding the likelihood of a US recession was ‘50 per cent or better’.

His successor Ben Bernanke disagrees on the recession prediction and thinks inflation will moderate in the coming quarters.

He is far from alone on the inflation prediction.

Lakshman Achuthan, managing director at the Economic Cycle Research Institute, said his group’s future inflation gauge remained in a downtrend, even as its weekly index of leading economic indicators hit recessionary levels.

‘Consumers have been losing the battle at the pump, where gas prices have been high, but winning the war on inflation at the checkout counter, where in spite of higher import prices, stores like Wal-Mart are making repeated rounds of price cuts to keep consumers purchasing,’ he said.

With wheat hitting an all-time high of US$11.53 per bushel and oil creeping back towards US$100 per barrel, corporate profit margins are hurting.

Martin Baily, a senior fellow at the Brookings Institution and former economic adviser to President Bill Clinton, said there was one key ingredient missing from the current episode of stagflation – rising wages.

It is the vicious circle of rising prices leading to wage increases and still higher prices that has marked previous severe episodes of stagflation like the 1970s.

Citigroup’s Mr Wieting said that unlike that period, labour unions have limited negotiating power now, and are unlikely to have much success pushing for big cost-of-living raises.

‘I don’t know anyone who gets a higher wage because the cost of driving has gone up,’ he said.

 

Source: Reuters (Business Times 18 Feb 08)

2008 not necessarily like 2007: UBS

(ZURICH) UBS AG does not expect 2008 to be a year like 2007, when the Swiss bank wrote down US $18 billion in bad credits and posted the first loss since its creation, its chief executive was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the US economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ UBS chief executive Marcel Rohner told newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime writedowns.

Mr Rohner said UBS’s investment banking business would concentrate in 2008 on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks,’ he said.

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of 2007, including US$27.5 billion in sub-prime debt.

But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks. ‘The quality of our investment in leveraged buyouts, for example, is much better than in complex securities based on mortgages with poor debtor quality,’ he noted.

Mr Rohner said it was not currently possible to sell intact structured products. But where a collateralised debt obligation structure had become insolvent, UBS had been able to reduce its risks by selling the underlying securities at prices in line with their current valuation by the bank.

UBS’s private banking business has not been affected by the blow to the bank’s reputation, Mr Rohner said. Private banking recorded net inflows of more than 30 billion Swiss francs (S$38.8 billion) in the fourth quarter of 2007, and net inflows continued in January.

Mr Rohner defended the continuing payment of bonuses amid the losses, as the losses arose from real estate loans handled by a small part of the bank. Other areas of the bank had worked well and it was important to continue to motivate staff producing these results by treating them fairly.

 

Source: Reuters (Business Times 18 Feb 08)

HDB flat still very affordable for average S’porean

Some get up to $88k in subsidies, says Mah Bow Tan; also flats still cheap enough for families to use CPF for full mortgage payments

PROPERTY prices may be on the rise but HDB flats still remain very affordable for the average Singaporean, National Development Minister Mah Bow Tan emphasised yesterday.

That is because families have access to subsidies which can go as high as $88,000 for some households, he noted.

And flats are still cheap enough for families to be able to fund their mortgage instalments entirely from Central Provident Fund (CPF) contributions – without the need to stump up cash.

Mr Mah made these points at a Chinese New Year dinner at the Tampines East Community Club yesterday.

With HDB resale prices rising about 17.5 per cent last year, he said he is well aware that younger Singaporeans are becoming increasingly concerned about the affordability of HDB flats.

He reiterated the Government’s commitment to providing affordable public housing and said there were two ways to achieve this.

One was to give big housing subsidies to help newly-weds buy their first HDB flat. The other was to provide mortgages at a concessionary interest rate.

In terms of subsidies, an Additional CPF Housing Grant (AHG) introduced in March 2006, provided lower income families with an additional grant of between $5,000 and $20,000 to buy their first HDB flat.

The income ceiling for this grant was raised from $3,000 to $4,000 to allow more families to benefit. And the grant limit was also increased by $10,000 so that the highest tier grant is now $30,000.

Mr Mah said: ‘A recent Ministry of Finance simulation estimated that the typical young low-income household could enjoy housing subsidies worth about $88,000.’

He also revealed that HDB’s records show that recent buyers of new HDB flats use only about 20 per cent of their monthly household income to service their housing loans.

‘This means that families can service their housing loan entirely from their CPF Ordinary Account contribution, without any cash outlay,’ he noted.

In any case, rising resale prices seem also to have stabilised for now so there is no need for buyers to rush in at this point, said Mr Mah.

‘The HDB Resale Price Index grew by only 1 per cent last month, and we expect prices to grow at a more moderate pace in 2008,’ he added.

Mr Mah also noted that the proportion of resale transactions with a positive cash over valuation, as well as the median cash over valuation also dipped marginally last month.

He said HDB will continue to monitor the situation closely.

 

Source: The Straits Times 18 Feb 08

Budget could have helped more with costs, firms say

Tax rebate and cut in worker levies, fuel taxes among measures sought

THE Government’s Budget this year may look like it is hongbaos all around, but companies are disappointed that they are getting little aid with their most pressing challenge – escalating costs.

Even as families look forward to generous Budget goodies to help them cope with rising inflation, the corporate sector says it has been left to fend off the same economic demon on its own.

Finance Minister Tharman Shanmugaratnam yesterday said, however, that corporate taxes were already cut since last year, adding that the Government should not overreact to the present situation.

‘Particularly for small and medium-sized companies, the tax regime in Singapore is already more competitive than in Hong Kong or any other country,’ he told reporters at a community event.

Still, companies, business groups and economists said with a near-record surplus of $6.45 billion, the Government could afford to dish out rebates and other measures to help with spiralling rental and wage bills.

And while they welcomed new schemes to promote innovation in the long term, they said they would have liked some immediate aid, too.

‘Our costs have gone up on all fronts, be it raw materials, labour or rentals,’ said Mr Lee Tong Soon, managing director of the Thai Village restaurant chain. ‘Our profit margins will be hurt, and we had hoped that the Government would do something to help us in the Budget.’

The latest Budget was presented to Parliament by Mr Tharman last Friday. Strong economic growth and a redhot property market led to the exceptional surplus, paving the way for special transfers totalling $5.4 billion.

Most benefits went to ease the burden of rising living costs for households, especially those of the poor and needy.

‘For businesses, there was really little in terms of direct help to tackle rising costs,’ said CIMB-GK economist Song Seng Wun.

While a cut in the corporate tax rate would have been welcome, few expected it since the rate was reduced from 20 per cent to 18 per cent last year.

‘The tax rate is already fair. Our China branches are taxed at more than 30 per cent,’ said Mr Lee.

Still, companies and analysts were hoping for a one-off income tax rebate, like that offered to individuals.

Foreign worker levies and fuel taxes could also have been lowered, while foreign worker quotas could have been raised and rebates given to relieve rising transportation costs, they said.

Mr Phillip Overmyer, Singapore International Chamber of Commerce chief executive, applauded the move to allow renovation costs to be expensed. This will mean big savings for retailers and restaurants, which have to remodel their outlets every two to three years.

But he was disappointed that the Government did not address Singapore’s acute shortage of skilled labour.

‘In the hospitality sector, foreign worker sources are mostly exhausted already, so there’s scope to broaden the countries that hotels and restaurants can source from.’

DBS Bank economist Irvin Seah said it was unfair to look at this Budget only. The Government has been working to relieve rental and wage burdens through non-Budget initiatives, he said.

Citigroup economist Kit Wei Zheng also said the Government may be counting on cost pressures to dissipate as the global economy slows.

Others suggested that the Government may be keeping its powder dry for off-Budget measures that may be needed should the United States and world economy slow more severely than expected.

Reactions to Budget 2008

STAYING AHEAD

‘Budget 2008 focuses on innovation and manpower – twin strategies that require an early investment in order for Singapore companies and the Singapore economy to stay ahead of global competition.’

SINGAPORE BUSINESS FEDERATION

ATTRACTING INVESTORS

‘For the financial sector, the most significant financial incentive is the removal of the estate duty… This would certainly make Singapore more attractive to overseas investors and assist in promoting the asset and wealth management business in Singapore.’

ASSOCIATION OF BANKS IN SINGAPORE

WOOING TALENTS

‘The tax measures introduced were well-balanced and consistent with the overall aim of the Budget to create a top-quality economy… Reduction of personal tax rates would have been a real icing on the cake in helping to achieve this aim, and we look forward to this materialising in the coming Budgets.’

MR AJIT PRABHU, Deloitte Singapore & South-east Asia tax partner

BOOSTING BUSINESSES

‘The Budget is good news for SMEs with most of the goodies appearing to go to them. However, it falls short of the expectations of multinational corporations and big business.’

MR DANNY TEO, KPMG managing partner

GOING GREEN

‘We had hoped to see additional tax depreciation on energy efficient and pollution-reducing equipment for businesses. The absence of such incentives… is a big let-down given the increasing worldwide concern on sustainability.’

MR LEONARD ONG, KPMG executive director

EASING COSTS

‘Significantly higher business costs from soaring rentals, GST hike, increased transportation costs from ERP, taxi fares and fuel prices have all exacerbated the situation. The Budget could have been better if it had brought some relief to address the rising cost of doing business.’

SINGAPORE CHINESE CHAMBER OF COMMERCE AND INDUSTRY

Source: The Straits Times 18 Feb 08

Don’t expect big Budget goodies every year: SM Goh

THE generous goodies given out last Friday are the result of a bumper Budget surplus that cannot be expected every year, Senior Minister Goh Chok Tong warned yesterday.

The surplus was driven by ‘exceptional’ economic growth of 7.7 per cent last year that may not be repeated, he said.

And the other conditions that led to such a big surplus – such as fast-rising property prices – may not even necessarily be desirable.

On Friday, the Government announced a huge Budget surplus of $6.4 billion, as well as $1.8 billion in benefits in the form of Growth Dividends, income tax rebates and health care and education related top-ups.

Urging people to have realistic expectations and not to keep asking for more, SM Goh said: ‘What I find missing is a little bit of reflection. That is, people asking themselves how this Budget is possible.

‘You got to understand that the surpluses came about because of the exceptional economic performance. We cannot grow by 7.7 per cent every year.’

He also noted that a key factor behind this year’s surplus was the strong growth of the property market.

It led to the Government collecting $4.1 billion in stamp duties paid on property purchases last year, a 211 per cent increase over the previous year.

But continued growth of the property sector at such a pace is neither possible nor desirable, SM Goh said, because it may lead to an oversupply of property or an overheating of the economy.

SM Goh was speaking to reporters yesterday at a Chinese New Year lunch at the Singapore Expo for about 1,000 elderly people from Marine Parade GRC.

He said that when he looked around at the silver-haired attendees, one question in his mind was how Singapore will look after them in the future.

‘So, therefore in our budgeting, we always have an eye on the future,’ he said.

For this reason, it is important for the Government not to give out too much of the surplus, Mr Goh added.

Rather, the Government must keep aside a sum to increase the size of Singapore’s reserves, which will come in handy in the future.

