January 31, 2019

Singapore Economics

Budget Preview: A Pre-Election “Merdeka” Boost

Budget 2019: From Pioneer to Merdeka Generation Analysts Budget 2019 will likely be generous and expansionary, setting the stage for a Chua Hak Bin possible early general election. Focus will be on national security, social (65) 6231 5830 needs (esp. healthcare), and the on-going industry transformation program. A [email protected] centerpiece will be the “Merdeka Generation Package” – which we estimate Lee Ju Ye could cost S$8bn (slightly lower than S$9bn Pioneer Generation Package) and

(65) 6231 5844 cover about 460K Singaporeans (more than the “Pioneers”). This could boost [email protected] consumer spending, as seen in the recovery of retail sales after the Pioneer

Package was introduced in 2014. Accumulated overall fiscal surpluses over the last 3 years add up to over S$19bn (1.4% of GDP), by our estimates, which provides ample fiscal room to boost pre-election and social spending.

ECONOMICS Small Primary Deficit for FY2018 We forecast the FY2018 fiscal primary deficit at 0.9% of GDP, better than government’s estimate of 1.6%. Operating revenue is growing strongly, based

on the first 8 months, especially corporate (+8.7%) and personal income tax

(+7.7%), and stamp duties (+8%). But the absence of an exceptionally high MAS contribution (+$4.5bn) seen last year will mean that the primary balance will not turn into a surplus. The MAS reported a net profit of S$6.4bn for FY2017/2018 and contributed a lower S$1.1bn. We forecast an overall fiscal

Singapore surplus (incl. net investment income) of 0.5% of GDP, better than the budgeted 0.1% deficit. For Budget FY2019, we expect the government to register a primary and overall deficit of around 1.5% of GDP. Spending Falling Short of Budget Projections Government is under-spending what was budgeted, largely because of slower than projected development spending. For the first 6 months of FY2018 (Apr– Sep), development expenditure only rose +7.4% versus the budgeted +24.3%. Delays in some cross-border transport infra plans may be a reason. Spending on infocomm & media development (+46% in 6 months) is growing the strongest, likely boosted by Smart Nation initiatives and cyber-security

measures. National Security, Social, Transport & Climate Change We expect more funding to be allocated to national security and defense, including on cyber-security. Delays in the KL-Singapore High Speed Rail may accelerate the construction of the Thomson-East Coast (costing $24bn), Jurong Region and Cross Island Line. Funds may be set aside for infra projects to prepare for rising sea levels and climate change. Taxes Deferred Until After Elections Finance Minister Heng already guided for a hike in GST from the current 7% to 9%, somewhere between 2021 and 2025, to fund rising healthcare and social spending. No other major tax increases are likely, given the stronger than expected tax revenue growth and prospects of early elections. We favour some targeted relaxation of foreign manpower policies, but this remains a sensitive issue. Foreign worker levies for offshore marine and processing will likely be raised by about $50-$100/month, after being deferred last year. Generous handouts for lower and middle-income segments, especially for the underprivileged, and some tax reliefs for SMEs may also be in the cards.

THIS REPORT HAS BEEN PREPARED BY MAYBANK KIM ENG RESEARCH Co. Reg No: 198700034E MICA (P) : 099/03/2012 SEE PAGE 16 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS Economics Research

Preview: “Merdeka” Pre-Election Budget

“Budget will focus on these very key areas - in security, on taking care of social needs, especially in education, healthcare and, of course, in transforming our economy. The needs are very large, whether it is building big-scale infrastructure projects, like our MRT lines or the airport, or especially our HDB flats, or whether it's taking care of our seniors, and in fact all Singaporeans.”

Finance Minister Heng Swee Keat1, 20 January 2019.

Budget 2019 will likely be generous and expansionary, setting the stage for a possible early general election. Focus will be on national security, social needs – with a generous “Merdeka Generation” healthcare package - and the on-going industry transformation program. Budget 2019 will be unveiled on 18th February.

A similar fiscal formula might yet again echo in this electoral cycle. In the last general elections in September 2015, the government unveiled a generous S$9bn “Pioneer Generation Package” in the Feb 2014 Budget2. That package covered a large proportion of healthcare costs for those born on or before 1949, which “Pioneers” will enjoy for life. More than 400,000 Singaporeans benefited from the package. The PAP rode on the feel good factor and won with a strong mandate in the Sep 2015 general elections, with the popular vote surging to 69.9% (up from 60.1% in 2011 GE) (see Table 1).

Table 1: Past General Election Results – Share of Popular Vote Won by PAP % change from previous General Election Popular Vote Won by PAP election Sep 2015 69.9% +9.7% May 2011 60.1% -6.5% May 2006 66.6% -8.7% Nov 2001 75.3% +10.3% Jan 1997 65.0% +4.0% Aug 1991 61.0% -2.2%

Source: Compiled by Maybank Kim Eng

A centrepiece of Budget 2019 will be the “Merdeka Generation Package”, which will benefit Singaporeans born in the 1950s. We think that the Merdeka Package could cost as much as S$8bn, covering as many as 460K Singaporeans (slightly higher than the number of people who qualified for the Pioneer Generation package, given their younger demographic profile). The healthcare coverage will not be as generous as the Pioneer package, but the duration of the coverage will be longer as the age profile is roughly a decade younger.

We forecast the fiscal primary deficit for Budget FY2018 will come in at around 0.9% of GDP (or S$4.3bn), better than the government’s estimate of 1.6% of GDP (see Table 2). Our forecast nevertheless implies that the primary balance flips into a deficit from the surplus of 0.5% of GDP (S$2.3bn) in FY2017 (see Fig 1). This is largely because the FY2017 primary surplus was boosted by a one-time exceptional item: the MAS’ contribution of S$4.5bn because of a net profit surge to S$28.7bn due to strong currency translation effects (see Table 3). This strong contribution will not be repeated in the FY2018 budget. The MAS reported a net profit of S$6.4bn in FY2017 and will be contributing a lower S$1.09bn to the consolidated fund3. For Budget FY2019, we expect the government to register a primary and overall deficit of around 1.5% of GDP.

