Singapore Business Review (April - July 2015)

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THE changing taste of

Asian Art

Collectors

singapore’s weak

m&a appetite crowdfunding

+

vs bank financing

Ranking

more ex-homeowners

seek public rentals

serviced residences consumer debt levels

remain risky

MICA(P) 244/07/2011 KDM No: PPS1645/3/2008

billionaire battle: hk VS SG

Lennart Bergelin COACH

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FROM THE EDITOR Our annual Art Report in this issue reveals that in the last five years, there has been a dramatic change in what Asian collectors are looking to buy. It turns out that during auctions, specialists representing Asian clients are now very active in acquiring western art.

And with an increasing number of ultra rich Asians with a great passion for art as an investment, the western art market is in for a lucrative treat.

Our channel checks also reveal that almost six in ten ex-homeowners who could no longer afford their mortgage payments are seeking public rentals.

This alarming trend is becoming a concern for the government since public rental flats are highly subsidised products mainly dedicated to the real needy Singaporeans.

In this issue, you will also find a comprehensive report on the latest trends in the mergers and acquisitions scene, as well as an industry brief on what’s happening in Singapore’s SME financing sector.

Moreover, you can find our inaugural ranking of the 50 largest serviced residences in Singapore in this issue.

We have a lot in store for you so start flipping the pages!

Tim Charlton

Singapore Business Review is available at the airport lounges or onboard the following airlines:

Singapore Business Review is available at the following clubs and hotels: American Club Hollandse Club Laguna National Orchid Country Club Raffles Country Club Raffles Town Club RSYC Seletar Club Sentosa Golf Club Singapore Cricket Club Singapore Island Country Club Swiss Club The Tanglin Club The China Club The Legends Fort Canning Park The Pines Club Tower Club Singapore Fullerton Hotel Grand Plaza Park

Royal Hotel Inter-Continental Le Meridien Orchard New Park Hotel Pan Pacific Raffles Hotel The Hilton The Regent Singapore The Ritz Carlton The Swiss Hotel Stamford Traders Hotel Singapore Darby Park And to 16 serviced residences

SINGAPORE BUSINESS REVIEW | JULY 2015 1

CONTENTS

28

CoVER STORY The changing taste of Asian art collectors bodes well for the Western art market

FIRST

ANALYSIS

08 More ex-homeowners seeking

26 The crowning glory of

public rentals

22 Financial Insight

crowdfunding in Singapore

32 Consumer debt in Singapore

10 Billionaire battle between

Hong Kong and Singapore

12 Is the KL-Singapore High-Speed Rail

wealth centre?

Published Bi-monthly on the Second week of the Month by Charlton Media Group 101 Cecil St. #17-09 Tong Eng Building 2 Singapore SINGAPORE BUSINESS REVIEW | JULY 2015 069533

shows signs of stabilisation, but leverage is still high

24 Economic Insight 36 Legal Briefing 38 CMO Briefing

RANKINGS

project still on the right track?

14 Is Singapore a ‘stagnating’

44

REGIONAL ANALYSIS Key debate in Asia still about deflationary pressures and central banks’ response

REGULAR

09 No more shop till you drop

40

regional economy briefing How weak exports are threatening the looming Indian current account surplus

34 Demand for longer leases in

serviced residences declines

For the latest business news from Singapore visit the website

www.sbr.com.sg

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News from sbr.com.sg Daily news from Singapore most read

MARKETS & INVESTING

No need to rush to buy Singapore Savings Bonds: MOF Senior Minister of State for Finance and Transport Josephine Teo said that the government intends all individuals to have access to the bonds and could potentially issue $2-4 billion of Savings Bonds this year, depending on demand.

“If total applications exceed the total issuance size in a particular month, the MAS will allocate bonds to all applicants in increasing multiples of $500,” said Teo.

leisure & entertainment

ENERGY & OFFSHORE

No end in sight for Genting’s troubles after dire first quarter results The company warned that its core gaming business will continue to suffer on back of the anti-corruption crackdown in China and the slowing Chinese economy.

“We do not expect any respite in the medium term, and are restructuring our operational and marketing organisation to adjust to this change. The year ahead will be challenging,” Genting noted in its financial statement.

Noble Group still in a good spot despite recent troubles The steep decline in the group’s share price might be a long-term positive because it “forces greater financial transparency”.

“Noble Group is in a much better spot than a couple of years ago, having disposed of its loss-making agri business and reduced balance sheet leverage to lows not seen in over a decade. ROEs in 2015 are at the cusp of reversing the declining trend since 2010,” said Barclays.