Singapore’s long-term well-being was also the focus of Education and Finance Minister Tharman Shanmugaratnam’s first public comments since delivering the Budget statement on Friday.

‘We have got to turn our minds away from the immediate benefits that are being handed out…Far more important is what we are doing for our children, our youth, particularly those who are going to post-secondary education.’

A slew of incentives in the area of education was announced as part of the Budget. They included subsidies for part-time degree courses, an $800 million boost for the lifelong learning fund, enhanced aid for needy university and polytechnic students, and more top-ups to student education accounts.

Mr Tharman also encouraged local businesses to pursue innovation in order to compete against those from China, India and Western countries.

He said: ‘They must invest in some R&D, some innovation…try to improve, do something special, different.

This is most important for us in the future.’

Commenting on concerns about rising inflation, Mr Tharman said Singapore is well poised to cope with this short-term problem.

He said: ‘Inflation is not a problem for us in Singapore because we can help those who are directly affected, make sure that their families can continue to get by, continue to afford their food, and also encourage everyone to get a job. This is a Budget principally about preparing for the future.’

 

Source: The Straits Times 18 Feb 08

IMPROVING OUTLOOK: UBS expects this year to be a better one

ZURICH – UBS does not expect this year to be like the last, when the Swiss bank wrote down US$18 billion (S$25.5 billion) in bad credits and posted the first loss since its creation, its chief executive officer (CEO) was quoted as saying yesterday.

‘I view the environment as difficult due to great uncertainties related to the United States economy. Nervousness will remain high in the markets. But you cannot conclude from that that 2008 will be a year like 2007 for UBS,’ CEO Marcel Rohner told Swiss daily newspaper NZZ am Sonntag.

UBS, the world’s largest manager of affluent people’s money, is Europe’s biggest casualty of the credit crunch by far. Investors fear the possibility of billions of dollars in new sub-prime write-downs.

Mr Rohner said UBS’ investment banking business would this year concentrate on its strengths in customer business, such as equities and mergers and acquisitions advisory business.

‘Our goal is to give the businesses that do excellent work the space to develop further, while isolating the problem portfolios in the US mortgage market, managing them separately and quickly reducing the risks.’

UBS has published details of its exposure to problem areas in US debt, totalling US$88 billion at the end of last year, including US$27.5 billion in sub-prime debt. But Mr Rohner said the figure could not be used to predict losses, as it comprised highly diverse positions and risks.

Last December, the Government of Singapore Investment Corp bought a 9 per cent stake in UBS for 11 billion Swiss francs (S$14.2 billion).

On Jan 30, UBS announced a 12.5 billion Swiss franc loss for the final three months of last year and a full-year loss of 4.4 billion Swiss francs, a record for the bank. This was due to a higher-than-expected US$14 billion write-down on assets connected to sub-prime mortgages in the US.

UBS was formed in 1998 after the Union Bank of Switzerland took over local rival Swiss Banking Corp.

 

Source: REUTERS (The Straits Times 18 Feb 08)

Asia won’t catch flu if US gets a cold, says MM Lee

With China and India propelling it, Asia won’t be ‘unduly disadvantaged’ by a recession in the US

ASIA – propelled by the twin engines of China and India – will not be ‘unduly disadvantaged’ if a recession hits the United States, said Minister Mentor Lee Kuan Yew last night.

‘I believe this may be the first time where the US economy catches a cold and we are not going to catch influenza – I hope,’ he said at the Singapore Airshow Aviation Leadership Summit dinner dialogue attended by about 200 aviation pundits.

The Chinese and Indian economies are unlikely to dip below 8, 9, or 10 per cent, he added, and while about 40 per cent of intra-Asian trade today is bound for the US, even if the US cuts its imports by half, Asia will not be too badly hit.

Zeroing in on the aviation industry, he was confident Asia will continue to soar high, as new airports are built and more people take to the skies.

He said: ‘I see enormous growth in Asia in the next 10, 20 years, more in Asia than in any other part of the world.’

China alone is looking at about 240 airports by 2020 and more than 500 by 2050 – and ‘that is just the beginning’ he said.

But on whether Asia, with its booming air travel sector, is well-placed to lead the aviation industry in all areas, including liberalisation going forward – an agenda that the International Air Transport Association (Iata) led by its head Giovanni Bisignani is trying to push – Mr Lee was a bit more sceptical, adding that ‘it will be very difficult’.

Countries with airlines that are not doing so well will want their flag carriers to grow stronger first before they open up. And while in his view, this is the ‘wrong approach’, it is nonetheless the reality.

Citing Singapore Airlines’ example, Mr Lee said its success shows how you become competitive when you are forced to compete internationally.

He remembers telling management and unions when Singapore Airlines (SIA) was set up as a separate entity from Malaysia’s national carrier that ‘if you can fly the flag and make a profit, I will be proud. If you cannot, let us forget it and somebody else can fly this flag’.

Everybody in SIA – from management, to pilots, to cabin crew and catering – understood that unless SIA was better than the rest, there was no reason for people to fly the airline.

Mr Lee said: ‘So I believe many of the problems that our neighbours are facing will go if they get international competition going and get international management to bring them up to speed. Then the whole region will prosper.’

Some progress has been made, he said, noting that by December, Asean will lift all restrictions on flights between capital cities of the 10 member states and by 2015, Asean national carriers will be able to criss-cross the skies over the region with no restrictions.

Turning to the other hot potato of global warming, Mr Lee was also asked during the 45-minute session for his reactions to attacks on the aviation industry by governments and organisations, primarily in Europe. Proposals have included taxes and penalties on airlines.

He replied that the industry contributes to about 2 per cent of man-made carbon emissions, but global warming has to be attacked in every way.

Still, if the problem is to be dealt with in a more cost-effective way, ‘then you must come to the conclusion that surely you can save more by rationalising air routes and have less of this prohibited flights and no-fly zones.’

Other things like more fuel-efficient jets, maybe the use of solar cells and many other options will also have to come.

According to industry average, one minute less of flight time saves 62 litres of fuel and 160kg of carbon emissions.

 

Source: The Straits Times 18 Feb 08

PROPERTY: Where to find homes at or below $600,000

They include executive condos as well as older private apartments in suburban locations

THE property market has quietened considerably this year, but prices have yet to fall.

Nevertheless, if you have a modest budget of about $600,000 for a home, your choices are not just confined to HDB flats.

Some fairly new executive condominiums as well as older private condos or apartments are within reach, if you look hard enough.

These are typically 99-year leasehold properties in suburban locations such as Woodlands, Choa Chu Kang and Jurong.

Some city-fringe locations such as Geylang, where the red-light district is nestled, or small apartments in places such as Upper East Coast Road, may also offer some bargains. Landed homes, however, will require a bigger budget. So will new condo launches, unless you do not mind tiny studio apartments.

New versus Old

BUYERS tend to prefer buying new properties directly from developers, rather than old ones. They are drawn by the slick marketing promotions put out by developers and pay a premium for their new homes. But new properties may not be worth buying when you have a tight budget.

‘In 2006, all the record prices were achieved by new launches,’ said Knight Frank’s director of research and consultancy, Mr Nicholas Mak.

‘Units at Ardmore Park, an older development which is in a very good location and is well-maintained, were transacted at much lower prices than those in new high-end condos in not-so-good locations.’

It is the same in suburban locations, as buyers pay more for what is new, he said.

The 99-year leasehold apartments at the 636-unit Maysprings in the Bukit Panjang area are mostly going for $650,000 and below. A year ago, they went for $500,000 and below.

The 17-year-old, 616-unit Orchid Park Condominium in Yishun, which faces Lower Seletar Reservoir, also had some units that went for around $600,000.

At the West Bay Condominium, a 936 sq ft unit was sold for $585,000 in January, while a bigger 1,216 sq ft unit went for $650,000.

Studio apartments, which can range from around 500 sq ft to 600 sq ft, can be bought for $600,000 or less.

The only problem is that there are not many of them in suburban projects, Mr Mak pointed out.

Private versus HDB

NOW that HDB prices have risen and there is overwhelming demand for new HDB flats, buyers may do well to consider private homes if they can afford them.

‘There will be growing demand for mass market properties as Singapore continues to create jobs,’ said Savills Singapore’s director of business development and marketing, Mr Ku Swee Yong. The opening of the two integrated resorts alone will create a significant number of entry-level jobs, he said.

‘Our unemployment rate is at a 10-year low, which means that we will need foreigners for some of these jobs,’ he said. ‘As long as rental values remain strong, capital values should also trend up.’

For those buyers who may one day want to rent out their homes, a private property could be a better choice than an HDB flat.

First of all, not everybody can buy an HDB flat. Also, there are leasing restrictions.

Yields may be higher for some HDB flats than private homes, but a private condo unit may be easier to rent out as condos usually come with amenities and security, property consultants said.

On average, net rental yields for private homes across Singapore are at 3.6 per cent, said Mr Mak.

Government data shows that the median rental rate in the fourth quarter of last year for Maysprings was $2.38 per sq ft a month. For a 904 sq ft unit at Maysprings, the rent would work out to $2,151 a month, or a 5.2 per cent gross yield.

The median rate was $2.09 psf for Orchid Park Condominium and $2.98 psf for West Bay Condominium.

Using this rate, the rent at West Bay Condominium would work out to $2,789 a month for a 936 sq ft unit.

Whether you are buying a property to live in or to rent out, know that you have a fair number of choices even if your budget is only $600,000.

 

Source: The Sunday Times 17 Feb 08

ME & MY MONEY: He makes room only for property investments

Door company Slide & Hide MD places his faith in real estate in S’pore and China, and blue-chip property stocks

HE HAS worked in the construction industry for more than a decade and so it comes as no surprise to learn that Mr Andrew Lim, the managing director of door company Slide & Hide System, opts for property-related investments such as real estate and property stocks.

He said he has more than $500,000 invested in the Singapore stock market, mainly in blue-chip property counters like Wing Tai, CapitaLand and Chip Eng Seng.

‘I prefer to buy blue chips because they are well managed. The management is transparent so I can be assured that the company won’t collapse,’ he said.

His property investments include factories in Singapore as well as office space and an apartment in China.

Mr Lim, 48, has come a long way from his childhood days. His family was poor and he spent much of his time helping his father collect leftover food from households to feed the pigs at their squatter hut in Toa Payoh.

A polytechnic graduate in civil engineering and a student of the school of hard knocks, he had his fair share of challenges when he started Slide & Hide in 1994.

At that time, he was the first in Singapore to manufacture and supply a pre-fabricated, concealed sliding door wall system, and it took much perseverance before his product became accepted by architects and interior designers.

‘I was not able to secure any big project owing to the fact that my product was new and, hence, still not accepted in the construction industry yet. As I did not have enough money to employ people, I doubled as the salesman, factory manager, delivery man and site supervisor,’ he said.

He recalled how a contractor cheated him in his first project, creating cash-flow problems for his company.

Fortunately, he managed to avert going bust with a loan of $100,000 from his father-in-law, a retiree who used to work as a packager at flour miller Prima.