1 Business Times, “Singapore finance minister says Budget 2019 to focus on education, healthcare, security and defence”, 21 Jan 2019. 2 Budget 2014 set aside $8bn for the fund, with the remaining $1bn is to be funded with accumulated interest over time. 3 Contribution by MAS is based on 17% of its actual net profit for the previous fiscal year. January 31, 2019 2

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Based on our FY2018 estimates, accumulated overall fiscal surpluses over the last 3 years (first 3 years of the government’s term) add up to over S$19bn (1.4% of GDP), which provides ample fiscal room and flexibility to boost pre- election spending. Overall budget surplus came in at $6.1bn (1.4% of GDP) in FY2016, $10.6bn (2.4% of GDP) in FY2017 and an estimated $2.5bn (0.5% of GDP) in FY2018.

Table 2: Fiscal Position in FY2017 and FY2018 (Budgeted vs. Maybank Estimates) FY2018 FY2018 FY2017 FY2018 FY2018 Apr to Nov (Maybank (Maybank (Actual) (Budgeted) (Budgeted) 2018 Estimates) Estimates) SGD mn SGD mn SGD mn %YoY %YoY %YoY

OPERATING REVENUE 75,816 72,677 73,362 -4.1 -3.2 3.5 Corporate Income Tax 14,944 15,112 1.1 8.7 Personal Income Tax 10,724 11,425 6.5 7.7 Withholding Tax 1,532 1,351 -11.8 -0.6 Statutory Boards’ Contributions 4,866 458 1,200 -90.6 -75.3 NA Assets Taxes 4,440 4,445 0.1 2.6 Customs and Excise Taxes 3,133 3,372 7.6 -2.7 Goods and Services Tax 10,960 11,364 3.7 3.1 Motor Vehicle Taxes 2,153 2,808 30.4 23.9 Vehicle Quota Premiums 5,796 5,585 -3.6 -39.3 Betting Taxes 2,688 2,752 2.4 -0.9 Stamp Duty 4,905 3,763 -23.3 8.0 Other Taxes 6,019 6,432 6.9 21.7 Fees and Charges 3,267 3,448 5.5 4.5 Others 378 363 -3.9 17.7 Less:

TOTAL EXPENDITURE 73,556 80,019 77,620 8.8 5.5 *2.8 Operating Expenditure 55,581 57,667 3.8 *1.3 Development Expenditure 17,975 22,351 24.3 *7.4 PRIMARY SURPLUS / DEFICIT 2,259 -7,342 -4,257 (% of GDP) (0.5%) (-1.6%) (-0.9%) Less:

SPECIAL TRANSFERS 6,230 9,110 9,110

Special Transfers Excluding Top-ups to 2,220 1,810 1,810 Endowment and Trust Funds BASIC SURPLUS / DEFICIT 39 -9,152 -6,067

Top-ups to Endowment and Trust Funds 4,010 7,300 7,300

Rail Infrastructure Fund - 5,000 5,000

GST Voucher Fund 1,500 2,000 2,000

Add:

NET INVESTMENT RETURNS CONTRIBUTION 14,610 15,850 15,850

OVERALL BUDGET SURPLUS / DEFICIT 10,639 -602 2,483 (% of GDP) (2.4%) (-0.1%) (0.5%)

*Refers to Apr to Sep 2018 numbers. Source: Ministry of Finance, CEIC, Maybank Kim Eng estimates

Figure 1: Overall Budget Balance vs. Primary Balance, FY2005 Table 3: MAS’ Contribution to the Consolidated Fund Falls to to FY2018 S$1.1bn in FY2018 from S$4.5bn in FY2017

% of GDP Net Profit (before Overall budget surplus/deficit Primary surplus/deficit Contribution to Contribution to Conslidated Fund 3.0% Consolidated Fund) 2.5% FY10/11 -10,940 2.0% Based on the framework for FY11/12 2,771 1.5% Contributions to Consolidated Fund, FY12/13 -10,613 no contribution to the Consolidated 1.0% Fund was required as there were FY13/14 15,837 0.5% carried forward losses from previous financial years to offset against the FY14/15 281 0.0% net profit for the year. -0.5% FY15/16 157 -1.0% FY16/17 28,724 4,457 -1.5% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY17/18 6,398 1,088

Note: FY2017 refers to actual numbers, while FY2018 refers to Maybank KE’s Source: MAS Financial Reports estimates. Source: CEIC, Maybank Kim Eng estimates

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We project overall higher operating revenue than government projections, because of stronger than expected corporate and personal income tax collection, as well as stamp duties (see Table 2). For the first 8 months of FY2018 (Apr – Nov), positive surprises came from corporate income tax (+8.7%), personal income tax (+7.7%) and stamp duties (+8%). Some revenue lines are coming in slightly below budget projections, notably vehicle quota premiums (- 39.3%). COE premiums fell to 8 year lows in 2018.

On the expenditure side, we think the government may underspend what was budgeted, particularly on development. For the first 6 months of FY2018 (Apr – Sep), development expenditure only rose +7.4% versus the budgeted +24.3%. Delays in some cross-border transport infrastructure plans because of differences with Malaysia following the change in government may be a reason. By sector, spending on infocomm & media development (+46%) posted the strongest growth, likely boosted by the government’s Smart Nation initiative and cyber-security push. Among the larger items under government expenditure, national development and health are close to 50% of the target, while spending on education (32% of budgeted amount) and transport (38% of budgeted amount) have not been aggressive (see Table 5).