AI - The Great Disruptor

BY CALLUM LAING Big data is beginning to shape every element of life in Singapore. Change is coming in the form of a new breed of disruptive technology. Following these changes will impact your business will decide its survivability and level of success.

Big data, embedded artificial intelligence (AI), smart robotics, cognitive computing, nanotechnology, 3D printing, and biotech are a few examples of a suite of disruptive technology I have called The Great Disruptors.

Protecting the value of your business in Singapore

BY PAUL COATES A Business Will -- have you made one? I ask this question frequently when meeting businesses in Singapore. Often I am met with silence or an awkward pause.

I normally interject at this point by advising it is a Business Protection solution, which will either protect profits or cover liabilities. Business liabilities such as Business Loans which have possibly personal guarantees attaching, or Loan Accounts or Overdrafts need to be covered.

MOST READ COMMENTARY These are the skills in demand right now in Singapore

BY CHRISTINE WRIGHT Singapore’s jobs market has bounced back to high levels of activity following the slowdown during Chinese New Year. Now that the pace of hiring is picking up again, will your skills be in demand?

In accountancy & finance we are seeing many roles in commerce with employers recruiting Corporate Finance specialists who have the ability to manage finances from a strategic level.

Agenda PEOPLE | PLACES | SERVICES | OPPORTUNITIES

Places

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OPPORTUNITIES The Guidebook to Optimum Health

The Guidebook to Optimum Health is book 2 by Carl Massy - ex Australian Army Major turned author, NLP expert and Coach.

Massy suggests as important as exercise and good nutrition are; alone they’re not enough. He shows how our thinking and emotions seriously impact our health and vitality, and influence disease.

Get a copy on Amazon or at UFIT Gym Singapore. For more info visit: www.carlmassy.com and find out how you can have more energy and vitality.

SERVICES

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Places

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FIRST and move to public rental flats.

“Both ways of changing dwellings – upgrade or downgrade – reflect an increased housing mobility over the years, as people become more financial and investment savvy, opportunity conscious, more practical, and nimble in their living requirements in accordance with their circumstances,” says Ong.

WHERE TO STUDY?

Singapore’s high school graduates need not look too far for college, as their parents will most likely send them to local universities.

This trend can be seen across Asia Pacific, according to the MasterCard survey of Consumer Purchasing Priorities – Education which reveals that 2 in 3 parents in Singapore prefer their children to study at a local university.

One of the major reasons behind this trend is that Asian, particularly Singaporean, universities feature in global rankings, making the education sector very competitive. Two of Asia’s top universities are located in Singapore, namely the National University of Singapore (NUS), ranked 2nd in Asia and 25th worldwide, and Nanyang Technological University (NTU), ranked 11th in Asia and 61st worldwide.

Going local The MasterCard survey shows that 9% more parents in Singapore plan for their children to attend local universities, compared with one year ago.

When asked about personal education plans, close to 40% of respondents in Singapore expressed interest in attending an education course in 2015. 47% cited professional skills upgrade as the main reason, while 16% said that the courses were hobbyrelated and for self-improvement.

“Parents today are focused on investing in their children’s education and save early to provide them with quality learning. It’s very encouraging that universities in Singapore are ranked well globally, and that parents in Singapore have the option of providing their children with a world-class education right here at home,” says Deborah Heng, group head and general manager, MasterCard Singapore.

8 SINGAPORE BUSINESS REVIEW | JULY 2015

Why are they moving to public rental flats?

More ex-homeowners seeking public rentals

W

hen Madam A and her husband decided to sell their 4-room flat back in 2010 after their business ventures failed and subsequently could no longer afford their mortgage payments, they applied for a public rental flat. Back then, Madam A shared the same predicament with the other 52% of public rental flat applicants who were ex-homeowners, but in 2015, that number has swelled to a worrisome 59%, according to Dr. Mohamad Maliki Bin Osman, the Minister of State, Ministry of National Development. The notable increase in ex-homeowners applying for public rental flats can be attributed to a couple of factors, says Ong Kah Seng, director at R’ST Research.

Ong says in the few years before 2013, HDB resale prices were also spiraling and many buyers jumped into the bandwagon of buying large flats or flats in prime locations. But some homeowners who bought into the hype faced difficulty meeting mortgage payments, so they have been recently forced to sell at a loss and apply for a public rental flat.

Another factor is that exhomeowners are now more willing to trade down their living requirements, and one attractive option is to apply

In the few years before 2013, HDB resale prices were also spiraling and many buyers jumped into the bandwagon of buying large flats.