His business picked up in 1995 after he managed to secure bigger contracts, supplying his product to the Pebble Bay and Signature Park condominiums. By 1997, he had broken even and repaid his father-in-law.

His wife, Hui Ngoh, 47, whom he married in 1989, is an administrator. They have two sons aged 15 and seven.

Q What are your money habits?

A I draw a monthly gross salary of $5,000 from my company, which is enough for me and my family’s daily needs.

The profits the company makes are partly re-invested to grow the business and paid to me as director fees, which I use for my property and stock investments, whenever an opportunity arises.

I am a Buddhist and I always keep in mind the saying: Don’t consume more than what you need. For every cent I spend, I make sure it is spent wisely. I don’t buy branded goods just for the sake of flaunting them or feeling good, and we dine mostly at hawker centres and only in restaurants when I need to entertain business clients and friends.

Q What investments do you have?

A My investments are mainly in my business, properties and Singapore stocks. I started Slide & Hide with $200,000, and it has grown many folds.

As for my properties, I bought four adjoining units of a flatted factory in Singapore over time from 1996 for my own use and to guard against future rental increases, as well as to prevent eviction by the landlord.

I own a four-room HDB flat in Ang Mo Kio, which is being rented out. In late 1996, I bought a freehold condo unit in the River Valley area as an investment.

I began investing in China properties in 2005 with the purchase of an office unit in Shanghai for around half a million dollars. This was when I noticed that the supply of offices could not catch up with demand because of the influx of foreign companies there. The price has since appreciated more than 35 per cent.

I also bought two apartments in Zhuhai, a city in southern China that is next to booming Macau. One was sold for a 35 per cent profit in the middle of last year, while the price of the other unit has more than doubled. My China properties are generating net rental yields of above 7 per cent.

I started dabbling in the stock market in 1990, and I currently have more than $500,000 invested mainly in Singapore blue-chip property counters.

Q What about insurance planning?

A I don’t view insurance as an investment tool to earn a profit but as protection against disability and death.

That is why I believe in buying term insurance where the premium is low and the coverage is high. I am covered for more than $600,000 on my life. My annual premiums amount to nearly $10,000.

Q What is your investment philosophy?

A I don’t feel comfortable investing my money in instruments where I can’t make direct decisions such as unit trusts, or investing in an unfamiliar territory like a non-construction-related business.

When it comes to stock investing, I buy when there is an opportunity; that is, when there is bad news, and I feel that the price is value for money.

I monitor a few selected stocks which are mainly property-related. In the last few years, I have achieved average annual returns of about 20 per cent from my stock investments.

Q Money-wise, what were your growing- up years like?

A My parents worked very hard to support me and my two younger brothers and sister.

When we relocated from our kampung squatter to a 300 sq ft rental flat in Toa Payoh, the six of us had to adjust to sharing one small bedroom and a toilet. Living in such a cramped environment conditioned me to be more patient and tolerant.

From pig farming, my father went on to start a building construction business while I was studying at the Singapore Polytechnic.

Later, he was cheated by his partner. That experience taught me the danger of trusting people too easily, the importance of having full control and prudent management of my finances.

Today, my wife and I constantly remind our children to be thrifty. We give them only sufficient pocket money to spend on food, other necessities and transport to and from school.

Q What has been a bad investment?

A My worst investment was putting $10,000 with a friend working in a commodities company in 1990.

Over a one-week period, he made buy and sell transactions with a loss without my knowledge and called me to top up my account. I terminated it immediately.

I lost $10,000 of my hard-earned savings that week.

Q Your best investment to date?

A My best investment is my business.

It has provided me a stable income, a comfortable life for my family, as well as the freedom to decide what I want to do.

Q What is your retirement plan?

A I am financially independent now, but I want to carry on working as I enjoy the challenges of making my company grow.

My long-term plan is to use my civil engineering knowledge and experience to help charitable organisations or to link up with like-minded people to sponsor and build orphanages in poor countries.

I believe $4,000 a month is enough to cover my expenses and that of my wife in our old age.

Q And your home now is?

A When I sold my executive mansionette in 1994 to raise capital for my business, I promised my wife that I will buy her a condo unit 10 years later to show my gratitude for her support and sacrifice.

So in mid-2003, I bought a 1,400 sq ft unit near Bishan, and we have been living there ever since.

Q And your car is?

A A pearl white Toyota Camry.

Source: The Sunday Times 17 Feb 08

9 in 10 find S’pore an expensive place to live in

Respondents in Sunday Times poll blame higher cost of housing, transport, food and utilities

HOUSEWIFE Goh Lay Leng has seen her monthly grocery bills go up by 10 per cent, and that has prompted the mother of four to look for cheaper alternatives.

‘Everything is increasing and we’re spending more. My husband says there’s hardly any money left at the end of the month,’ said Madam Goh, 44.

Her engineer husband brings home about $5,000 a month and the family lives in a four-room flat in Pasir Ris.

A total of 91 per cent of the 353 respondents in a Sunday Times survey agreed with Madam Goh, saying that Singapore had become an expensive place to live in.

The survey had been conducted in late December to understand Singaporeans’ attitude to money.

Nine in 10 also felt that Singapore was an expensive place to raise a family. Less than half were confident that their living standard would improve in the next two years.

They blamed the higher cost of housing, transport and basic necessities such as food, water and power.

Almost half said that they felt the financial strain of servicing mortgages or rents, although 36 per cent were contented.

Nearly half felt that a family of four needed between $50,000 and $70,000 a year – or $4,167 to $5,833 a month – to live comfortably.

The latest figures from the Department of Statistics show that the average household’s income went up by 9.6 per cent last year, the biggest increase in at least a decade.

It rose to $6,280, up from $5,730 the year before. Families with higher incomes also had bigger pay hikes than those in lower-income households, widening the rich-poor gap.

Prime Minister Lee Hsien Loong said recently that he expected inflation this year to be 5 per cent or more. It was about 2 per cent last year.

MP Halimah Yacob said that the public’s mood may have been dampened by the continuing prospect of high inflation. But she was also heartened that Singaporeans were practical and prudent.

‘They think of investing in their children’s education and old age and that reflects that they do recognise the need to plan for the long term,’ she said.

Take 41-year-old Madam Zaina Mohammad. The part-time cashier and her Cisco officer husband’s combined monthly income is just $2,000, but the couple make sure they deposit $50 every month into each of their three children’s bank accounts for their education fund.

Like her, the priority for most Singaporeans is their children’s future. If they had a million dollars, 27 per cent said that they would spend most of the money on education.

One possible indication as to why their children’s education reigned supreme: More than half of those surveyed said that they were either not sure, or did not think that their children would be able to improve upon or afford their present lifestyle as adults.

Another indication of Singaporeans’ prudent and practical traits: More than four in five chose to save their surplus income every month.

Despite rising prices, nearly all the people polled had no plans to pack up for greener pastures.

Ninety per cent agreed that Singapore was still a place worth living in. Also, two in five were glad that Singapore had become one of the richest countries in the world, because it meant better public amenities, a more cosmopolitan society and a vibrant nightlife and cultural scene.

Despite having to scrimp and save, Madam Zaina isn’t going anywhere. ‘It’s peaceful here and it is our home after all,’ she said.

 

Source: The Sunday Times 17 Feb 08

BUDGET 2008: THE DAY AFTER: The Government’s Budget Book

The Government’s Budget Book is a fascinating treasure trove of facts and figures about how different ministries are spending their money and what standards they hold themselves to. Fiona Chan and Adam Lee plough through this year’s offering

$20.1 million To be spent for the relocation of the People’s Association headquarters

$218 million To be spent on reclamation at Pulau Tekong

788 Number of overall crimes expected per 100,000 population, up from 717 last year

90% Proportion of ‘999′ calls answered within 10 seconds, down from 98% last year

$1.9 Amount given to the universities in grants and subsidies

15% Proportion of single males in the 40-44 age group. The proportion of single females in this age group is 12.9 per cent

7.6 Number of divorcees per 1,000 female residents

3 number of cooks in PM’s office

450 Number of arts groups/artists to be assisted through grants this year

$2.9 Compensation payments for Jurong Island Project

$3 million To buy furniture and equipment for new Changi Prison Complex

45.2% Increase in Public Service Commission spending last year over 2006, mainly due to the higher civil service salaries

24.4% Percentage of Primary 1 cohort admitted into NUS, NTU and SMU

$27 To be spent developing *Scape, the new Youth Park behind Orchard Cineleisure on Grange Road

90% Proportion of all criminal cases that are proceeded with as scheduled

Source: The Sunday Times 17 Feb 08

TOP OF THE NEWS: Budget boost for middle class

THIS year’s Budget has helped Singaporeans cope with their top concern – rising prices – by putting cash in the hands of both low-income and middle class workers, said MPs yesterday.

While bonuses for the poor and the elderly have been par for the course for several Budgets now, this year’s Budget saw the so-called ’sandwiched class’ receiving a big boost from a 20 per cent income tax rebate.

‘The savings can be considerable and help middle-income earners cope,’ said Hong Kah GRC MP Zaqy Mohamad on the Budget package Finance Minister Tharman Shanmugaratnam delivered in Parliament last Friday.

The economy grew by 7.7 per cent last year. But inflation – caused in part by high food prices globally – reached a 25-year high of 4.4 per cent last December, and is expected to rise further.

‘Some countries try to address the problem by putting price controls…The more practical way is what we do in Singapore,’ said Health Minister Khaw Boon Wan at a grassroots event last night.

‘Let the prices flow down to the market but we put extra money, because of good Budget growth, into Singaporeans’ pockets. And that’s the way we address rising inflation.’

The tax rebate announced last Friday is a 20 per cent reduction of the income tax paid this year on last year’s earnings. An individual who makes just under $100,000 a year and would normally pay $3,500 in taxes can save some $700 in cash.

This dwarfs the relatively modest sums some middle class workers received in previous Budgets and is equal to the largest payout of this year’s surplus-sharing programme – the Growth Dividends.

The dividends, which range from $100 to $700 in cash, will be given out in April and October, with more for the old and poor.

‘People used to say the middle-income have been left out, but not this year. They are getting something, so it’s a welcome relief,’ said tax expert Lam Kok Shang from KPMG.

MPs also noted that significant non-cash payouts were made: Children aged seven to 20 had their post secondary education funds upped by up to $600, and Medisave accounts of citizens 51 and above received up to $450.

Mr Tharman said on Friday that investing in education and growing jobs and incomes were the best offsets against inflation.

But even for the shorter term, education top-ups and wider subsidies will help parents cope with higher tertiary fees, Aljunied GRC MP Cynthia Phua said.

Tanjong Pagar GRC MP Indranee Rajah said that it was an equitable Budget with something for everybody, yet those in need will get more.

Tampines GRC MP Sin Boon Ann wished small businesses had more help to cope with rising costs, while Pasir Ris-Punggol GRC MP Charles Chong felt rising health-care costs should be addressed. MPs said they would raise these and other issues when Parliament sits from Feb 25 to debate the Budget.

Commenting on the bumper Budget surplus of $6.45 billion, Mr Sin said it made the generous giveaways this year possible.

