Caught in the Middle

This prosperous city-state is built on a mountain of insecurity.

Surrounded by larger, occasionally hostile neighbors and devoid of natural resources, the Singapore government muzzled political dissent, armed itself with the best weapons money could buy and created a sophisticated trade entrepot backed by $60 billion in foreign reserves.

But in recent months, it has become painfully apparent to Singapore’s leaders that no amount of fiscal or physical barriers could protect their 3 million citizens from the economic crisis that has crippled currencies and even toppled governments in nearby Indonesia, Thailand, South Korea and Malaysia.

The latest blow was the weakening of the Japanese yen, which has pulled the Singapore dollar and its stock market lower along with other markets in Asia. The worsening of Japan’s huge economy reduces the demand for Southeast Asian exports and makes it tougher for Singapore’s manufacturers to compete against Japanese firms in key third markets such as the U.S.

The yen shock follows on the heels of last month’s violent riots and political upheaval in neighboring Indonesia, which sent a flood of expatriates and ethnic Chinese fleeing to Singapore. Singapore’s economy is intricately tied to the fortunes of Indonesia, whose wealthy residents are major investors and business partners.

Singapore banks, which have historically enjoyed significant deposits from wealthy Indonesians looking for a safe haven, have at least $3 billion to $4 billion in loans in Indonesia, according to Andy Tan, general manager of the Singapore office of MMS, a subsidiary of Standard & Poor’s.

“The impact on Singapore will be quite huge,” he said. “Singapore’s exposure to Indonesia is significant through its banks and its trade ties.”

Problems in Singapore ripple throughout Southeast Asia because it has been one of the leading investors in the region behind Japan. Singapore’s investments in Thailand, for example, fell 62% last year from the previous year, according to the Thailand Board of Investment.

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While Singapore is still far healthier than its neighbors, newly released economic indicators show its highly trade-dependent economy sliding into a more severe contraction than expected. Since last summer, the Singapore dollar has weakened against the U.S. dollar--but remains 50% higher than other regional currencies, making it tough for its exporters to compete.

As the world’s largest manufacturer of computer disk drives, Singapore has also been hit hard by the global slowdown in the electronics industry. Earlier this year, Scotts Valley, Calif.-based Seagate Technology Inc., the largest U.S. employer here, laid off 1,800 of the 16,000 people employed at its five factories and regional marketing office here. Last month, Irvine-based Western Digital Corp. laid off 439 of its 9,300 Singapore employees.

Particularly alarming was an unexpected 16.9% drop in non-oil exports in May. Those figures showed a sharp decline in shipments of integrated circuit boards, assembled printed circuit boards and disk drives, which make up 45% of Singapore’s locally produced exports.

Singaporeans, who have enjoyed the highest living standards in Southeast Asia, are suddenly feeling vulnerable. Its neighbors, instead of sending over planeloads of wealthy tourists carrying Gucci bags and wads of cash, have become a launching pad for thousands of economic refugees hoping to find work.

The Singapore government has stepped up its border enforcement, in hopes of dissuading impoverished Indonesians from making the risky voyage across the Strait of Malacca, one of the world’s busiest sea lanes. In March, government officials launched two raids which netted 422 illegal immigrants.

“If this was to turn into a flood of people, navigation in the straits would become hazardous for ships. That could impact very directly on Singapore’s trade,” said Bruce Gale, an analyst in the Singapore office of the Political and Economic Risk Consultancy.

Particularly hard hit by the drop in wealthy Asian visitors are the designer boutiques and expensive restaurants on Orchard Road. Tourist arrivals plunged 22% in February, the biggest decline in two decades.

In the past six months, retail sales in Singapore have dropped more than 25% and the property market has fallen 20%. Property values are expected to slide an additional 15% to 20% over the next 12 to 18 months, according to a recent Merrill Lynch report.

Unemployment is predicted to rise from 2% to 4.5%, a frightening prospect for a tiny, crowded nation that has made social stability a badge of national pride. The Singapore government has already said it may send home some of the 700,000 foreign workers to free up jobs for locals.

Greg Brusberg, a senior vice president at the Singapore office of Charlotte, N.C.-based NationsBank Corp., said U.S. firms have already slashed their budgets and are prepared for a few tough years doing business in Southeast Asia. But he said most firms plan to stay and stake out their territory for when the regional economy eventually recovers.

“Some of these companies are dusting off their files from the Mexican crisis,” he said. “And one of the lessons is, ‘You don’t abandon the market.’ ”

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No one is predicting a quick turnaround.

George Yeo, Singapore’s minister of arts and culture, sees danger in every direction: increased political instability in Indonesia; mounting social pressures in South Korea, Malaysia and Thailand; floundering leadership in Japan; and a “big question mark” hanging over China’s leaders as they attempt to grapple with thousands of unprofitable state-owned enterprises and debt-laden banks.

If Japan’s bureaucrats are unable to jump-start their economy or China’s leaders give in to competitive pressures to devalue their currency, the situation could easily turn from a regional recession into a global depression, Yeo said during a recent visit to Los Angeles.

“If I were an American, I would be worried,” he said.

Related Coverage:

* China’s role in supporting the yen raises its international profile. A1

* Asia’s economic troubles sent the U.S. trade deficit soaring in April. A1

* Stocks closed lower and the dollar rebounded against the yen. D4

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Singapore’s Woes

Singapore hasn’t been as severely affected by the Asian meltdown as some of its neighbors. But the weakening of the Japanese yen has pulled the city-state’s dollar and its stock market lower.

Singapore stocks have declined . . .

The Straits Times Industrials Index since June 1997, monthly closes and latest:

Thursday close: 1133.41

. . .along with the Singapore dollar.

How many Singapore dollars a U.S. dollar would buy, monthly closes and latest:

Thursday close: 1,6755

Source: Bloomberg News