Impact of Brexit on Singapore's Economy and Investments

Mr Patrick Tay Teck Guan asked the Minister for Finance what is the short-term and medium-term impact of Brexit on (i) Singapore's economy; (ii) Temasek Holdings' investments; and (iii) Government Investment Corporation of Singapore's investments.

The short-term impact of Brexit is mainly on the financial markets, more than on economies. The immediate impact of Brexit on currencies and stock markets has also not been a major concern for us.

Following the Brexit vote, as Members know, the British pound has declined sharply in value, and the US dollar and the yen have strengthened in global markets. Other Asian currencies, including the Singapore dollar, also weakened against the US dollar, as is typical when there is a sudden increase in risks in global markets. The resulting movement of the Singapore dollar on a trade-weighted basis has been orderly and contained. Stock markets also fell immediately after the Referendum, but have since recovered.

We can expect repeated bouts of volatility in financial markets as Brexit is debated and negotiated. But what is of greater concern are the economic and political uncertainties resulting from Brexit. These uncertainties will weigh on the UK, Europe and the global economy for at least a few years and are likely to dampen growth.

The first uncertainty has to do with what Brexit actually means. There is no clarity within the UK, even among proponents of Brexit, on the nature of its future relationship with the EU. This state of affairs may persist for some time. It is also not clear when the UK will formally trigger Article 50 of the Lisbon Treaty, which serves formal notice to leave the EU.

Second, even after formal notice is served, negotiations between the UK and the EU are likely to be complex and prolonged. The basic conundrum is that the UK wants free access to the EU market but control over immigration from the EU, whereas the EU sees free access to its market and free movement of people as one package. That is the basic conundrum. Both UK and EU leaders will be mindful of their domestic political circumstances, and the EU will want to ensure that more member states are not encouraged to follow the UK.

In short, there is no precedent for Brexit and no one can say how and when events will unfold. Until the future trade and investment relationships between the UK and the EU are formally settled, the uncertainties will likely reduce investments and economic growth in the UK and, to some extent, in Europe as well. They will present another headwind in a generally subdued global economic outlook for the next few years.

As of now, MTI does not expect these developments on their own to result in a significant reduction of growth in Singapore over the short term or the next few years. However, if a European slowdown coincides with other factors, such as a sharper than expected slowdown in China or the United States, we will see a more major impact on our economy.

What happens over the longer term following Brexit is even less predictable and a deeper concern. Analysts have begun to paint the possible scenarios. In the more optimistic scenarios, the UK and the EU arrive at a new and mutually beneficial arrangement for trade, investment and immigration. If, as a result, the UK retains substantial access to the EU single market, we should not underestimate its ability to regain economic competitiveness and strength and to remain a valuable economic partner for us in Singapore over the long term.

However, a more pessimistic state of affairs cannot be ruled out. The key unpredictability is in the political dynamics, both within the UK and in Europe. If the UK is unable to hold itself together as a union, or if nationalism gathers pace among the EU's member countries, there will very likely be a permanent weakening in their economies. More divisive politics in the UK and the EU will also weaken the resolve to undertake needed economic and financial reforms for the long term.

Last week, the World Bank released a report stating that the Brexit Referendum outcome has marked a "historical shift in trade policy attitudes" that could impair global economic growth. If we do, indeed, see a shift towards protectionist policies worldwide, it will have major implications for Singapore, which thrives on an open global trading system.

Mdm Speaker, it is premature to say what the longer term impact of Brexit will be, positive or negative. We must watch the developments carefully and be prepared to adjust our strategies so that we stay competitive as an economy and can retain good jobs in Singapore.

Let me turn now to Mr Patrick Tay's question on the impact of Brexit on GIC and Temasek Holdings' investments. GIC and Temasek, like other major global investors, can never be insulated from volatility in the financial markets. However, both GIC and Temasek make investment decisions for the long term and look beyond the short-term market booms and busts. Their focus with regard to Brexit, for example, is to assess how it could fundamentally alter the long-term prospects for the EU and UK economies.

From time to time, GIC and Temasek will face market dislocations. They aim to weather the ups and downs of the market and adopt investment strategies that can deliver good long-term returns. The 2008 Global Financial Crisis was a major case in point. Global capital markets saw much larger declines than what we saw recently with the Brexit vote. MSCI World (Equities) fell by more than 40% from its peak to the trough during the Global Financial Crisis. The value of GIC and Temasek's investment portfolios declined significantly, together with the markets. But their portfolios recovered their value within one to two years and have continued to grow since then.

Mdm Speaker, the Brexit Referendum outcome is an important turning point for the UK and the EU. We must expect a period of economic uncertainty over the next few years at least. What is especially critical is how politics will unfold in the UK and Europe. It will have lasting economic repercussions extending beyond Europe. We will continue to watch these developments closely, be prepared for their impact on Singapore and see what lessons might be useful for ourselves.