But Foreign Minister George Yeo sounded a note of caution when asked why there were not even more rebates. He said at a grassroots event: ‘When we look a year ahead, there are clouds on the horizon. So we have to be careful.’

 

Source: The Sunday Times 17 Feb 08

BUDGET 2008: THE DAY AFTER – Goodies for many, a tinge of regret for some

The disabled as well as single working women benefited less from this year’s Budget

STROKE patient Jason Yap will receive about $750 in total from the Government this year, from growth dividends announced yesterday and goods and service tax (GST) rebates announced last year.

Yet the good news has come with a tinge of regret.

There was, again, nothing specific in the Budget targeted at the disabled.

Along with single working women, they represent a small number of groups in society that have consistently received smaller hongbao come Budget time.

‘It seems like the disabled are classified as an invisible lot,’ said Mr Yap, 43, a former human resource executive, yesterday. ‘But we need to survive as well.’

The articulate Bedok resident, who has a bachelor’s degree from Britain, was paralysed by a stroke at age 36.

Unable to work and with his savings virtually wiped out by medical bills, he lives with his elderly parents in a three-room flat.

The family survives largely on the $230 he gets from the South East Community Development Council and the $500 or so the older Mr Yap makes as an odd-job worker at the airport.

Holland-Bukit Timah GRC MP Liang Eng Hwa, who has spoken about help for the disabled before, said that there was no ‘direct assistance’ for the disabled community and that they could be made eligible for help from several social and medical assistance funds that have been topped up by the Government as part of the Budget.

These include the ComCare fund, Medifund and funds that voluntary welfare organisations can tap.

About $200 million will be pumped into the ComCare fund alone. This fund is the primary source sustaining the Government’s social assistance schemes.

But the disabled are not the only group that may feel slightly short- changed by this year’s Budget.

Single working women who do not earn enough to pay tax also did not get much.

They already do not qualify for the NSmen bonuses given to most male Singaporeans.

But this year, they also missed out on the benefits of a 20 per cent income tax rebate, which higher-income workers received.

Customer service officer Faizah Salleh, 23, for instance, will get $500 in her Budget hongbao this year, which is less than half of what an elderly woman living in a one-room flat can get.

But she said that she did not mind both her smaller hongbao and the fact that her father or brother would get more since they had served NS.

What has left her a little disappointed is the fact that, because her family of eight lives in a five-room flat, they received around $750 less than what they would have got had they lived in a smaller unit.

‘Because our family is so big, it’s difficult for us to downgrade,’ said Ms Faizah, who lives with her parents, sister-in-law and four siblings. ‘It would be good if the Government considered family size as well while giving assistance.’

Jurong GRC MP Halimah Yacob conceded that there was ’some basis for concern’ in Ms Faizah’s argument.

Housing type, she said, was the ‘easiest proxy indicator’ of a person’s economic status. ‘But we also know that there are many large families that live in five-room flats out of necessity,’ said Madam Halimah.

‘It would be good if per capita income could also be taken into consideration in any future distribution of surpluses.’

Another group that did not receive much in terms of relief were the top income earners, since a muchanticipated cut in income tax rates did not materialise and the tax rebate was capped at $2,000 per person.

But most felt that this elite group did not need the money, since they were key beneficiaries of substantial wage increments and bonuses paid out last year.

 

Source: The Sunday Times 17 Feb 08

BUDGET 2008: STRATEGY – Some govt units moving out to free up city space

20,000 sq m or more will be available to private sector

THE government has decided to relocate several agencies out of the Central Area to free up space of 20,000 square metres or more by first quarter next year for use by the private sector.

The space being released, which will help to address the office space shortage in the near term, is equivalent to 20 floors or more of an office tower block in Suntec City.

Finance Minister Tharman Shanmugaratnam did not identify the government agencies that will be moving out of the city but market watchers suggest that they may include Singapore Land Authority, which currently occupies several floors at Temasek Tower near Tanjong Pagar MRT Station; the Energy Market Authority, which is housed in Singapore Power Building on Somerset Road; Intellectual Property Office of Singapore, located at Plaza by The Park on Bras Basah Road; and Info-Communications Development Authority of Singapore, now at Suntec City.

The Workforce Development Agency, housed at One Marina Boulevard, has also been highlighted by market watchers as being a possible candidate for relocation out of its prime CBD offices.

The Economic Development Board is expected to vacate its offices at Raffles City when its lease expires next year and move into Fusionopolis at one-north in Buona Vista.

Market watchers suggest that some of these government agencies with public counters are likely to move to city fringe locations, rather than to outlying areas to minimise inconvenience to the public. ‘Vacant state properties could be their new homes,’ an industry observer reckons.

In his Budget speech, Mr Tharman noted that in the short term, Singapore faces tight office space capacity, caused by the surge in business growth, especially in the business and financial sector.

‘Office rentals have risen sharply. Although office space still costs 30 to 50 per cent less in Singapore on average, compared to Hong Kong and Tokyo, the pace of cost increases has been rapid and unsettling for businesses,’ he added.

‘The tightness in office space should ease over the medium term, with the completion of major projects currently under construction, such as phases one and two of the Marina Bay Financial Centre, the Marina View sites and South Beach. By 2012, we will have an additional 1.4 million sq m of office space.’

To address the problem in the short term, the government has released a total of 15 transitional office sites and vacant state properties, which will yield 150,000 sq m of additional office space. Companies are already relocating to some of these sites, and to new regional centres, Mr Tharman noted.

Source: Business Times 16 Feb 08

BUDGET 2008: ESTATE DUTY – Analysts hail scrapping of estate duty

Story Print Friendly Page

Move will boost S’pore’s economic competitiveness

ESTATE duty is finally dead. Tax consultants and financial advisers yesterday hailed the scrapping of the tax – denounced as ‘death duty’ by its opponents – saying that the move would boost the wealth management industry and Singapore’s overall economic competitiveness.

Eliminating the tax on a person’s assets at death puts Singapore on par with rival Hong Kong, which abolished estate duties two years ago, and would make Singapore a more attractive place in which to live, they said.

‘It’s been a long time coming,’ said Ooi Boon Jin, executive director of tax services at KPMG. ‘It’ll be a boost to the wealth management industry, and it’ll also encourage families to come and sink their roots here.’

Peter Tan, tax partner at PricewaterhouseCoopers Singapore, said that it was right for the government to remove the ‘archaic’ tax and ‘keep up with countries that have already seen the light’.

Other countries such as Malaysia, India, New Zealand and Australia have already done away with estate duties.

But there are countries that still retain an inheritance tax, such as the US and the UK.

‘It’s a misconception that estate duty only applies to the super-wealthy. It applies to middle-income people as well,’ said Mr Ooi.

Here, estate duty was previously payable on all assets of an individual upon death, subject to various exemptions, including the first $9 million of residential property and the first $600,000 for non-residential assets. The tax rate was 5 per cent on the first $12 million of taxable assets and 10 per cent for assets in excess of $12 million.

‘If you had $600,000 in your Central Provident Fund (CPF) accounts, that would have soaked up your $600,000 exemption,’ said Mr Ooi. ‘Anything else outside CPF you left behind would be subject to estate duty.’

Finance Minister Tharman Shanmugaratnam yesterday said that Singapore’s estate duty – inherited from the British when the island was a colony – would be removed with immediate effect, including for people who died yesterday.

He acknowledged that Singaporeans who had built up their savings from a lifetime of work wanted to pass on their wealth to their families. Some people became liable for estate duty when their estates received large cash payouts from life insurance policies.

Roy Varghese, director of financial planning practice at financial advisory firm ipac Singapore, said: ‘Wealth redistribution should not be at the expense of those who accumulate assets legitimately and diligently.’

Critics of estate duty have long pointed out that the tax generates insignificant revenue for the government and that wealthy people can avoid it by transferring their assets into offshore trusts.

The Inland Revenue Authority of Singapore’s latest annual report for the fiscal year to last March-end shows that it collected just $98 million in estate duties, or 0.4 per cent of the total $22.9 billion in tax collections for that year.

In contrast, corporate income tax and personal income tax collections were $8.5 billion and $4.7 billion respectively.

Removing estate duty could also give a boost to the budding philanthropic sector in Singapore, as rich individuals who had already planned for estate duty may give the money to a worthy cause, said Terry Farris, Asia-Pacific head of philanthropy services at private bank UBS. ‘It may be an opportunity to give that directly to a philanthropic initiative.’

In his Budget speech, Mr Tharman also urged wealthy individuals to make a contribution to society.

With estate duty gone, the government’s remaining tax on individual wealth is property tax, which Mr Tharman said would stay. Unlike estate duty, property tax ‘does not affect our middle and upper-middle-income estates disproportionately compared to wealthier ones’, he said.

 

Source: Business Times 16 Feb 08

Parkway’s Novena bid poised to set govt land sales record

(SINGAPORE) Hospital operator Parkway Holdings looks set to shatter all records for government land sales (GLS) with its $1.25 billion bid for a hospital site at Novena.

Parkway’s bid, which works out to be about $1,600 per square foot per plot ratio (psf ppr), topped the previous record set by Australia’s Lend Lease, which paid $1,455 psf ppr (or $617.2 million) for a commercial site just above Somerset MRT Station in August 2006.

The Urban Redevelopment Authority (URA) will assess all bids and award the site in a few weeks’ time, but it is unlikely that Parkway’s bid will lose out to the two other bidders, Napier Medical and Raffles Medical Management, which put in bids of $694.5 psf ppr and $344.1 psf ppr respectively.

On its likely win, a spokesman for Parkway Holdings said: ‘We believe that the value we have placed in this tender reflects ParkwayHealth’s desire to enhance Singapore’s position as a global medical hub with leadership in specialist services.’

He added that the hospitals that it operates – East Shore, Gleneagles and Mount Elizabeth Hospitals – are operating at capacity and the new hospital will add beds and critical space needed.

The Novena site, which has a permissible gross floor area of 778,768 sq ft, is the first hospital site to have been launched in about 30 years. URA said that the last hospital site launched was at Mount Elizabeth in 1976.

Knight Frank director (research and consultancy) Nicholas Mak, who had earlier estimated that the Novena site could fetch bids of $770-860 psf ppr, said that it is difficult to price the site. However, he believes the broad range of bids received suggests that his estimated price would be closer to market expectations.

Mr Mak also noted that Parkway’s bid could boost the value of neighbouring properties, especially Novena Medical Centre, where medical suites sold for around $2,500-3,000 psf last year.

Parkway has not indicated that there could be medical suites for sale if it builds a hospital, but Mr Mak estimates these would have to sell for around $4,000 psf. He added that a unit at Mount Elizabeth Hospital recently sold for around $5,000 psf.

Still, Mr Mak does not believe Parkway’s record bid price will be used as a benchmark for future land sales, and may be considered more of an anomaly.

The possibility of injecting the new hospital into Parkway’s healthcare real estate investment trust, Parkway Life Reit, also seems unclear. ‘To put it in the Reit, the land price should be lower to make the deal yield accretive,’ he added.

Napier Medical director Mark Wee also ‘cannot fathom’ Parkway’s bid except to suggest that it could have been a defensive play against competition.