Table 4: Government Operating Revenue (First 8 Months of Fiscal Year) % of FY18 Apr to Nov Apr to Nov 2018 target 2017 2018 target %YoY achieved to (SGD bn) (SGD bn) (SGD bn) date Total Operating Revenue 49.05 50.78 72.7 +3.5 69.9% Income: Corporate 12.06 13.11 15.1 +8.7 86.8% Income: Personal 7.73 8.33 11.4 +7.7 72.9% Income: Withholding 0.85 0.84 1.4 -0.6 62.5% Assets Taxes 2.47 2.53 4.4 +2.6 56.9% Customs & Excise Duties 1.98 1.92 3.4 -2.7 57.0% Goods and Services 7.82 8.06 11.4 +3.1 70.9% Motor Vehicles 1.38 1.71 2.8 +23.9 60.8% Betting Taxes 1.70 1.69 2.8 -0.9 61.3% Stamp Duty 3.21 3.46 3.8 +8.0 92.0% Others 3.51 4.27 6.4 +21.7 66.4% Vehicle Quota Premiums 4.11 2.50 5.6 -39.3 44.7% *Other Fees & Charges 2.02 2.11 3.4 +4.5 61.3% Other Receipts 0.21 0.24 0.4 +17.7 66.7%

^A budget that is equally distributed every month implies that 66.7% of the budget would have been spent in the first eight months. Source: CEIC, Maybank Kim Eng

Table 5: Government Expenditure (First 6 Months of Fiscal Year) ^% of FY18 Apr-Sep Apr-Sep target 2017 2018 %YoY achieved to (SGD bn) (SGD bn) date Total Expenditure 30.7 31.5 +2.8 39.4% Security & External Relations 8.6 8.1 -5.5 37.5% Government Administration 1.0 1.0 +0.3 33.0% Social Development (SD) 15.3 14.8 -3.2 41.1% SD: Education 3.8 4.2 +8.2 32.4% SD: Health 4.6 4.7 +3.1 45.9% SD: Culture, Community & Youth 0.8 0.7 -8.2 37.7% SD: Communications & Info 0.3 0.2 -34 34.0% SD: Environment & Water Resources 1.9 1.0 -47 45.7% SD: National Development 2.1 2.1 +1.4 52.9% SD: Social and Family 1.3 1.4 +6.3 44.1% SD: Manpower 0.5 0.5 -1.1 47.8% Economic Development (ED) 5.7 7.6 +32 39.5% ED: Transport 3.8 5.2 +35 37.7% ED: Trade & Industry 1.4 1.8 +26 40.3% ED: Manpower 0.2 0.3 +8.9 44.0% ED: Info-Comm & Media 0.3 0.4 +46 74.3%

^A budget that is equally distributed every month implies that 50% of the budget would have been spent in the first six months. Source: CEIC

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Rewarding the Merdeka Generation

“Most of the Merdeka Generation today are in their 60s. They have either left the workforce, or will soon be retiring. Many have similar healthcare concerns as the Pioneers. They are looking at their CPF savings and MediSave accounts, worried about having enough for their medical needs as they grow older. I think we owe something to them.

The Government will work out a “Merdeka Generation Package”. The Merdeka Generation Package will help this group to meet their medical expenses. We will announce the details next year. It will cover similar areas as the PG Package. For example, outpatient subsidies, MediSave top ups, MediShield Life premium subsidies, and payouts for long term care. The benefits will not be as large as for the Pioneer Generation, who had much less advantage in life. But the Merdeka Generation Package will go some way to relieve their healthcare worries. More importantly, it will show our appreciation for the Merdeka Generation and their contributions.”

Prime Minister Lee Hsien Loong, National Day Rally speech, 19 August 2018.

During the 2018 National Day Rally, PM Lee introduced the Merdeka Generation Package for Singaporeans born in the 1950s. There are currently 460k Singaporeans in the 60 to 69 age group, accounting for around 13% of total citizens (see Fig 2). The Merdeka package will likely be similar to the Pioneer Generation Package introduced in 2014, but may not be as generous (see Tables 6 & 7). The package will likely cover outpatient subsidies, Medisave account top- ups, MediShield Life premium subsidies and payouts for long-term care.

Figure 2: The Merdeka Generation Accounts for Around 13% of Singapore Citizens

Source: Singstat

We think the Merdeka Generation package could cost about S$8bn, only slightly lower than the S$9bn Pioneer Generation Package. More Singaporeans could qualify for the Merdeka package, as compared with the Pioneer package, given the younger demographic profile. While the healthcare coverage will not be as generous as the Pioneer package, the duration of the coverage will likely be longer as the Merdeka generation is younger than the Pioneers.

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About $1.3bn has been spent so far for the Pioneer Generation package. Based on our estimates, close to 415k Singaporeans (65 years old and above) or 12% of total citizens were eligible for the Pioneer Generation package when it was launched in 2014. The Pioneer Generation Package in the FY2014 budget was also introduced prior to an election year (the Jubilee Year general election in Sep 2015). Fiscal surplus in the preceding year (FY2013) was relatively healthy with primary surplus of 1.4% of GDP and overall surplus at 1.3% of GDP (see Fig 3).

