Recent election marks PAP's narrowest margin of victory

The rise in popular dissatisfaction with the PAP may eventually alter the economic policy framework, said Moody's.

According to Aninda Mitra, Vice President-Senior Analyst, Sovereign Rish Group of Moody's Singapore, if political pressures for increased attention to social welfare demands weaken Singapore’s economic, there may be a further rise in popular dissatisfaction with the PAP.

Singapore held its general election on May 7. The ruling People’s Action Party (PAP) won 60% of the popular vote and 82 out of 87 seats. This would constitute a resounding electoral victory by global standards. The PAP’s absolute majority ensures -by-and-large- political and policy continuity and underpins Singapore’s Aaa sovereign rating, and stable outlook.

In Moody's previous sovereign risk assessments, they have highlighted the possibility of an unprecedented shift in political power away from a PAP-led administration as a potential source of "political event risk" through which Singapore's economic policy framework has not been tested.

With the conclusion of the recent general elections, the possible materialization of this political transition risk is now at least five years away. During which time, both, the economic agenda of an increasingly robust political opposition and the response of the ruling party and government to that challenge are new developments that may alter the course of Singapore in the future.

It is worth highlighting three key socio-economic trends which are widely perceived to be fueling popular dissatisfaction with the political status quo.

First, is the rapid increase in home prices which has accompanied Singapore’s sharp economic rebound (+14.5% year-on-year real GDP growth) in 2010 after a shallow recession in 2009 (-1.3%). Alongside macro-prudential measures, such as raising minimum down-payment requirements for second mortgages and higher taxes for short-term sales, rising home prices have squeezed first-time home-purchasers and as well as made government subsidized housing less affordable than in the past.

Second, the dependence on foreign labor has lowered real wages in low value add sectors. Meanwhile, substantial increases in permanent residents in the past decade and the arrival of larger numbers of highly skilled workers have also heightened labor market competition. These have also fueled wage disparities, pressured public services, and fueled questions about the inclusiveness of Singapore’s relatively strong growth fundamentals.

Lastly, a growing maturity of the electorate, fueled by demographic shifts in the voting population and a general desire for greater political voice, appears to have been ably exploited by a better organized opposition.

The PAP-led government appears to have anticipated many of these issues when it convened the Economic Strategies Committee (ESC) in the wake of the global financial crisis. The ESC’s recommendations focusing on raising medium-term productivity and social inclusiveness include:

1. tax incentives, grants and subsidies to help companies and workers innovate and deepen their skills and expertise;

2. incentives to companies to develop growth capabilities, commercialize their R&D, and expand abroad; and

3. helping lower skilled workers reach their full potential, and benefit from more gainful employment and quality of life.

Singapore’s dynamism and competitive edge in large part comes from its very strong rule of law, its openness to foreign participation in the economy and increasingly strong technological base. The country is well positioned to take advantage of the shift in global demand towards Asia. Ongoing tax and regulatory incentives, alongside flexible labor and product markets and amidst an effective policy framework, should also facilitate further specialization and value-added activity, and thereby ensure Singapore’s prosperity .

However, a broader uplift in domestic productivity is also contingent on deeper shifts in education and toward more innovation. Despite a long tradition of social cohesion and cultural openness, changes in several of these areas may take longer, and remain constrained by well-entrenched socio-political traditions. Meanwhile, the government has emphasized its attention to social issues by “special transfers” in its annual budget, and which now account for 18% of total operating revenues, up from 10-11% in the middle of this past decade. Singapore’s fiscal and debt position, however, does not encumber the sovereign rating.

At the same time, Singapore’s competitiveness will also need to be bolstered by a deepening of strategic reforms. It will be important that new domestic political debate ushered in by the election and likely adjustments in Singapore’s social and economic system do not undermine Singapore’s fundamental strengths.