Based on Napier’s own projections, a new hospital would probably not make money for the first six years either.

 

Source: Business Times 16 Feb 08

Demand for mass market projects shifts into higher gear

Story Print Friendly Page

Developers not keen to release high-end projects in shaky market, say analysts

DEVELOPERS’ housing sales figures for January reflect a change in strategy to focus more on mass market projects.

Despite the still lacklustre figures for overall developer launches and sales last month, an analysis by Knight Frank shows the number of private homes (excluding executive condominiums) launched and sold in January in the Outside Central Region (covering traditional mass-market/suburban locations) rose 190 per cent and 123 per cent respectively from December 2007.

In contrast, launches and sales in the Core Central Region and Rest of Central Region fell in January, compared to December.

Given the dearth of activity in high-end locations, the Core Central Region suffered the biggest drop in median prices for units transacted during the month, with the figure halving to $1,623 per square foot in January, from $3,200 psf the previous month.

Elsewhere, median prices held steady, edging up 1.6 per cent to $1,053 psf in the Rest of Central Region and $811 psf in the Outside Central Region. The median prices include private homes as well as ECs.

Property consultants expect developers to continue to push out mass market projects, since demand fundamentals are stronger in this segment than the high-end sector, where buying traditionally emanates more from speculators.

‘Despite the more dismal global economic outlook, the employment rate in Singapore is still high and this will continue to support demand for mass market homes,’ says Colliers International director of research and consultancy Tay Huey Ying.

‘As for high- end/luxurious projects, developers are quite cautious and not so prepared to release them amid the current, uncertain market conditions. They will want to wait for better conditions before they launch these projects,’ she said.

Monthly data from the Urban Redevelopment Authority (URA) show developers sold a total 316 private homes (excluding ECs) in January, up slightly from 305 units in December, which was the lowest figure since URA began publishing developers’ monthly sales figures and prices in June 2007.

However, Colliers’ Ms Tay says that stripping out the bulk sale of 97 units at Goodwood Residence in December, the January sales figure was roughly a 52 per cent improvement from December.

January volume was boosted by the launch of new projects like Waterfront Waves at Bedok, which sold 79 units during the month, and Wilkie 80, which saw 50 units sold.

‘We observed that luxury prices remained firm despite a decline in sales volume. In the prime districts, units in Grange Infinite, Helios Residences, Hilltops and Scotts Square were sold at median prices between nearly $3,300 psf and $3,700 psf.

‘At Sentosa Cove, units in Marina Collection and Turquoise were sold at above $2,650 psf,’ says CB Richard Ellis executive director Li Hiaw Ho.

However, Knight Frank director (consultancy & research) Nicholas Mak points out that the number of homes priced above $4,000 psf sold by developers has fallen from 72 units last July to five units in December.

In January, there was not a single primary market transaction in this price range.

Colliers’ analysis shows the highest priced home sold in January was a $3,671 psf unit at Scotts Square, compared with $5,146 psf in December achieved at The Ritz-Carlton Residences, and the record $5,600 psf achieved for a unit at The Orchard Residences last October.

The number of new private homes (excluding ECs) developers launched in January sank to a low of 410 units, about 8 per cent less than the 446 units in December and about a fifth of the high of 1,885 units in August last year.

Property consultants suggest developer sales in February may be lower than those in January because of the Chinese New Year.

‘However, developers are likely to maintain prices at current levels as they monitor the market situation,’ CBRE’s Mr Li says.

 

Source: Business Times 16 Feb 08

BUDGET 2008: BUSINESSES (COMMENTARY) – S’pore sharpens new edge in rivalry with Hong Kong

Battle could go beyond taxes to areas like innovation and pacts with other countries

BOTH Hong Kong and Singapore have the advantage of proximity and to a certain extent, blood relationship to China.

However, as close as they seem ethnically where their majority populations are concerned, they could also not be more different in terms of their commercial views of the world.

With Singapore inflation now hitting a 25-year high at the end of last year, and expected to rise to as high as 5.5 per cent this year, the questions over Singapore’s competitiveness in the regional and global market place has many businesses concerned.

Strictly from a commercial perspective, both are equally affected by the external factors which are driving up global prices and so it may be fair to say that Singapore’s current inflationary woes are not limited solely to the island.

So how does Singapore stack up against Hong Kong and do the recent budget changes in Singapore enhance our position?

Key thrust

While the 2008 budget announcement by Finance Minister Tharman Shanmugaratnam was limited in terms of tax changes for big business, the minister announced incentives to signal that innovation would be a key thrust of Singapore’s economic progress. Many measures were clearly also targeted at encouraging innovative thinking in small and medium enterprises.

Indeed, the message is that developing new and leading-edge products will be a key focus for strengthening Singapore’s position as one of the leading knowledge hubs in Asia.

Hong Kong has yet to introduce enhanced tax incentives for R&D.

In terms of tax rates, Hong Kong’s standard rate of corporate income tax of 17.5 per cent compares favourably to Singapore’s standard rate of corporate income tax of 18 per cent. However, once Singapore’s broad network of tax incentives and partial exemptions are taken into consideration, Singapore’s effective tax rate is significantly lower than Hong Kong’s.

With the Hong Kong government having announced an impending one per cent cut to 16.5 per cent however, the differential can become insignificant.

However, tax rates are not the only factor for investors.

On the international tax front, Singapore has negotiated almost 60 double-tax agreements with most of its major trading partners throughout the world, including the majority of its Asian trading partners and, in particular, the major growth engines of China and India.

On the other hand, Hong Kong has negotiated only three double-tax agreements, including treaties with China and Thailand. Even these treaties are comparable to the benefits negotiated by Singapore with these jurisdictions.

Accordingly, when it comes to a ‘one-stop’ shop for investment in Asia-Pacific, Singapore remains attractive as the first port of call for foreign multinationals.

In Singapore, the standard rate of Goods and Services Tax (GST) has been 7 per cent since July 2007. There is no VAT or GST in Hong Kong.

One apparent advantage that Hong Kong has over Singapore is therefore the absence of an indirect tax regime similar to Singapore’s GST. So far, the Hong Kong government has been forced to defer the introduction of such a tax from the business community and the populace at large.

It is worthwhile noting that GST in Singapore is a tax on the final consumer, a cost which finds its way into the final price of goods and services which contributes to overall inflation.

In the area of individual taxes, while Singaporean residents did not receive the highly anticipated 2 per cent cut in top-tier tax rates, what they received was bittersweet. There was a 20 per cent rebate, but this is capped at $2,000.

Singapore’s personal tax regime may not be viewed as being as competitive as Hong Kong’s in terms of attracting high-income talent. As the table above shows, the effective tax rate for most senior executives remains more competitive for executives working in Hong Kong.

However, while the numbers speak for themselves, there are other non-tax factors such as air quality and housing costs which may sway in Singapore’s favour.One area where there was some cheer this time in Singapore was the long-awaited abolishment of Singapore estate duty.

This tax, which is essentially a ‘tax on the handing down of wealth’ finally came through after some years on many pre-Budget wish-lists.

The promotion of Singapore as a wealth management hub also saw the introduction of a tax incentive scheme for family-owned investment holding companies, allowing them to enjoy increased exemptions. This announcement should be an added boon to the wealth management industry in Singapore which will now find it far easier to attract wealthy foreigners to Singapore’s shores in competition with Hong Kong which abolished its estate duty back in 2005.

The most apt description, then, for Singapore Budget 2008 is that while still aimed at ensuring Singapore’s longer term competitiveness, was largely a bread and butter Budget for Singaporeans.

Nothing earth-shaking was announced for corporate Singapore.

However, the message remains that the government will focus on what it believes is right for the long-term growth of the country as always, while caring for the vulnerable, came through.

The writer is head of tax services at KPMG in Singapore. The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in Singapore

 

Source: Business Times 16 Feb 08

BUDGET 2008: STRATEGY(COMMENTARY) – Deficit next year? Just don’t bet on it

Wealth management gets a boost, but Tharman keeps his powder dry

EVERY year at Budget time, Singapore’s Finance Minister, Tharman Shanmugaratnam, faces a task that must make him the envy of his peers in the rest of the world: he must explain why the nation’s tax revenues were so much higher than originally planned. Like those of his immediate predecessors, Lee Hsien Loong and Richard Hu, Mr Tharman’s Budgets have been inherently conservative in outcome – even if they are often (as this year and last) intended to be stimulative at the outset.

In each of the last four years, real GDP has grown much faster than anticipated at Budget time. Tax revenues have consequently far exceeded those projected at Budget time. This fiscal year (which ends on March 31, 2008) was expected to yield a fiscal deficit of $0.6 billion, but the government now estimates that the final outcome will be a surplus of $6.35 billion. In fact, over the first three quarters of the fiscal year, the actual fiscal surplus was $10.8 billion. All tax revenues were higher (as they almost always are in Singapore), but asset taxes surged most spectacularly as property values soared.

The January-March quarter tends to be the seasonally-weakest one for the fiscal balance, but the deficit for that quarter is unlikely to be $4.4 billion, so the actual surplus for this year will almost certainly be larger than the government’s current estimate.

With a larger surplus as the base, next year’s fiscal balance will also be stronger, assuming budgeted increases in revenue and expenditure. A betting man could do worse than place a large wager on actual revenues comfortably exceeding the Budget’s projections next year too!

The government’s intention is to provide a fiscal stimulus in the year ahead – evident in the projected fiscal deficit next year of $0.8 billion, which is not very different from last year’s projection.

Modest tax reductions include a 20 per cent rebate on personal income tax (capped at $2,000), revenue-neutral changes to the alcohol tax, a slight reduction in vehicle taxes (largely offset by planned increases in the coverage of ERP), and the elimination of estate duty.

Of these, the last will have a permanent positive impact on the wealth management industry (and Singapore’s attractiveness as a home for the wealthy) without hurting the exchequer much. The market will be disappointed that the top rate of income tax will not decline from 20 per cent, and the corporate tax from 18 per cent.

Mr Tharman has kept his powder dry for a rainy day – leaving ample room to lower taxes further were the global economy to weaken substantially more. He has still outlined an ambitious spending programme on further honing Singapore’s world- beating transport infrastructure, tweaking its skills-development schemes, and moving Singapore’s three (soon to be four) universities closer to the global frontiers of research and innovation.

Fiscal incentives and spending will further bolster Singapore’s R&D capabilities, by boosting both start-ups and existing companies’ research and also by attracting global talent. And for the community, there are further incentives for more voluntary saving and a deepening of funds to help the needy, vulnerable and sick.

Most exciting for the longer term, however, are the steadily-widening schemes for sharing surpluses with citizens.

Singapore’s budgetary accounting system is among the most conservative in the world. The fiscal balance is obtained by subtracting both operating and development expenditure from the government’s operating revenue alone.

The government’s ample investment income (from land sales, as well as the dividends, interest and capital gains of its sovereign wealth funds) is not counted as government revenue. In recent years, the government has made a small concession by using up to 50 per cent of the dividends and interest income from its invested reserves to fund the special transfers (to MediShield for the elderly, growth dividends for citizens, GST credits, etc, which are properly skewed towards benefiting the needy more).