Table 6: Specialist Outpatient Clinics Services Subsidy Rates Table 7: Lifetime Annual Medisave Top-Up for Pioneer for Pioneer Generation Generation Subsidy for Pioneer Estimated Top-Up Value Annual Value of Subsidy Amount per Population (as Monthly household Generation, after Age in 2014 over 5 Years (2014 to home (for those (from 1 year of 2014) income per capita further 50% 2018), S$ mn without income) Sep 2014) discount 65 to 69 $200 154,483 $154

Up to $1,100 Up to $13,000 70% 85% 70 to 74 $400 102,019 $204

$1,101 to $1,800 $13,001 to $21,000 60% 80% 75 to 79 $600 73,467 $220 80 and above $800 84,875 $340 More than $1,800 More than $21,000 50% 75% Total 414,844 $918

Source: Ministry of Finance Budget 2014 Source: Ministry of Finance Budget 2014, Department of Statistics, Maybank KE estimates

Figure 3: Three Years of Healthy Fiscal Surplus Above 1% of Figure 4: Retail Sales Improved From 3Q14 After the Pioneer GDP Prior to Announcement of Pioneer Generation Package Generation Package was Introduced in Budget 2014

% of GDP Overall budget surplus/deficit Primary surplus/deficit 3.0% FY2014: Introduction 2.5% of Pioneer Generation Package 2.0%

1.5%

1.0%

0.5%

0.0%

-0.5%

-1.0%

-1.5% FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Source: CEIC, Ministry of Finance Source: CEIC

The FY2019 Budget may include other generous measures in light of Singapore’s Bicentennial Celebration, similar to the Jubilee Budget in 2015. Pre-Election Budget 2015 included benefits such as corporate income tax rebates, a personal income tax rebate, and enhancements to the GST Voucher scheme. Such measures, together with the Merdeka Generation Package, could help boost consumer sentiment. For instance, following the introduction of the Pioneer Generation Package in 2014, retail sales started recovering in the third quarter of the year, around the time that eligible recipients received letters informing them of their benefits and Medisave top-ups were credited to their accounts (see Fig 4).

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Security, Infrastructure & Social Needs

National security, infrastructure and social expenditure will also be a focus of Budget 2019.

Cybersecurity may be a feature in the Budget following the major SingHealth cyber attack last year. Cyber-crime is intensifying with 56% of SMEs in Singapore having experienced a cyber-error or attack in the past 12 months, according to a survey conducted in Aug to Sep 2018 by Chubb4. The Infocomm Media Development Authority (IMDA) recently launched a task force to develop a roadmap for telecom cybersecurity, with its first set of recommendations to be published later in the year5.

National security spending will likely see a strong lift. The Ministry of Defence recently announced its selection of a next-generation fighter jet to replace its current fleet of ageing F-16s which will have to retire soon after 20306. Some budget will likely be allocated to purchase a small number of new F-35 jets from the US (the Pentagon’s most expensive weapons system7) for a full evaluation of their capabilities before a decision is made on purchasing a full fleet.

Figure 5: Singapore’s Largest Expenditure is in Defence, Figure 6: Social Development Expenditure Set to Rise in Transport, Education & Health FY2019

% of total Defence Transport Education Health expenditure 25

20

15

10

5

0 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 (Budgeted)

Source: Ministry of Finance Note: FY2018 refers to budgeted number.

Source: Ministry of Finance

The government will have ample fiscal room for social programmes focusing on education and helping the disadvantaged and underprivileged. Second Minster for Finance and Education Indranee Rajah stated that the budget will have a special focus on helping the underprivileged group through the Uplift committee (Uplifting Pupils in Life and Inspiring Families Taskforce)8. We expect budget allocation for social expenditure to exceed 8% of GDP for FY2019. Throughout the decade, social development expenditure has more than doubled from $16bn (5.9% of GDP) in FY2008 to $36bn (7.7% of GDP) in FY2018 (see Fig 6).

A S$5bn Rail Infrastructure Fund was set up in 2018 to save up for major rail lines. The Ministry of Transport estimated that more than S$260mn had been incurred for the High Speed Rail (HSR) project by end July 2018, less than one- tenth of the S$3bn earmarked for both the HSR and Johor Bahru-Singapore RTS Link project in FY20189. Delays in the KL-Singapore High Speed Rail may mean

4 Business Times, “Over half of SMEs in Singapore have experienced a cyber error or attack last year: poll”, 17 Jan 2019. 5 Business Times, “IMDA task force to develop roadmap for telecom cybersecurity”, 26 Jan 2019. 6 Straits Times, “Singapore eyes F-35 jets to replace ageing F-16 fighters”, 19 Jan 2019. 7 Based on the latest contract between Lockheet Martin and the Pentagon, 141 of the F-35s come at a price tag of US$11.5bn. 8 Straits Times, “Special focus on disadvantaged in Budget, says Indranee”, 31 Jan 2019. 9 Ministry of Transport, “Oral Reply by Minister for Transport Khaw Boon Wan to January 31, 2019 7

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that the government will likely shift their focus and accelerate the construction of other infrastructure projects, such as the Thomson-East Coast Line (cost estimated at $24bn), Jurong Region Line and Cross Island Line10.

More details on the Home Investment Program (HIP) II, mentioned in PM Lee’s National Day Rally speech, may be unveiled. The government spent more than $4bn to upgrade HDB flats in the first HIP that was implemented a decade ago. The second round of upgrading, HIP II, will be launched in ten years and is expected to cost more as HDB flats would be twice as old. Blocks built up to 1997 will also be included in this expanded program.

Funds may be allocated to prepare Singapore for rising sea levels and climate change, including flood prevention. According to the Singapore Met Service, 2018 was the eighth warmest year in Singapore’s historical record since 1929. With much of Singapore lying only 15 meters above the mean sea level, safeguard measures such as shoreline restoration works and increase in the minimum land reclamation level have already started since the start of the decade. The government had already invested S$1.2bn in drainage improvement works since 2012 and will spend another $500mn in the next two to three years, according to the Environment and Water Resources Minister11. In Sep 2018, the Public Utilities Board (PUB) unveiled two drainage projects costing S$277mn to keep Orchard Road flood free, which will likely take four years to complete construction.

