Singapore: Singapore, despite its tiny size and reliance on just a handful of industries, has lately managed to steer clear of vicious boom and bust cycles thanks to a simple economic strategy of diversification.
The question for investors is whether the country -- trying to thrive in myriad new areas from gaming to drugs -- can continue to succeed as globalisation and fierce competition make its big bets all the more risky.
One pointer to the outcome, analysts say, is how Singapore is coping with big shifts in a sector that has gained hugely in economic importance but which now faces a more difficult future: the oil industry.
“We are at the top of the cycle,” said Sailesh Jha, an economist at Credit Suisse. “Singapore is preparing for the long-term potential of the sector by creating complementary sectors. It’s clearly diversification.”
By some estimates, the industry accounts for about 6% of the economy -- nearly double its contribution just five years earlier.
The island built up a massive, multi-billion-dollar oil refining industry to capitalise on what is today a voracious appetite for energy across the region and has seen the pay-off in four unbroken years of booming business.
Singapore’s four-decade-old refining industry now faces much more competition. National oil companies in India and the Middle East are about to take on Singapore with plans to flood the region with products from sophisticated, new refineries.
But Singapore is moving fast to foster new oil-related industries such as logistics and storage, climbing up the product value chain and making a huge effort to develop its petrochemical industry even further.
Such diversification could help insulate the island-state from a dramatic and sudden drop in demand similar to that during the Asian financial crisis of 1997/98, which forced Singapore refiners to slash operating rates.
Irvin Seah, an economist at DBS Bank, likened Singapore’s push to broaden out its oil industry to its move to diversify its manufacturing base by moving up the high-tech value chain and pushing into new products such as pharmaceuticals.
Similarly, Singapore will develop its oil industry by moving into biofuels, biodiesel, liquefied natural gas and top petrochemicals, he said.
New revenue in store
Singapore has to be flexible and nimble, analysts say.
Even resource-rich countries such as Vietnam, Malaysia and Indonesia -- some of Singapore’s best customers -- want to boost refining capacity at home, threatening to spoil the market for Singapore refiners.
“The refining business looks to be a mature and saturated industry as far as Singapore is concerned,” said Ong Eng Tong, a Singapore-based oil consultant.
So far, the diversification strategy appears to be working.
The trade-driven economy has grown by more than 6% for the past three years -- above the country’s medium-term potential -- and is expected to grow 5 to 7% this year.
Investment in the spin-off sectors is looking robust, too.
The petrochemicals sector saw Royal Dutch Shell breaking ground on a massive 800,000-tonne-per-year petrochemical complex last year. Local media reported this week that Exxon Mobil was recruiting engineers and technicians ahead of a final decision on a $4 billion petrochemical complex.
India and Kuwait announced plans this month to tie up with Singapore on a $100 million plant.
Analysts say that Singapore is ideally placed to boost its position as a base for commercial oil storage by leveraging off its existing strength as a financial and oil trading centre.
The government, which wants to more than double storage capacity in the next few years, says the oil storage business already contributes about 0.5% to the country’s GDP.
“We are in the middle of a booming global region and I think Singapore is positioning itself to take advantage of this,” said Tim Condon, an economist at ING Financial Markets. “It’s a case of ‘build it and they will come´.”
Singapore is investing S$700 million in the first phase of a massive underground rock cavern which will be ready by 2011 and companies such as Vopak, Oiltanking and Tankstore are building storage.
The government boasts that oil traders such as Hin Leong, Emirates National Oil Co. and Chemoil are also joining the rush for storage space.
There is huge potential here. Singapore is already capitalising on strong oil trade through its port. Oil re-exports, which include oil that has been “warehoused” in Singapore, rose a massive 137% last year to S$11 billion.
All of this could bode well for Singapore as it diversifies into new industries and services.
Long dependent on demand for high-tech goods, Singapore is building casinos, laboratories and universities to attract people and generate new sources of economic activity.
“Policy-wise, if you can kickstart a new growth engine before the old engine dies off, then Singapore should be OK,”