Competition for limited subsidies But the trend of people resorting to sell their homes and apply for public rental flats is creating some concern, as public rental flats are highly subsidized products. Housing subsidies, or subsidies at large, always have to give priority to the real needy, says Ong. “Subsidies are also very income and wealth regressive, so public rental flats should ideally cater mostly to very low-income groups or those who are having difficulties in moving their life forward almost every day, instead of catering to people who make unwise decisions and fall back on public rental flats as their safety net,” says Ong. Aside from the increased competition for limited subsidies, the Singapore government has also expressed some alarm that homeowners could be making decisions at a panic. While there is strong temptation to sell in a rising property market, Minister Osman encouraged homeowners to resist it when possible since cashing out too early can be detrimental to their wealth and prosperity. “We hope homeowners will make informed choices and not be easily taken in by the promise of short-term gains without realizing the serious longerterm implications,” says Osman.

HDB resale flat price index (1Q 2009 =1 100)

Source: HDB (statistics on website)

FIRST Prime retail rents, 2008–Q1/2015

Source: Savills Research & Consultancy

Refocusing on better-performing outlets

No more shop till you drop

W

hen Marks & Spencer and John Little closed their outlets in Centrepoint and Marina Square, Dubai-based owner Al-Futtaim said the move was necessary for them to focus manpower and resources on enhancing its better performing stores. But Alan Cheong, senior director at Savills, notes this has brought to light the sluggish sales in the department store segment, largely due to the change in shoppers’ habits and preferences.

According to the Singapore Department of Statistics, the annual retail sales growth for department

stores has slowed significantly during the last three years from 2012 to 2014. Cheong says that this slowdown spurs department stores to seek new retailing strategies to differentiate themselves from both their traditional competitors and as well as online retailers.

“For example, following the announcement of the closure of some of its stores, the Al-Futtiam Group revealed its plans to invest in an online shopping platform for its Robinsons chain, establishing an omni-channel presence where customers can have a click-andcollect service or have their in-store

The annual retail sales growth for department stores has slowed significantly during the last three years from 2012 to 2014.

purchases delivered. Developing an additional online presence may therefore be the way forward for traditional retailers,” adds Cheong.

Apart from changing customer preferences, the retail sector is also fraught with increasing annual job vacancies (from 3.7% in 2011 to 5.1% in 2014). “With declining margins and restrictions on foreign hiring still in place, retailers are finding it difficult to fill vacancies at salaries that would not put them in the red. It is not surprising then that straddled with these problems, retailers are increasingly resisting higher asking rents.”

Chua Yang Liang, JLL’s head of Southeast Asia research, says a challenging business environment is anticipated, likely hindering growth in demand and occupancy. “Rental and capital values may face further downside pressure as higher labour costs continue to put a damper on retailers’ confidence,” adds Chua.

The Chartist: competition in Singapore’s EC market heats up in 2015 Nine new launches totalling 4,900 will enter the Singapore EC market over the course of 2015. The hectic pace of supply entering the market implies that new launch prices are likely to be lower than current. According to a report by DBS, developers could see their margins squeezed to <10%, especially for projects in Sengkang and Sembawang (four projects totalling 2.2k units over 2015-16).

DBS analysts are more upbeat on the outlook for upcoming projects in Yishun (City Dev, 490 units) and Choa Chu Kang (MCL Land, 1, 328 units), given a lack of new EC supply in the respective micromarkets. DBS adds that possible changes in the monthly household income for ECs could widen the addressable market and lift transaction volumes in the space.

EC pipeline and location breakdown

Source: DBS Bank estimates, URA, HDB

Anticipated EC supply by planning area

Source: DBS Group Research

SINGAPORE BUSINESS REVIEW | JULY 2015 9

FIRST

Billionaire battle between Hong Kong and SG

Survey

CLUELESS ON CASH

M

uch has been said about the rivalry between Hong Kong and Singapore, but if the ranking of the most important cities for the ultra-wealthy is anything to go by, Singapore is losing out to Hong Kong for the ultra rich. In terms of the cities that are consistently favoured by the ultra-rich (defined as someone with a net worth of US$30m or more, excluding their principal residence), Asian cities now make up four of the top 10 slots in Knight Frank’s Global Cities Survey.

The most intriguing battle remains between the region’s top two cities, as Hong Kong retakes third spot from Singapore this year. Strengthened by its connections with mainland China and the sheer weight of Chinese capital on its doorstep, Hong Kong boasts a larger billionaire population (53) than its Southeast Asian rival which only has 24 billionaires in 2014.