Coastal protection solutions from countries such as Netherlands have been cited as examples that Singapore can learn from. The Dutch government spends over €400mn (S$598mn) per year for flood protection, and has built a system of dykes to regulate water levels12. The Netherlands is also building a sea wall (estimated to cost €2.9bn in total) to protect Maasvlakte, Europe’s largest port.

Budget 2019 may include more details on how to fund Changi Terminal 5. Budget FY2018 included a Changi Airport Development Levy to fund the Changi East expansion project. Starting 1 July 2018, passengers departing and transiting at Changi Airport were charged levy rates of S$10.80 and S$3.00 respectively. Based on the first 5 months since the start of the levy, we estimate that around S$146 million revenue was collected (see Table 8). More details could be unveiled on a decision on whether the government would fund the Changi expansion with long-term debt rather than just taxes.

Table 8: Estimates of Airport Development Levy (ADL) Collected from Transit Passengers & Departures at Changi Airport (Jul to Nov 2018) Transit Departures Estimated ADL Estimated ADL Passengers Passengers Revenue Collected Revenue Collected (Persons) (Persons) (S$) (S$) Jul 2018 81,042 243,126 2,764,491 29,856,503 Aug 2018 74,661 223,983 2,817,913 30,433,460 Sep 2018 72,313 216,939 2,550,670 27,547,236 Oct 2018 65,957 197,871 2,652,749 28,649,689 Nov 2018 49,779 149,337 2,717,011 29,343,719 Total 343,752 1,031,256 13,502,834 145,830,607

Source: Department of Statistics, CEIC, Maybank KE estimates

Parliamentary Questions on Developments of the HSR Project”, 9 July 2018 10 Straits Times, “Malaysia, Singapore ink agreement to defer high-speed rail project for 2 years; KL to pay S$15m for suspending work”, 5 Sep 2018 11 Straits Times, “Drainage projects to keep Orchard flood-free ready”, 29 Sep 2018. 12 Straits Times, “As sea levels rise, Singapore prepares to stem the tide”, 28 May 2017. January 31, 2019 8

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Taking Stock of Tax Measures

“In preparation for the long term, I would raise GST from 7% to 9% so that we can better take care of our seniors. That is still very much in the plans, but this is between 2021 and 2025 and is part of our long-term planning.”

Finance Minister Heng Swee Keat, Bloomberg interview, 22 Jan 2019.

Budget 2019 is unlikely to announce new major taxes given the prospect that elections may be called later this year or next year. The government has already proposed a timeline for the GST hike of 7% to 9%, scheduled for some time between 2021 and 2025.

In Budget 2018, the government had announced a GST on digital services effective Jan 2020. The tax will apply to overseas firms that have annual global turnover exceeding S$1 million and sales to Singapore consumers exceeding S$100,000.

An e-commerce tax on online goods has not been announced yet, but Budget 2019 might provide more details on the timing and scheme. Singapore will likely extend the current GST rate to online goods in the future, as online transactions have been soaring. GST revenue collection fell short of target in FY2017, and will likely do so again for FY2018. Online sales penetration is rising steadily to reach 8.3% of total retail sales in 2018, based on Euromonitor data (see Fig 7).

Singapore is adopting a wait-and-see approach, observing the experience of countries such as Australia (10% VAT on online sales of imported goods starting July 2018) and Japan (8% GST for all overseas online purchases since Oct 2015, to be raised to 10% from Apr 2019). Singapore will likely adopt the new e-commerce framework that World Trade Organization members aim to start negotiation on this year (see Table 9)13.

Figure 7: Singapore’s Online Sales Share Has Risen to 8.3% of Table 9: Examples of Countries that Have Imposed Digital Tax Total Retail Sales as of 2018

% of total Indonesia Malaysia Philippines retail sales Country Digital Tax Singapore Thailand 9% SG: 8.3% 8% 8% GST for all overseas online purchases since Oct Japan 2015, to be raised to 10% from 1 Apr 2019 7%

6% 5% VAT on digital services provided to consumers by Taiwan foreign businesses since May 2017 5% MY: 3.8% 10% VAT on physical and digital goods and services 4% South Korea bought online since Jul 2015 3% ID: 2.8% 10% GST on sales of imported services (since Jul 2% TH: 2.0% Australia 2017) and digital products (since Jul 2018) to PH: 1.4% Australian consumers 1% 15% GST for most goods and services supplied in 0% New Zealand '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 New Zealand since Oct 2016

Source: Euromonitor Source: Compiled by Maybank Kim Eng

A carbon tax of S$5 per tonne has been set for 2019 until 2023. Around $1bn revenue collection is projected in the first five years, which will be recycled on worthwhile environmental projects. The rate will be reviewed by 2023 with plans to raise it to between $10 and $15 per tonne by 2030.

13 Reuters, “China and U.S. among 76 WTO members pushing for new e- commerce rules”, 25 Jan 2019 January 31, 2019 9

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A potential sugar tax and a ban on high-sugar drinks have been discussed to tackle the growing number of diabetic cases in Singapore. Other possible options discussed in the press include mandatory front-of-pack labelling on the level of sugar content and a targeted ban on advertisements for high-sugar drinks. Revenue collected from the imposition of the sugar tax will be small and likely channelled towards subsidising healthier food options and other health promotion programmes.

Countries that already have sugar taxes include France, Mexico, UK, US and Ireland. Some countries in ASEAN have also started imposing or issuing plans to impose a sugar tax (see Table 10). In Thailand, an excise duty on sugary drinks ranging from 1 baht (S$0.04) to 5 baht per litre was introduced in September 2017, and intended to be progressively increased over the next six years. Philippines and Brunei have both also introduced taxes on sugary beverages since early 2018. In Vietnam, plans to start imposing a 10% tax on sugary drinks have also been mooted.

