Indonesia’s new tax law is bad news for Singapore

published 23 February 2015

150223-joko-widodo — Indonesian president Joko Widodo: luring investors back

Indonesian president Joko Widodo isn't going to be very popular in Singapore.

He's recently announced plans to introduce a tax amnesty for Indonesians in a bid to lure investors and companies back to the country.

The nuts and bolts of it is that money kept in Singapore and other offshore countries could be repatriated to Indonesia without paying tax on it.

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It's part of President Widodo's plan to increase Indonesia's GDP from about 5% to 7%. To make that a reality, a lot of capital is needed to build ports, railways and industrial estates. This tax amnesty plan is just one of several ways Widodo is planning to raise funds

It's great news for Indonesia, but bad for Singapore.

Singapore is having a mid-life crisis

After starting off as a modest trading hub in Southeast Asia in 1965, it has grown to be the third richest country in the world.

Its success came from its popularity as a trading hub. Natural resources were either shipped or traded through Singapore to buyers elsewhere. Singaporean entrepreneurs were able to profit from this, and Singapore established itself as the middleman of Southeast Asia.

For decades, countries such as Indonesia, Malaysia, Philippines and Thailand have lagged Singapore in trading and services, But I think the gap is narrowing, making it tougher for Singapore to continue its economic growth model.

Official statistics bear out this view.

Since 1976, Singapore has registered an average GDP growth of 6.9%. In the fourth quarter of 2014, GDP dropped to a pedestrian 2.1% (2.9% for whole 2014).

The Ministry of Trade and Industry forecasts GDP growth of between 2% and 4% in 2015. Even if they are proved right (too bullish, in my view) it would mean that Singapore is still slowing down massively.

That slowdown is being felt in the stockmarket as well.

A bad time to invest in Singapore

It means that foreign investors could have given Singapore a miss over the last seven years.

Surely that's too harsh? Some sceptics suggest a stock picker would have been able to generate fabulous returns. And they'd be right so long as the stock picker bought foreign-owned stocks.

Four out of the top five performing stocks are foreign, both in terms of ownership and scope of business.

The situation isn't much better in the small-cap market. Chinese companies listed in Singapore were the hottest tickets in town five to eight years ago. I can recall attending number of briefings, presentations and conferences where they were touted as a cheap and alternative way to access the Chinese market.

Well, in hindsight that was a waste of time.

Since January 2010 the FTSE ST China Index and the FTSE ST China Top Index have yielded -19.5% and -9.5% in Singapore dollar terms.

Meanwhile, Indonesia, Malaysia and the Philippines have generated positive returns since November 2010, but they have also outperformed Singapore.

I think this trend will continue, making it difficult to be bullish about the Singapore stock market.

Lars is an emerging-markets expert, with many years of 'on the ground' experience hunting down profit opportunities in Asia. Lars spent ten years living in Malaysia and Thailand, seeking out strategic opportunities, before moving to London to manage the Oracle Asia Absolute Fund. In short, Lars has real knowledge of where the opportunities in Asia are.