However, over the next 10 years, Singapore is set to gain the most UHNWIs of any city with 1,752 new residents compared to only 1,251 in Hong Kong, according to David Ji, director and head of research & consultancy, Greater China at Knight Frank. He says, “Geographic concentration of

Which city lays more golden eggs?

wealth remains a key facet with 10% of all additional growth in UHNWIs taking place in just five cities – Singapore, Hong Kong, New York, London and Mumbai – over the next decade.”

Most notably on a regional level, Knight Frank reveals that Asia overtook North America as the region with the second-largest increase in ultra-high net worth individuals in 2014.

The ultra-wealthy in Asia now also hold more in total wealth with net assets of $5.9tn – 7% more than those in North America with $5.5tn. Some 1,419 people moved past the $30m+ mark in Asia in 2014, after an increase of fewer than 1,000 in 2013.

Over the next 10 years, Singapore is set to gain the most UHNWIs of any city with 1,752 new residents compared to only 1,251 in Hong Kong.

SINGAPORE BUSINESS REVIEW EVENT

Full turnout at SBR’s Budget Breakfast Briefing An esteemed group of panelists lauded the Jubilee Budget for its focus on improving local innovation and manpower skills, as well as its comprehensive support system for businesses at SBR’s Singapore Budget Breakfast Briefing 2015. Over eighty attendees trooped to The Fullerton Hotel in the early morning of 24 February to learn the implications of Budget 2015 immediately after it was read in Parliament.

This year’s panelists included Anuj Kagalwala, Financial Services Tax leader at PwC; Russell Aubrey, partner – Transaction Tax at EY; Lee Tiong Heng, Tax partner at Deloitte; Liu Hern Kuan, partner at Rajah & Tann; and Sum Yee Loong, professor of Accounting (Practice) at SMU. The event was proudly supported by the SAC, ACCA, SiATP, SMU School of Accountancy, AcClarity, SIAS, ASME, EuroCham, CanCham, AmCham, SCCS, BISA, and LexisNexis.

10 SINGAPORE BUSINESS REVIEW | JULY 2015

Over 80 professionals flocked to the recently concluded SBR Budget Briefing

Our moderator, Simon Hyett, and esteemed panelists

Ask corporates anywhere in Asia about their company’s real-time cash position, and you’d most likely receive a shrug of the shoulders in response.

The Cashfac Operational Cash Index, a survey conducted by research firm East & Partners Asia, interviewed 364 chief financial officers and corporate treasurers and reveals that almost 2 in 3 of these corporates lack a clear idea of their cash positions.

The Cashfac Operational Cash Index highlights issues around clarity on cash positions and the realities of managing multi-bank systems for large corporate treasuries in the region. It also found high levels of frustration with the linking of bank accounts and with the cost of bank product solutions and upgrades.

It was also revealed that only 35% of corporates surveyed had access to a real-time view of their transactions and cash and that only 23% of cash is physically pooled in Asia Pacific. Notional Pooling, where possible, is not fully exploited.

Patchy solutions East & Partners found that high costs, proprietary banking systems and patchy workaround solutions were all seen by corporates as undermining the accuracy and confidence in data, and impacting the ability to achieve real-time cash visibility.

Lachlan Colquhoun, chief executive, East & Partners Asia, says, “Due to the complexities and shortcomings of managing multiple banking relationships regionally, our research found that many Asia Pacific corporates lack a line of sight to their cash positions.”

FIRST

Is the KL-Singapore High-Speed Rail project still on the right track?

I

t has been five years since Prime Minister Najib Razak told the world about the Kuala Lumpur-Singapore High-Speed Rail (HSR) project, but there has been very little progress and updates from the concerned parties have been very limited.

Perhaps a step closer to realizing this project is when Prime Minister Lee Hsien Loong and PM Najib officially agreed to begin construction by 2020 in February 2013. A special committee has also been formed to conduct feasibility studies for the US$11billion project. The HSR will not only cut travel time between Malaysia and Singapore to 90 minutes, it will surely serve as an infrastructure that will greatly boost both countries’ economy and investment influx.

Hak Bin Chua, an economist with Bank of America Merrill Lynch, says greater collaboration is emerging out of economic necessity since Malaysia’s abundant land and larger population offers Singapore a natural avenue to overcome its geographical and manpower constraints. Moreover, Malaysia needs more foreign investment as the oil & gas price collapse is hurting growth and fiscal revenue.