Table 10: Countries that Have Imposed or Are Considering Sugar Tax Country Amount of Sugar Tax Imposed or Measures Being Considered Brunei Sugar tax of B$0.40 (S$0.40) per litre for drinks with sugar content of 6g or more per 100ml was introduced since April 2017. One of the first countries in the world to introduce a sugar tax as early as 2012. Starting 2017, the sugar tax regime was further revised France from one that is flat to a tiered structure, whereby sugar drinks will now face a tax rate of €0.08 (S$0.12) per litre on all sweetened drinks starting from 1g of sugar per 100ml, and up to €0.20 (S$0.31) per litre for drinks that contain more than 11g of sugar per 100ml. Tax rates of €0.20 (S$0.31) per litre for drinks with a sugar content of 5-8g per 100ml, and €0.30 (S$0.46) per litre for drinks with a sugar Ireland content of 8g or more per 100ml were introduced in April 2018. Mexico Introduced a sugar tax of 1 Mexican peso (S$0.07) per litre of sweetened drinks in 2014. Excise taxes between six pesos (S$0.15) to 12 pesos per litre on sweetened beverages were introduced as part of the Tax Reform for Philippines Acceleration and Inclusion (TRAIN) in Jan 2018. Ministry of Health announced that they were considering various options including an excise duty (either flat rate or tiered) on Singapore manufacturers and importers of pre-packed sugary drinks, amongst other non-tax related measures, to encourage lower sugar intake among Singaporeans. Tax duty on sugary drinks was introduced in September 2017, and intended to be progressively increased over the next six years. The tax Thailand rates range from 1 baht (S$0.04) to 5 baht per litre for drinks with a total sugar content of more than 6g per 100ml. A two-tiered “Soft Drinks Industry Levy” was imposed on the manufacturers in April 2018. Under the levy, drinks with a total sugar UK content of more than 8g per 100ml will face a tax rate of £0.24 (S$0.42) per litre, whereas drinks with 5-8g of sugar per 100ml will pay a slightly lower rate of £0.18 (S$0.32) per litre. While a nationwide tax on sugar drinks has not been legislated, some local/state governments such as Berkeley, Philadelphia, Seattle, USA San Francisco etc have implemented their own versions of the sugar tax between 2014 – 2018, ranging from US$0.33 (S$0.45) to US$0.60 (S$0.80) per litre. A 10% special consumption tax on sugary drinks has also been proposed by the Vietnam Finance Ministry in 2018, but details and timeline Vietnam of the implementation are still being discussed.

Source: Compiled by Maybank Kim Eng

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Wish List: Addressing Labour Constraints

Demographic trends remain a major concern. In 2018, total population rose by a small +0.5% from a year ago, with citizens rising by +1% but Permanent Residents declining by -0.8% (see Fig 8). Fertility rate has fallen to a 7-year low of 1.16 in 2017, far below the replacement rate of 2.1. More measures may be necessary to support families with children.

We would like to see some targeted relaxation of foreign manpower or immigration policies given the acute labour market tightness and cost pressures in certain segments. But this will not be likely given its sensitivity in the run-up to elections. Stricter foreign manpower policy is hurting growth prospects and constraining companies from expanding and investing.

The hikes in foreign worker levies for marine shipyard and process14 sectors were deferred in last year’s budget (see Table 11). We think the foreign worker levy hikes may be raised by about $50-$100/month given that production in these sectors posted a recovery in 2018. Marine & offshore engineering rebounded by +18% in 2018 following three years of double-digit decline (see Fig 9). Performance in the process sectors was a mixed bag, with pharmaceuticals posting strong growth of +8.6% (vs. -14% in 2017) while petroleum (-0.5% vs. +8.9% in 2017) and petrochemicals (+4.4% vs. +13% in 2017) worsened in 2018 as production started to decline in the second half of the year.

Figure 8: Singapore’s Total Population Rose by Only +0.5% in Figure 9: Industrial Production of Marine & Offshore and 2018, with Permanent Residents Falling by -0.8% Pharmaceuticals Rebounded, But Chemicals Slowing Total Population Singapore Citizens %YoY Marine & Offshore Engineering Singapore Permanent Residents Non-Residents %YoY Chemicals 10 40 Pharmaceuticals 8 30

6 20

4 10 0 2 -10 0 -20 -2 -30

-4 -40 '10 '11 '12 '13 '14 '15 '16 '17 '18 '15 '16 '17 '18

Source: CEIC Source: CEIC

Total foreign workforce has fallen to 1.37 million as of June 2018 from 1.39 million in end 2016. The decline is mainly due to the decline in work permit holders in the construction sector, but also due to the fall in employment pass holders following the increase in the qualifying salary to $3,600 (from $3,300) starting 1 Jan 2017 (see Table 12). About 56% of Singapore employers indicated that they are unable to find the skills they need based on the latest 2018 ManpowerGroup Talent Shortage Survey. Sales representatives, engineers, drivers, professionals and technicians were the top five hardest roles to fill in 2018 (see Table 13).