However, the substantial capital gains on the government’s investments continue to accumulate, and cannot yet be distributed to citizens.

By next year, a constitutional amendment will allow the government to share the fruits of the capital gains made by investing its burgeoning reserves over the past several decades. That will give Singapore the ability to turn the dream of being the pre-eminent global city into reality. Clearly, only a small proportion of capital gains will be made available for spending in this way – the prudent practices of rich university endowment funds being cited as a precedent to preserve much of the corpus for the future while spending largely the recurrent components of capital gains.

When it begins to free up some of the capital gains from past investments, Singapore will have the wherewithal to realise the vision of an innovative, research-driven global city. This Budget contains merely the hint of those vast possibilities, but the vision is already there for those who choose to look.

 

Source: Business Times 16 Feb 08

BUDGET 2008: INDIVIDUALS (COMMENTARY) – Great expectations … dashed for now

One-off rebate can’t make up for an income-tax cut, especially when inflation is expected to rise sharply

THE collective groan of disappointment that greeted the government’s announcement of no cuts in personal tax rates this year was just about matched by the cheers that went up when a one-off 20 per cent rebate was subsequently announced.

But make no mistake: the rebate, generous as it was, cannot make up for the much-needed tax cut.

And that’s because what’s at stake are not just lower individual tax bills – but how tax cuts can help Singaporeans cope with the rising costs of living and aid Singapore’s regional and international competitiveness.

But don’t get me wrong: the 20 per cent rebate is a very welcome measure. It would mean having a fifth of your tax bill knocked off this year, subject to a maximum reduction of $2,000.

Public accounting firm KPMG has done the math, and calculated substantial savings for the lower to middleincome earners. The benefits thin out for the big-income earners, expectedly, because of the $2,000 cap.

But are the savings enough to help Singaporeans cope with one of their most pressing concerns in recent times – the rising costs of living here?

Inflation in Singapore, as mentioned in the Budget speech yesterday, was about 2 per cent for 2007 as a whole – and was much higher towards the end of the year. And inflation is expected to hit between 4.5 per cent and 5.5 per cent this year.

As Finance Minister Tharman Shanmugaratnam himself said: ‘Inflation today is higher than what we have been used to in Singapore for many years.’

The unprecedented level of inflation will be a grave concern for Singaporeans, going forward – which makes the need for lower taxes all the more urgent.

And the 20 per cent rebate, while generous and targeted at the low to middle-income earners, is just a one-off measure – that is, it will only mean lower tax bills this year. What’s needed to help Singaporeans cope with rising costs over the longer term is a more permanent move, in the form of a reduction in the tax rates for all individuals.

To a lesser extent, a cut in personal income taxes would also have helped to boost Singapore’s competitiveness as a wealth management hub in the region.

The abolition of estate duty in Singapore will go far in luring wealthy individuals to park their money here – and that announcement in the Budget yesterday will, for now, help to increase Singapore’s attractiveness as a wealth management hub, even without a cut in personal taxes.

But, one needs to remember that neighbouring Hong Kong – Singapore’s fiercest rival for private banking and wealth management funds – is pulling ahead of Singapore, in terms of being able to offer a competitive tax environment for individuals.

Hong Kong slashed personal taxes in its 2007 Budget – it widened the marginal salaries tax band, cut the top two income tax rates, and announced a one-time waiver of 50 per cent of salaries tax and tax under personal assessment payable – when Singapore chose to keep its rates on hold. KPMG worked out that a person earning S$1 million would pay less tax in Hong Kong than in Singapore, as a result of these measures.

Assuming the individual is married with two children below the age of 16, he would pay an effective tax rate of 12.29 per cent in Hong Kong, as opposed to an effective tax of 17.42 per cent in Singapore, after deducting the respective reliefs applicable to him.

Experts agree that it’s not something Singapore can afford to ignore – and all eyes will be on whether Hong Kong decides to cut its tax rates again this year.

And it’s not just Hong Kong; with tax rates coming down across the globe, Singapore can ill-afford to lag behind.

The country has always prided itself on being one of the most competitive in the region, and it will need to seriously consider lowering personal taxes – along with the other generous incentives it’s offered to make itself the preferred hub for science and technology, businesses and individuals – to maintain that edge.

Expectations had been great that this would be the year for Singapore to bring its personal tax rates down to 18 per cent at the top level, but those expectations have been sorely dashed.

 

Source: Business Times 16 Feb 08

BUDGET 2008: STRATEGY – Five-pronged strategy to fight inflation

A key problem is imported inflation, especially of food and oil

SINGAPORE will adopt a five-prong strategy to tackle inflation which is expected to stay high at 4.5-5.5 per cent this year, more so especially in the first half, said Finance Minister Tharman Shamugaratnam.

This includes steps like diversifying the Republic’s food sources and more fundamentally, keeping the economy competitive.

Inflation is a concern ‘not expected to go away soon’, he warned, adding that Singaporeans have to brace themselves for more cost rises.

Over the last year, global oil prices have spiked by 50 per cent, raw food prices by 55 per cent and commodity prices by 31 per cent. These have cascaded down into higher transport costs, more expensive manufactured goods, and costlier consumer foods.

‘We cannot say how long it will last, but we have to expect that it will remain high, in the first half of this year especially. For example, China’s worst winter in 50 years will likely add pressure to prices of certain foods in the next six months,’ he added.

While last July’s Goods and Services Tax (GST) increase had partly contributed to inflation, this has been compensated for by substantial GST offsets – spread over four years – for most Singaporeans, Mr Tharman said.

‘The key problem we face going forward is that of imported inflation caused by high global prices, especially of food and oil.’

Outlining his five-prong anti-inflation plan, Mr Tharman said that this firstly involves the Monetary Authority of Singapore’s (MAS) use of the exchange rate to moderate imported inflation.

‘Had the MAS not allowed the Singapore dollar to appreciate over the last two years, our CPI inflation in the last quarter would have averaged 6.5 per cent, instead of the 4.1 per cent that was actually recorded,’ he said.

However, there is a limit to this strategy as it can hurt the Republic’s economic performance and growth, he warned.

An overly strong Singapore dollar can bring inflation down, but at the cost of lower growth and higher unemployment.

Secondly, Singapore is stepping up the diversification of its food sources so as to minimise spikes in the prices of imported foods.

The Agri-Food and Veterinary Authority of Singapore (AVA) is helping private importers buy from new overseas sources and the government will also continue to work with retailers to increase public awareness of cheaper food choices and substitutes.

The third way has been the government’s support of home ownership, especially through the heavy subsidies provided to lower-income Singaporeans to own a home.

This insulates Singaporeans, especially retirees, from increases in rental costs which are a significant long-term concern in other countries, he said. In the US, for example, about a fifth of older Americans rent their homes, with rentals accounting for close to one-third of their monthly expenditures.

Fourthly, the government provides assistance directly to Singaporeans who face problems coping with the cost of living, such as through the Workfare Income Supplement scheme and GST Offset Package.

‘This approach of helping those in need directly is better, and more sustainable than taking reflex actions such as imposing price controls on essential goods,’ he said, adding that the latter will only lead to negatives like hoarding and black markets.

Finally, the government aims to keep the economy competitive and build up capabilities for strong economic growth.

‘This is the best offset to global inflation – to educate and train up our people, attract new investments, create jobs, and sustain good growth of incomes for our whole population.

‘If global inflation stays high, all countries will be affected by it and we will not be able to totally insulate ourselves. But there is no reason why we cannot keep growing, and keep outperforming,’ he stressed.

 

Source: Business Times 16 Feb 08

China’s economy may grow around 10% in 2008: IMF

Its MD says a faster pace of appreciation of yuan is needed to address economic challenges

(BEIJING) China’s economy is likely to grow around 10 per cent this year despite a global slowdown stemming from the US sub-prime mortgage crisis, Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), said yesterday.

Mr Strauss-Kahn said he had agreed with Premier Wen Jiabao and central bank governor Zhou Xiaochuan on the need for China to run a continued tight monetary policy to contain investment growth and inflation.

The inflation-adjusted exchange rate of the yuan, measured against the currencies of China’s main trading partners, has been moving in the right direction recently, Mr Strauss-Kahn told a news conference during a two-day visit to Beijing.

‘However, we encourage a faster pace of appreciation that would be helpful for addressing China’s key economic challenges and would also contribute to preserving global economic stability,’ he said in a prepared statement.

The central bank, which keeps the currency on a tight leash, let the yuan rise yesterday to 7.1760 per US dollar, the highest since it was revalued by 2.1 per cent in July 2005 and cut free from a dollar peg to float within narrow bands.

The yuan has now appreciated by 13 per cent against the dollar since then. But it has gained much less when measured against a basket of currencies and, to the ire of European policy makers, is actually worth less against the euro than it was in July 2005.

Relations between the IMF and China have been strained since the fund introduced new currency surveillance rules last June. Beijing objected to the rulebook, which will make it easier for the fund to determine whether a country is pursuing policies that lead to a fundamentally misaligned exchange rate in order to boost exports. China regards the new framework as a ploy by the United States to enlist the fund in its campaign for a stronger yuan.

The dispute has delayed the completion of the fund’s 2007 report on China detailing economic consultations between the two sides.

Mr Strauss-Kahn sidestepped a question on whether the yuan was fundamentally misaligned, saying the decision was one for the IMF’s board. But he said he had sought to make the case to Chinese policy-makers that a more flexible exchange rate would contribute both to a better-balanced Chinese economy and to global stability.

 

Source: Reuters (Business Times 16 Feb 08)

Priority is curbing inflation: PM Singh

Rising prices last year caused Congress party to lose power in three states

(NEW DELHI) Indian Prime Minister Manmohan Singh said that inflation hurts the poor the most, indicating that controlling prices was the government’s top priority.

‘There have been some impatient editorials about the sacrifice of growth at the altar of inflation,’ Mr Singh said at a conference here yesterday. ‘I see things differently. Inflation is an iniquitous tax. It is essential that we ensure that the poor are not adversely affected by high inflation.’

India, the world’s fastest growing major economy after China, may slow for the first time this year since 2005, as the highest interest rates in six years hurt consumer demand and investments. While companies seek conditions that favour faster growth, Mr Singh may prefer a firmer grip over inflation, with general elections just a year awayin a country where more than half the people live on less than US$2 a day.

‘Slowing growth is unacceptable to us,’ said Habil F Khorakiwala, president of the Federation of Indian Chambers of Commerce and Industry and managing director of drugmaker Wockhardt Ltd, before Mr Singh’s speech.

‘Interest rates must be brought down to stimulate demand.’ Reserve Bank of India governor Yaga Venugopal Reddy refrained from reducing interest rates at the last monetary policy meeting on Jan 29 on concern that rising oil and food prices will stoke inflation.

The yield on the benchmark nine-year bonds held losses after Mr Singh’s comments, rising two basis points to 7.47 per cent at 12.30 pm in Mumbai. A basis point is 0.01 percentage point. The benchmark stock index was little changed from Thursday’s close.

India’s inflation slowed to 4.07 per cent in the week ended Feb 2 from a year earlier, near a five-month high.

