Singapore's risk from Indonesia underestimated

SINGAPORE is facing more risks from the political and economic chaos sweeping Indonesia than many people think and the city-state's financial markets had still not fully taken this into account, economists say.

"Singapore has one of the highest exposures to Indonesia of any country in Southeast Asia in terms of capital and direct investment," Kay Hian Research director Kevin Scully said.

Economists and analysts are reassessing their assumptions for the city-state in light of the riots and demonstrations that have torn through Indonesian cities during the past week.

Most published forecasts for Singapore's economic growth this year still hover around 3 per cent, compared with a 7.8 per cent expansion last year, and only a minority have tentatively suggested the economy might slip into recession.

The Singapore Government still forecasts gross domestic product growth of between 2.5 and 4.5 per cent.

Economists say the deteriorating situation and violence in Indonesia could help slow the island's growth significantly, possibly by as much as 2 per cent.

Singapore is so sensitive about its relations with Indonesia that it does not even publish official figures on its trade with the republic.

Analysts said this reflected a long-standing fear of Jakarta and a memory of brief open hostilities in the 1960s.

Economists estimate that between 10 and 13 per cent of Singapore's total trade is with Indonesia.

If they are right, that would mean the business is worth about US$20 billion a year.

Singapore industry also has huge investments in Indonesia. About 10 to 15 per cent of its bank total loan asset exposure is in Indonesia, equivalent to about US$1.2 billion.

Data on Singapore corporate investments in Indonesia are not available but they are likely to be much bigger than the banking exposure.

In addition to all this, Indonesians have investments and property in Singapore estimated at about S$5 billion (about HK$23.52 billion) and about 16 per cent of tourist arrivals in the island are from Indonesia, worth about S$950 million a year.

"I think the exposure of Singapore to Indonesia is not fully discounted by the markets," said Chia Woon Khien, head of Asian research at SE Banken.

"People don't know the full extent of the exposure. Around the region, Singapore is going to be worst affected if Indonesia completely collapses."

Economists said part of the reason for the markets' optimism over Singapore was that it had a reputation for strong economic management and had so far remained relatively aloof from the Asian financial crisis that had battered currencies and stock markets.

The Singapore dollar has lost only 13 per cent of its value against the US dollar since July 1997, compared with more than 75 per cent for the Indonesian rupiah and at least a third for the Malaysian ringgit, the Thai baht and the Philippine peso.

The stock market has also been more resilient, falling only 33 per cent overall since last July, compared with at least 45 per cent for the composite indexes in Kuala Lumpur and Jakarta.

Singapore's stock market showed signs last week of catching up with its neighbours.

Analysts said the country and the currency could fall further if Indonesia's turmoil continued.

"Investors are cashing out on Southeast Asia and Singapore is one of the most liquid markets," DBS Securities director of economic research Kaan Quon Hon said.

 Published in the South China Morning Post. May 18, 1998