14 Based on the definition provided by Ministry of Manpower, process sector includes plants in the manufacturing of petroleum, petrochemicals, specialty chemicals and pharmaceutical products. January 31, 2019 11

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Table 11: Foreign Worker Levy Schedule in Budget 2018 Sector/ Pass Sector Levy Rates ($) (R1/R2) Types Tier Dependency Ratio (DR) 1-Jul-17 1-Jul-18 1-Jul-19 Basic Tier (All) ≤10% 330 330 To be S-Pass Tier 2 (Services) 10-15% 650 650 announced Tier 2 (Other Sectors) 10-20% 650 650 in 2019 Construction Basic Tier ≤87.5% 300/650 300/700 300/700 WPH MYE-Waiver 600/950 600/950 600/950

Basic Tier ≤10% 300/450 300/450 Services WPH Tier 2 10-25% 400/600 400/600 Tier 3 25-40% 600/800 600/800 Marine Shipyard 350/500 Basic Tier ≤77.8%^ 300/400 WPH 300/400 To be 300/500 Basic Tier ≤87.5% 300/450 announced 300/450 Process WPH in 2019 600/800 MYE-Waiver 600/750 600/750 Basic Tier ≤25% 250/370 250/370 Manufacturing Tier 2 25-50% 350/470 350/470 WPH Tier 3 50-60% 550/650 550/650

^Marine Shipyard DRC was reduced from 81.8% to 77.8% in Jan 2018, as previously announced at Budget 2013. Note: Numbers in red are Foreign Worker Levy rates announced in Budget 2018. Source: Budget 2018

Table 12: Foreign Workforce in Singapore Fell in 2017 With Cuts in Work Permit & Employment Pass Holders Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Jun-18

Pass Type Total chg Total chg Total chg Total chg Total chg Total chg Total chg Employment Pass (EP) 174 -1.6 175 1.3 179 3.8 188 9.0 192 4.4 188 -4.6 184 -3.3 S Pass 142 28.5 161 18.5 170 9.2 179 8.5 180 1.1 184 4.7 190 5.3 Work Permit (Total) 943 34.2 974 31.6 991 16.9 997 5.8 993 -4.4 965 -27.5 966 1.0 - Work Permit (Foreign 210 3.3 215 4.9 223 8.0 232 9.0 240 8.2 247 7.1 250 3.2 Domestic Worker) - Work Permit 293 28.8 319 25.6 323 3.8 326 3.3 316 -10.5 285 -30.6 280 -4.5 (Construction) Total Foreign Workforce 1,268 70.4 1,322 53.3 1,356 34.1 1,387 31.6 1,393 5.7 1,368 -25.0 1,372 3.7 Total Foreign Workforce 1,059 67.1 1,107 48.4 1,133 26.1 1,156 22.6 1,153 -2.6 1,121 -31.9 1,122 0.3 (excluding FDW) Total Foreign Workforce (excluding FDW & 731 32.2 748 16.8 764 16.4 780 15.8 788 7.5 788 0.8 794 6.0 Construction)

Source: Ministry of Manpower

Table 13: Top Ten Most In-Demand Skills in Singapore Scope of Job Specific Roles

1 Sales Representatives B2B, B2C, contact center 2 Engineers Chemical, electrical, civil, mechanical 3 Drivers Truck, delivery, construction, mass transit 4 Professionals Project managers, lawyers, researchers 5 Technicians Quality controllers, technical staff 6 Skilled Trades Electricians, welders, mechanics 7 Accounting & Finance Certified accountants, auditors, financial analysis Cybersecurity experts, network administrators, technical 8 IT support 9 Manufacturing Production and machine operators 10 Customer Support Call center operators, customer service representatives

Source: ManpowerGroup Talent Shortage Survey Singapore 2018

Some further foreign manpower policy tightening is already in the works over the next two years. S Pass holders will be impacted by the two-stage increase in minimum qualifying salaries in Jan 2019 (from $2,200 to $2,300) and Jan 2020 (to $2,400). Another upcoming measure announced in Budget 2018 is the hike in foreign domestic worker (FDW) levies starting 1 Apr 2019 ($265 to $300 for first

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FDW employed without levy concession, and $265 to $450 for second FDW employed).

Starting 1 July 2018, the Fair Consideration Framework – a policy to ensure open vacancies were advertised to locals first – was broadened to firms with 10 or more employees and jobs paying under S$15,000 a month (previously framework exempted firms with 10 to 25 employees and jobs that pay from $12,000 to $15,000 a month). This new framework will likely result in higher hiring costs and bureaucracy, and may discourage firms from investing and expanding.

The government can also do more to address the skills shortage in the digital economy. Skills shortage remains a top concern for 67% of 164 technology firms in Singapore surveyed by industry association SGTech in late 201715. Initiatives such as the Capability Transfer Programme – which funds up to 70% or 90% of costs for getting overseas experts to transfer skills and knowledge to local employees - had been introduced to help ease some of the manpower crunch problem.

15 Business Times, “Finding talent still top issue keeping tech bosses up at night: survey”, 7 March 2018. January 31, 2019 13

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Appendix

Table 14: 35th PAP Central Executive Committee Elected in Nov 2018 Position Office Holder Chairman Gan Kim Yong Vice-Chairman Masagos Zulkifli Secretary-General Lee Hsien Loong 1st Assistant Secretary-General Heng Swee Keat 2nd Assistant Secretary-General Chan Chun Sing Treasurer K Shanmugam Assistant Treasurer Ong Ye Kung Grace Fu Organising Secretaries Desmond Lee Christopher de Souza Indranee Thurai Rajah Ng Chee Meng Ng Eng Hen Members Tan Chuan-Jin Josephine Teo Sitoh Yih Pin Vivian Balakrishnan Lawrence Wong

Stepped Down Khaw Boon Wan Yaacob Ibrahim

Teo Chee Hean

Tharman Shanmugaratnam

Lim Swee Say

Note: Names in bold refer to senior members of the party. Source: People’s Action Party

Table 15: Singapore General Election 2015 Results Total % of Votes Change from Party Leader Contested Seats Seats Won Total Votes in Contested 2011, % Seats People's Action Party Lee Hsien Loong 89 83 1,576,784 69.9 9.7