While the pace of price gains is low in relation to historical data, it is still high by world standards and must be reduced, the central bank’s deputy governor Rakesh Mohan said on Thursday.

Rising prices last year caused Mr Singh’s Congress party to lose power in three states and fall further behind in the most populous province of Uttar Pradesh. The party faces 10 state elections this year and general elections before May 2009. People’s tolerance level of inflation is 4 per cent, according to Finance Minister Palaniappan Chidambaram.

India’s statistics office on Feb 7 said that India’s US$906 billion economy may expand 8.7 per cent in the 12 months to March 31, the weakest pace in three years. Growth was 9.6 per cent in the last financial year.

‘I am confident that this year, too, we will be able to sustain 9 per cent growth and hold the price line at acceptable levels,’ Mr Singh said. He said that construction of new roads, railway tracks, airports and other infrastructure was the ‘cornerstone’ of India’s development.

The prime minister said that civil aviation was going through an ‘unprecedented boom’ with two new international airports poised to start operations in the next few weeks in the southern cities of Hyderabad and Bangalore, apart from the ongoing modernisation of the airports in New Delhi and Mumbai.

Mr Singh said that the country’s railway system has undergone ‘revolutionary transformation’ in the past few years and expects companies to soon start investing in building logistics parks, railway stations and railcars.

He said that the planned 2.2 trillion rupee (S$78.5 billion) investment in roads in the next five years will further boost the nation’s infrastructure. He reiterated India’s plan to almost double spending on infrastructure to 9 per cent of gross domestic product by 2012. India’s growth is led mainly by domestic consumer and investment demand, and that was another reason to be optimistic about the nation’s growth prospects as the global economy shows signs of shrinking this year, Mr Singh said.

 

Source: Bloomberg (Business Times 16 Feb 08)

Citigroup funds may be in trouble: paper

(NEW YORK) Citigroup Inc has barred investors in one of its hedge funds from withdrawing their money, and a new leveraged fund lost 52 per cent in its first three months, the Wall Street Journal reported yesterday.

The largest US bank suspended redemptions in CSO Partners, a fund specialising in corporate debt, after investors tried to pull more than 30 per cent of its roughly US$500 million of assets, the newspaper said.

Citigroup injected US$100 million to stabilise the fund, which lost 10.9 per cent last year, the newspaper said.

The fund’s manager, John Pickett, left following a dispute with Citigroup executives and complaints from investors after he tried to back out from committing more than half the fund’s assets to buy leveraged loans tied to a German media company, the newspaper said.

That matter was settled when CSO agreed to buy US$746 million of the loans at face value, though they were trading at 86 per cent to 93 per cent of face value, it said.

Meanwhile, Falcon Plus Strategies, launched Sept 30, lost 52 per cent in the fourth quarter, after betting on mortgage-backed and preferred securities and making trades based on the relative values of municipal bonds and US Treasuries.

Some collateralised debt obligations in the fund traded at 25 per cent of their original worth, the newspaper said.

Both funds are run in Citigroup’s alternative investments unit. That unit was briefly headed last year by Vikram Pandit, who in December replaced Charles Prince as Citigroup’s chief executive.

Old Lane Partners, a hedge fund that Mr Pandit founded and sold to Citigroup last year, has also had weak performance, falling 1.8 per cent in January, the newspaper said.

Since June, Citigroup has disclosed some US$30 billion of writedowns and losses tied to sub-prime mortgages, complex debt and deteriorating credit.

The problems contributed to a record US$9.83 billion fourth-quarter loss. Profit that quarter in the alternative investments unit fell 89 per cent to US$61 million.

Citigroup was not immediately available for comment.

A spokesman told the newspaper that CSO and similar hedge funds are subject to comprehensive risk oversight, and that Falcon Plus’s returns suffered from volatile fixed-income markets.

Shares of Citigroup closed on Thursday at US$25.74 on the New York Stock Exchange.

 

Source: Reuters (Business Times 16 Feb 08)

US on verge of recession: Greenspan

(SAN FRANCISCO) Former Federal Reserve chairman Alan Greenspan said the US economy is on the verge of its first recession in six years as falling home values hurt consumer spending.

‘We are clearly on the edge,’ Mr Greenspan told a group of energy-industry executives at the Cambridge Energy Research Associates’ 27th annual CERAWeek conference in Houston. He reiterated comments from last month that the odds of an economic contraction are ‘50 per cent or better’.

Mr Greenspan’s view has evolved from a year ago, when he saw a one-in-three chance of a recession, citing slowing profit growth and becoming one of the first economists to warn of the risk. Now, Wall Street firms including Merrill Lynch & Co and Goldman Sachs Group Inc are forecasting a contraction in the aftermath of the worst housing downturn in a quarter century.

Fed chairman Ben S Bernanke, Mr Greenspan’s successor, acknowledged ‘downside’ risks to the expansion on Thursday, while telling lawmakers he expects growth to pick up later this year. He reiterated the central bank is prepared to take ‘timely’ action to aid the economy as needed.

‘While we are at stall speed in the US at the moment, we haven’t yet seen the discontinuity that characterises a recession,’ Mr Greenspan said during a question-and-answer session on Thursday.

‘American business was in such extra-good shape before this problem hit. Otherwise we would be talking about how long and how deep. We are not there yet.’

The lack of available credit ‘hasn’t been a major problem yet for American business’, he added. Consumer spending has been slowed by falling home values, which leaves homeowners with less capital to borrow against, Mr Greenspan said.

‘Home prices will continue to weaken,’ the 81-year-old former Fed chief said. ‘When a bubble breaks, you go into primordial fear.’ The former chairman, a Republican, gave a nod toward Republican presidential candidate John McCain, comparing him with ex-president Ronald Reagan.

‘John McCain has the same roots as Reagan, being a Goldwater Republican.’

 

Source: Bloomberg (Business Times 16 Feb 08)

BUDGET 2008: More office sites in the offing to ease space crunch

AT LEAST 20,000 sq m of office space – equivalent to 20 floors or more of an Suntec City block – will be freed up to help the private sector deal with the space crunch.

The initiative will kick in by early next year.

Finance Minister Tharman Shanmugaratnam said the tight supply of office space, a short-term problem, stemmed from the surge in business growth, which has brought higher rents in its wake.

‘Although office space on average still costs 30 per cent to 50 per cent less in Singapore than in Hong Kong and Tokyo, the pace of cost increases has been rapid and unsettling for businesses,’ said Mr Tharman.

The Government is even planning to relocate several agencies out of the pricey and congested central business district (CBD). A Jones Lang LaSalle report said these could include the Economic Development Board at Raffles City, the Singapore Land Authority at Temasek Tower, and the Ministry of Law and Ministry of Finance at The Treasury.

Mr Donald Han, the Singapore managing director of property consultant Cushman & Wakefield, said the move was a practical one: ‘It’ll create some breathing space for the private sector. Government agencies will be better off, as they won’t need to incur the opportunity cost of prime CBD rental.’

Mr Tharman said the Government has released 15 transitional office sites and vacant state properties, which will yield 150,000 sq m of additional office space.

‘Companies are already relocating to some of these sites and to our new regional centres,’ he said.

He noted that the shortage should ease over the medium term, given the completion of big projects now under construction. These include Phases 1 and 2 of the Marina Bay Financial Centre, the Marina View sites and South Beach.

‘By 2012, we will have an additional 1.4 million sq m of office space,’ said Mr Tharman.

The Government will also defer projects worth about $1 billion to ease the pressure on construction costs. This follows a decision last November to postpone public-sector building projects worth at least $2 billion.

But the latest deferment will not affect key projects such as the expressways, the Downtown Line or NUS University Town.

 

Source: The Straits Times 16 Feb 08

New home sales remain low with cautious property market

Developers launching fewer units as fears over US slowdown, stock volatility linger

CAUTION remains the watchword in the property market, with buyers still kept on the sidelines by concerns over the United States economy and choppy stock markets.

Developers sold just 316 new homes last month – a tad up on the 305 sold in December – and launched only 410 units, compared with December’s 445.

Prices also reflected the uncertain mood and remained largely flat, with overall median prices showing a slight dip.

The removal of the deferred payment scheme has brought transactions to a more sustainable level, according to property services firm Jones Lang LaSalle.

There were some bright spots. Wilkie 80 in Wilkie Road was sold out, while Waterfront Waves in Bedok Reservoir Road reported favourable sales. They made up 41 per cent of all new units sold last month, according to the sales figures out yesterday.

The pinch was felt most in the high-end sector, with few homes sold and none above $4,000 per sq ft (psf).

This is a sign that the high-end segment may be experiencing a ‘challenging period’, said Knight Frank director of research and consultancy Nicholas Mak.

The new figures, which came from developers but were released by the Urban Redevelopment Authority, show that some of the heat may have come out of the market.

Median prices for new private homes, excluding executive condos and landed homes, fell 3.2 per cent from $1,124 psf in December to $1,088 psf last month.

The lowest transacted price was $737 psf for a unit at Coastal View Residences in Jalan Loyang Besar, while Scotts Square in Scotts Road achieved the highest at $3,671.

Projects outside the central region performed best. There were more sales, and the 220 units launched marked the highest since last August.

Buyers at the leasehold Waterfront Waves picked up 79 units and pushed prices up to $909 psf.

In the mid-end segment, Wilkie 80 was sold out at a median price of $1,544 psf. Zenith in Zion Road, launched in December, sold 22 units, while 12 out of 50 units at Mount Sophia Suites went for a median price of $1,719 psf. At the landed project Pavilion Park, 24 terrace houses sold at between $1.8 million and $2 million.

Consultants project lower sales this month, as the Chinese New Year festival will deter buyers from venturing into the market.

‘However, developers are likely to maintain prices at current levels as they monitor the market situation,’ said Mr Li Hiaw Ho, the executive director of CBRE Research.

Mr Mak expects sales volume for the first quarter to remain thin due to uncertainties over the US economy and stock market turbulence. More developers are delaying or reviewing launches, particularly high-end ones.

‘The challenging period experienced in the high-end segment is expected to continue, but the fall in the volume could be compensated by the steady volume in the other segments,’ he added.

Colliers International director for research and consultancy Tay Huey Ying said: ‘We see the mass and mid-end segments supported by en bloc sellers looking for replacement homes.’

Developers could end up launching and selling up to 9,000 new private homes this year, compared with 14,811 last year, she said.

 

Source: The Straits Times 16 Feb 08

New trouble brewing as another debt market falters

Investors now refusing to buy US securities regarded not too long ago as safe as cash

NEW YORK – SOME investors got a big jolt from Goldman Sachs this week: Goldman, the most celebrated bank on Wall Street, refused to let them withdraw money from investments they had considered as safe as cash.

The investments at issue are so-called auction-rate securities, instruments at the centre of the latest squeeze in credit markets.

Goldman, Lehman Brothers, Merrill Lynch and other banks have been telling investors the market for these securities is frozen – and so is their cash.

Banks typically pitch these securities to corporations and wealthy individuals as safe alternatives to cash. The bonds are, in fact, long-term securities, but banks hold weekly or monthly auctions to set interest rates and give holders the option of selling the securities.