I thank the Deputy Prime Minister for the very comprehensive response and reply. I am aware that Temasek Holdings has about 8% of its portfolio in Europe. If you look at the actual numbers, we have large stakes in British Pounds like in Stan Chart, some in Lloyds, as well as in properties. How would that impact, because, as the Deputy Prime Minister has shared earlier, it might be prolonged, coupled with the fact that we have about 70% of our investments in both Asia and Singapore by Temasek Holdings and China has recalibrated itself the past year and the next couple of years? Bearing in mind also that, like last year, our Budget, moving ahead, would be highly dependent on Temasek's Net Investment Returns (NIRs). Will that, in a way, require us, as we prepare for Budget 2017 and beyond, to relook at our strategies and how we position ourselves and balance our books?

Whether or not Brexit and its impact on the UK and European economies affect our long-term expected returns on investments, both GIC and Temasek and, for that matter, Monetary Authority of Singapore (MAS), it is too early to say.

My guess is that it will dampen somewhat the outlook over the medium term but it is too early to say what the long-term impact will be. You have to remember that the NIR Framework is really a framework of looking at the returns over the next 20 years, which is a reasonably long period, and applying that then to the asset base in order to derive how much money can be spent in the Budget.

So, I would say we should not rush to a conclusion on the long-term implications of Brexit. For that matter, as far as Temasek and GIC are concerned, they have reasonably well-diversified portfolios. Temasek has a more concentrated portfolio in Asia and it is also more concentrated in equities. Even for Temasek, if you look at its equity portfolio, it is quite well-diversified across industry sectors. So, at any one point in time, you are hit by one cycle or another, but it is the overall portfolio over the long term that determines if you are fulfilling your mission of delivering good long-term value.

Mdm Speaker, may I ask the Deputy Prime Minister: there is some concern that because of the economic uncertainty in Europe and the UK, that many foreigners would want to come to Singapore to look for employment opportunities. So, can I ask whether MOF will work with the rest of the Government agencies like MOM to ensure that we do not allow these foreigners to adversely affect employment opportunities for Singaporeans in the FIs?

Our framework for admitting talent to Singapore remains unchanged. They must be talented, they must be experienced and they must be able to prove their worth. MOM's framework looks, as Members know, at a few criteria: how much they are paid, and not just how much they are paid at any age, it actually varies by age. So, if you are someone in your mid-40s, if you are talented and experienced, it will be reflected in your pay. So, it is not a framework where anyone who wants to come, comes into Singapore. They have got to meet some hurdles. But we have got to make sure that the framework does allow talented and experienced people – people with a track record that can add to teams in Singapore – to come to Singapore. It is what our firms need and what our economy needs. So, I would not worry too much about the perturbances in Europe leading to a sudden flood of the unwashed to Singapore.

Mdm Speaker, may I ask the Deputy Prime Minister whether it is correct to say that there has been a strengthening of the Singapore dollar and that he said earlier that the currency had been volatile lately with Brexit? Therefore, may I ask him whether this trend will further dampen Singapore's export and, if it is so, will that affect Singapore's economy? And should MAS mitigate this currency trend in the future?

I would like to thank Dr Neo for her question. First, we have to always, when we think of currency in the Singapore context, distinguish between the bilateral currency movements and the movements of the Singapore dollar against the trade-weighted basket.

Bilaterally, it is true that we have strengthened very significantly against the British pound. In fact, we have got a stronger exchange rate against the pound, compared to any time in the last 35 years. That is because the pound has collapsed in global markets. But if you look at the Singapore dollar against a basket of currencies, it has not moved very much. In fact, it has depreciated slightly because the US dollar and Japanese yen have strengthened in global markets.

So, essentially, this is typical of any instance that happens in the global markets, where you find that the bilateral rates move quite significantly, but, on balance, when you look at the Singapore dollar across the whole basket of currencies, it moves in a fairly moderate fashion. In this instance, the movement has been quite contained.

Mdm Speaker, just two supplementary questions for the Deputy Prime Minister. Firstly, on the outcome of the Brexit Referendum, how does the Government envisage that it would affect the timeframe for the ratification of the EU-Singapore Free Trade Agreement? Secondly, does the Government anticipate entering into a process of bilateral negotiation eventually with the UK for a bilateral FTA and, if so, what would be the approximate timeframe for that?

There can be no precise answer to both questions. First, I think this is a complication in the ratification of the Free Trade Agreement with the EU. It does not rule out early ratification but we know the distractions that are taking place in Europe. We are pushing them, we are in constant touch with them, both diplomatically as well as amongst our trade officials. But this is a bit of a setback. With the UK, I think we should always remain open to a free trade agreement.

I do not want to prejudge obviously what happens between the UK and Europe. If the UK does go ahead with its exit from the single market and decides to have a free trade agreement with Europe, it will be, of course, very keen to also have free trade agreements with other third parties like ourselves. It is something which we are in constant touch with the British on.