Workers' Party Low Thia Khiang 28 6 281,697 39.8 6.8 Singapore Democratic Party Chee Soon Juan 11 0 84,770 31.2 5.5 National Solidarity Party Sebastian Teo 12 0 79,780 25.3 14.0 Reform Party Kenneth Jeyaretnam 11 0 59,432 20.6 11.2 Singaporeans First Tan Jee Say 10 0 50,791 21.5 N/A Singapore People's Party Lina Chiam 8 0 49,015 27.1 14.3 Singapore Democratic Desmond Lim Bak Chuan 6 0 46,508 27.1 3.0 Alliance People's Power Party Goh Meng Seng 4 0 25,460 23.1 N/A Independent Han Hui Hui 1 0 2,629 10.0 N/A Independent Samir Salim Neji 1 0 150 0.6 N/A TOTAL 89 2,257,016

Source: Straits Times

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Research Offices

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APPENDIX I: TERMS FOR PROVISION OF REPORT, DISCLAIMERS AND DISCLOSURES

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India: As of 31 January 2019, and at the end of the month immediately preceding the date of publication of the research report, KESI, authoring analyst or their associate / relative does not hold any financial interest or any actual or beneficial ownership in any shares or having any conflict of interest in the subject companies except as otherwise disclosed in the research report. In the past twelve months KESI and authoring analyst or their associate did not receive any compensation or other benefits fr om the subject companies or third party in connection with the research report on any account what so ever except as otherwise disclosed in the research report.

MKE may have, within the last three years, served as manager or co-manager of a public offering of securities for, or currently may make a primary market in issues of, any or all of the entities mentioned in this report or may be providing, or have provided within the previous 12 months, significant advice or investment services in relation to the investment concerned or a related investment and may receive compensation for the services provided from the companies covered in this report.

OTHERS Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the re port. Reminder Structured securities are complex instruments, typically involve a high degree of risk and are intended for sale only to sophisticated investors wh o are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct its own analysis of the product and consult with its own professional advisers as to the risks involved in making such a purchase. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior consent of MKE.

Definition of Ratings Maybank Kim Eng Research uses the following rating system BUY Return is expected to be above 10% in the next 12 months (excluding dividends) HOLD Return is expected to be between - 10% to +10% in the next 12 months (excluding dividends) SELL Return is expected to be below -10% in the next 12 months (excluding dividends) Applicability of Ratings The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

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Economics Research

 Malaysia  Singapore  London  New York Maybank Investment Bank Berhad Maybank Kim Eng Securities Pte Ltd Maybank Kim Eng Securities Maybank Kim Eng Securities USA (A Participating Organisation of Maybank Kim Eng Research Pte Ltd (London) Ltd Inc Bursa Malaysia Securities Berhad) 50 North Canal Road PNB House 400 Park Avenue, 11th Floor 33rd Floor, Menara Maybank, Singapore 059304 77 Queen Victoria Street New York, New York 10022, 100 Jalan Tun Perak, London EC4V 4AY, UK U.S.A. 50050 Kuala Lumpur Tel: (65) 6336 9090 Tel: (603) 2059 1888; Tel: (44) 20 7332 0221 Tel: (212) 688 8886 Fax: (603) 2078 4194 Fax: (44) 20 7332 0302 Fax: (212) 688 3500

Stockbroking Business:  Hong Kong  Indonesia  India Level 8, Tower C, Dataran Maybank, Kim Eng Securities (HK) Ltd PT Maybank Kim Eng Securities Kim Eng Securities India Pvt Ltd No.1, Jalan Maarof 28/F, Lee Garden Three, Sentral Senayan III, 22nd Floor 2nd Floor, The International, 59000 Kuala Lumpur 1 Sunning Road, Causeway Bay, Jl. Asia Afrika No. 8 16, Maharishi Karve Road, Tel: (603) 2297 8888 Hong Kong Gelora Bung Karno, Senayan Churchgate Station, Fax: (603) 2282 5136 Jakarta 10270, Indonesia Mumbai City - 400 020, India Tel: (852) 2268 0800 Fax: (852) 2877 0104 Tel: (62) 21 2557 1188 Tel: (91) 22 6623 2600 Fax: (62) 21 2557 1189 Fax: (91) 22 6623 2604

 Philippines  Thailand  Vietnam  Saudi Arabia Maybank ATR Kim Eng Securities Inc. Maybank Kim Eng Securities Maybank Kim Eng Securities Limited In association with 17/F, Tower One & Exchange Plaza (Thailand) Public Company Limited 4A-15+16 Floor Vincom Center Dong Anfaal Capital Ayala Triangle, Ayala Avenue 999/9 The Offices at Central World, Khoi, 72 Le Thanh Ton St. District 1 Villa 47, Tujjar Jeddah Makati City, Philippines 1200 20th - 21st Floor, Ho Chi Minh City, Vietnam Prince Mohammed bin Abdulaziz Rama 1 Road Pathumwan, Street P.O. Box 126575 Tel: (63) 2 849 8888 Bangkok 10330, Thailand Tel : (84) 844 555 888 Jeddah 21352 Fax: (63) 2 848 5738 Fax : (84) 8 38 271 030 Tel: (66) 2 658 6817 (sales) Tel: (966) 2 6068686 Tel: (66) 2 658 6801 (research) Fax: (966) 26068787

 South Asia Sales Trading  North Asia Sales Trading Kevin Foy Andrew Lee Regional Head Sales Trading [email protected] [email protected] Tel: (852) 2268 0283 Tel: (65) 6636-3620 US Toll Free: 1 877 837 7635 US Toll Free: 1-866-406-7447

Indonesia London Harianto Liong Greg Smith [email protected] [email protected] Tel: (62) 21 2557 1177 Tel: (44) 207-332-0221

New York India James Lynch Sanjay Makhija [email protected] [email protected] Tel: (212) 688 8886 Tel: (91)-22-6623-2629

Philippines Keith Roy [email protected] Tel: (63) 2 848-5288

www.maybank-ke.com | www.maybank-keresearch.com

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