Only this week, almost 1,000 of these auctions have failed. The banks also refused to support the auctions, leaving many investors wondering when they will get their money back.

‘Investors have lost confidence in the liquidity of these instruments,’ said Mr G. David Mac- Ewen, the chief investment officer for fixed income at American Century Investments, a mutual fund company. ‘These types of instruments depend on new investors showing up to own the securities.’

The US$330 billion (S$467.7 billion) auction-rate market is dominated by municipalities and other tax-exempt institutions like the Port Authority of New York and New Jersey, which issued some auction securities and had its interest rate soar to 20 per cent on Wednesday. Closed-end mutual funds, student loan companies and corporations also issue such securities.

A failed auction does not mean the securities go into default because the issuer continues to pay interest at the higher rate – the ‘fail rate’.

The market, however, has a troubled history. In 2006, the Securities and Exchange Commission (SEC) reached a US$13 million settlement with 15 investment banks, and the industry agreed to impose a voluntary code of conduct for the auction-rate market.

The SEC investigation centred on how bidding was conducted for these securities. Critics complain that investment banks have the upper hand in bidding because they can bid after seeing what other investors have bid.

Brokerage firms are not legally obligated to make a market in auction securities or give clients a price, even if there is not one in the market. Clients who are unable to sell, however, are likely to argue that they were wrongly put into long-term securities when their intention was to buy shorter-term debts.

‘If these were pitched as cash equivalents, if that is what the broker said they were, the banks may be held responsible for losses and clients’ inability to get their money out,’ said Mr Jacob Zamansky, a securities lawyer who represents individual investors.

The situation is an awkward one for investment banks and brokers that have had to tell clients that their cash is frozen until at least the next auction – if not longer.

One affluent New Jersey family has sued Lehman Brothers for the declining value of its cash in auction-rate securities. Lehman has said it acted properly.

 

Source: NEW YORK TIMES (The Straits Times 16 Feb 08)

Estate duty R.I.P.

Death tax removal makes S’pore an attractive place for wealth to be built up, says Tharman

IN A LONG awaited move, the Government yesterday read the last rites for the death tax here.

The tax, known as estate duty, had been imposed if the assets of a person who died exceeded certain limits.

It was abolished with immediate effect yesterday.

The Government believes the move will boost the wealth management industry by encouraging both foreigners and Singaporeans to base their assets here.

Although the move had been keenly awaited, it drew gasps of surprise when announced by Finance Minister Tharman Shanmugaratnam in Parliament yesterday.

Calls to abolish the tax had grown more frequent in recent years as growing affluence meant that even the middle classes were caught by it.

A key grouse was that the exemption limits were lopsided. An estate could, for example, own up to $9 million worth of residential property and not pay the duty.

But everything above $600,000 in cash, shares and other non-residential assets was subject to the duty.

Mr Tharman said the exemption limits tended to ‘affect the middle- and upper-middle-income estates disproportionately compared to wealthier ones’.

The intended target of the tax – the super rich – had been able to set up trusts and other legal arrangements that allow them to minimise the duty.

Estate duty was taxed at 5 per cent on the first $12 million of applicable assets and 10 per cent on amounts above. Assets of $1 million, for example, incurred duty of $50,000.

The duty had been whittled down considerably over the years. In 1984, the top rate was a hefty 60 per cent.

Mr Tharman said that removing the duty was not just a practical and expedient measure but also in Singapore’s collective interest.

‘If we make Singapore an attractive place for wealth to be invested and built up, whether by Singaporeans or foreigners who bring their assets here, it will benefit our whole economy and society, not just the individuals who build up their wealth.’

This will be a boost to the wealth management industry here, said KPMG Tax Services executive director Ooi Boon Jin. ‘It will encourage the inflow of foreign talent. People will bring money here, sink their roots here and invest here,’ he added.

On average, the Government collected about $75 million a year in estate duty.

Mr Tharman is encouraging people with accumulated wealth to think of how they can use the savings from the scrapping of the tax to make a contribution to society.

Already, one foreigner living here is making such plans after learning of the move.

Mr Iain Ewing, 62, founder of management training consultancy Ewing Communications, plans to channel half of the estate duty savings to fund university scholarships and other causes. The rest will go to his son, Tejas, 27.

Mr Ewing, a Canadian with permanent residence here, has worked here for 23 years and expects the savings to be millions of dollars.

Two likely recipients are Singapore Polytechnic – where he previously worked as a media producer – and his alma mater, the University of British Columbia in Canada.

‘It’s great that some of my money can do more for other people after I’ve gone,’ he added.

 

Source: The Straits Times 16 Feb 08

Robust economy, property market lead to $6.4b surplus

THE Government racked up a Budget surplus of $6.45 billion last year, the highest since 1994, outdoing even the most bullish of market forecasts.

Unexpectedly strong economic growth and a runaway property market sent tax revenues surging, putting paid to an initial projection of a $700 million deficit.

But such a sizzling performance is not expected in the next financial year, with an $800 million deficit pencilled once handouts and changes announced in the Budget are accounted for.

Economists, who were predicting a surplus of between $4 billion and $5 billion, said they were caught out by higher-than-expected consumption and real estate-related tax collections.

They were also surprised by the size of ‘budget hongbaos’ that will be given out next year. ‘It’s a very generous Budget, with much more special transfers than last year,’ said United Overseas Bank (UOB) economist Ho Woei Chen.

Finance Minister Tharman Shanmugaratnam yesterday told Parliament the unexpected surplus came on the back of exceptionally strong economic growth.

‘We started the year expecting a growth rate of 4.5 to 6.5 per cent, which was also in line with market forecasts. With actual growth at 7.7 per cent, corporate and personal income taxes came in some $1 billion higher than projected.’

As anticipated, strong company profits sent income tax collections from businesses up 6.2 per cent to $9 billion despite a cut in the corporate tax rate from 20 per cent to 18 per cent.

Bigger wages and a tight job market sent personal income tax revenues up 18.1 per cent to $5.56 billion.

The strong economy also boosted goods and services tax (GST) revenues.

While a rise was factored in, given last July’s GST hike from 5 per cent to 7 per cent, the final figure was $1.2 billion higher than initial estimates. This, said Mr Tharman, was due mostly to higher consumption.

He added that the rate hike raised $1.4 billion in revenues, matching the size of benefits paid out in the year through the GST Offset Package and Workfare.

Economists said a buoyant economy enabled retailers to raise prices to pass on the GST hike. The higher prices, in turn, translated into more GST paid.

But the biggest surprise came from the red-hot property market, said Mr Tharman. Stamp duty rose to a record $3.8 billion, $2.3 billion higher than expected. Other property-related revenues also clocked in $1.1 billion above projections.

‘These were large gains, out of the ordinary, and which we cannot expect to see very often,’ he said.

UOB’s Ms Ho noted that net investment income contributions seemed low at $2.3 billion, given buoyant markets last year. ‘It’s the lowest since Sars-hit 2003.’

Mr Tharman said the Government is amending the Constitutional framework to let it draw on more investment income from its reserves. This would allow it to further enhance tax competitiveness.

A Bill will go before Parliament later this year.

In the year ahead, operating revenues are predicted to inch up 0.5 per cent. Spending will rise 12.5 per cent and special transfers will more than double.

Citigroup economist Chua Hak Bin said the estimates are very conservative as in previous years. ‘We could see another surplus next year.’

 

Source: The Straits Times 16 Feb 08

IMF predicts 10% growth in China

Beijing – THE International Monetary Fund (IMF) still sees China’s economy expanding 10 per cent this year.

‘The current financial crisis, which began in the United States housing market, is spreading to affect the real economy in the US and elsewhere,’ IMF managing director Dominique Strauss-Kahn told reporters in Beijing yesterday.

‘There will be some impact on China, but we still expect the economy to expand by 10 per cent this year.’

The World Bank this month cut its forecast for China’s growth to 9.6 per cent. The world’s fourth-largest economy expanded 11.4 per cent last year, the fastest pace in 13 years.

China is trying to slow inflation that is close to an 11-year high without triggering a sharp slowdown.

‘It’s even more necessary than before to have high growth in China,’ the IMF head said, referring to a slowing global economy.

‘More domestic-demand-driven growth will be what China needs rather than export-led growth.’

Mr Strauss-Kahn urged faster appreciation of China’s currency, the yuan, and said the IMF and China agreed the nation still needed a tight monetary policy to contain investment growth and inflation.

He said faster appreciation ‘would be helpful for addressing China’s key economic challenges and would also contribute to preserving global economic stability’.

China’s currency has climbed 1.7 per cent versus the US dollar this year. It traded at 7.181 to the US dollar yesterday.

Mr Strauss-Kahn said that ‘for a number of months now, the real exchange rate is moving in a good direction’.

 

Source: BLOOMBERG NEWS (The Straits Times 16 Feb 08)

US economy: Paulson, Bernanke play it cool

WASHINGTON – THOUGH economic officials have to avoid hysteria so that they don’t cause panic, United States Treasury Secretary Hank Paulson and Federal Reserve chairman Ben Bernanke, testifying before the US Senate banking committee on Thursday, went so far the other way that they seemed bored.

Mr Paulson could have been the secretary of ennui as he slouched in the witness chair before the Senate banking committee.

‘Are we headed towards or in danger of being in a recession?’ asked Democratic Senator Bob Menendez.

‘I don’t have a crystal ball,’ the secretary said.

‘Aren’t you underestimating – not paying enough attention to, the severity of the problem in the credit markets?’ inquired Democratic Senator Charles Schumer.

‘It’s one thing to identify a problem,’ Mr Paulson returned. ‘It’s another to know exactly what to do about it.’

Democratic Senator Bob Casey, asked about home foreclosures and the ’sub-prime crisis’.

Replied Mr Paulson, ‘I didn’t create this problem.’

No, but if he and his fellow Bush economic advisers get any more laid back about the state of the US economy, they will have to make their next appearance before Congress in a horizontal position.

For much of the exchange, Mr Paulson leaned back, draping his left arm over the back of his chair.

Mr Bernanke looked down, admired the chamber’s marble walls, and stroked his beard.

Even a few Republicans on the panel were troubled by the lethargy. ‘Chairman Bernanke, I just want to give you a heads-up: When you see something coming, don’t put it off,’ suggested Senator Jim Bunning.

Senator Bob Corker tried a semantic question to draw out the witnesses. Is it a housing ‘crisis’ or a ‘correction’?’

‘I don’t use loaded words,’ came Mr Paulson’s inevitable reply, ’so I’ve been using ‘correction’ because it is a correction.’

By contrast, committee chairman Chris Dodd used the word ‘crisis’ 12 times in his opening statement alone.

Mr Paulson must have known he sounded off-key, because towards the end, he threw in disclaimers such as ‘I don’t mean to be overly complacent’ and ‘I don’t mean to sound heartless’.

Heartless? No. But complacent was harder to avoid.

Mr Schumer noted that Wall Street bankers ’seem much more worried than you guys’.

‘Some see more worry than others,’ Mr Paulson replied.

Clearly.

 

Source: NEW YORK TIMES (The Straits Times 16 Feb 08)