But for PM Najib, the HSR is more than just an economic booster. The Kuala Lumpur stop, according to Chua, will likely be Bandar Malaysia, a development of

1Malaysia Development Berhad, a strategic development company wholly owned by the Government of Malaysia. Therefore, the HSR will potentially offer a means to salvage 1MDB from its debt-laden state and lift its asset values.

As of October 2014 the seven stops in Malaysia were announced to be in: Kuala Lumpur; Putrajaya; Seremban; Ayer Keroh: Muar; Batu Pahat; and Nusajaya (Iskandar).

For Singapore, the terminals could be at Tuas West; Jurong East; or the Downtown Core.

“This opportunity comes at a time when both Japan and China – armed with ready infrastructure funds – are showing keen interests in the project. With the ASEAN Economic Community set to start by end-2015, the fast train will complement ambitious train projects connecting Thailand and the Greater Mekong region,” adds Chua.

Should this ambitious project push through, it will mean better economic links between Singapore and Malaysia – two countries that have undergone some tension in the past, especially during PM Mahathir’s time. Chua recalls that Dr Mahathir’s proposed “crooked bridge” to replace the causeway was the epitome of that tense relationship. Only when PM Badawi took over the premiership in 2003 was there a

Collaboration becomes a necessity

warming of bilateral ties. Since then, we have witnessed greater cross-border investment and resolution to some outstanding issues, including the KTM railway land in May 2010.

According to Chua, Singapore’s cumulative direct investment into Malaysia has doubled to S$27.2bn in 2013 from S$13.5bn in 2003, the year when PM Badawi took over the premiership from Dr Mahathir. Malaysia is the fifth largest direct investment destination, accounting for about 7% of total.

OFFICE WATCH

Rickshaws and crazy golf at Spencer Ogden’s office Inspired by a vision to incorporate home and garden into the office environment, Spencer Ogden has opened one of the coolest workplaces in Singapore. Located in the heart of the CBD, on the 34th floor of One Raffles Place, Tower 2, the 12,000 sq ft space is Spencer Ogden’s ‘biggest’, ‘best’ and newest trademark space of the company’s 15 international offices.

With over $1M invested in this signature office, it will accommodate more than 120 executives of the company. It features AstroTurf flooring, an American-style diner, and giant knight’s tables. It has table-tennis, football, basketball hoops, crazy golf, bicycles and even rickshaws to keep their specialist consultants energized at work.

The space was designed by Bonita Spencer-Percival, design director of Spencer Ogden, and was planned and fitted by the design consultancy Space Matrix.

12 SINGAPORE BUSINESS REVIEW | JULY 2015

Reception

Trading floor

Meeting room

Club room

FIRST NUMBERS

Singapore’s net new assets grew $40 billion

Is Singapore a ‘stagnating’ wealth centre?

W

ith Singapore remaining stuck behind Hong Kong in the world’s wealth management rankings for the third straight year, analysts have begun to ask: is Singapore now a less attractive haven for investors, compared with Hong Kong? Daniel Kobler, partner and head of banking strategy consulting at Deloitte, says Singapore has been described as a “stagnating centre,” based on market volume from 2008 to 2014. “Despite a strong 24% increase in client assets, Singapore fell by one position and is now ranked sixth, with $0.5 trillion assets booked,” says Kobler.

Hong Kong, on the other hand, has been tagged a “growth leader”, achieving its highest growth since 2008 and elbowing Singapore out. “Fifth-placed is Hong Kong, which achieved growth of 146% ($0.4 trillion) in cross-border client assets during the period, more than any other centre,” Kobler notes.

Different propositions But Alvin Lee, managing director, regional wealth management at Maybank, notes that apart from the generic investment products, Singapore and Hong Kong offer slightly different propositions to HNWIs. “Hong Kong’s proximity to China and its deeper capital markets will always appeal to investors who are looking 14 SINGAPORE BUSINESS REVIEW | JULY 2015

for China exposures, while Singapore is in the heart of ASEAN and is continuously attracting offshore investors to not only park their funds, but also to consider setting up base. The key driver for Hong Kong’s stellar growth is due to mainland Chinese banking in Hong Kong,” adds Lee. Thus, it would be too early to count Singapore out of the wealth management game simply because of Hong Kong’s robust performance. Kobler notes that except for Hong Kong, the only other international wealth management centre attracting net new assets was Singapore, with a growth of $40bn.

Further, Singapore’s financial services sector continues to perform well, an indication that the country still deserves its position as a leading wealth management centre in the region. “I do not think that Singapore is a stagnating centre in wealth management. The financial services sector is a very key component of Singapore’s GDP and our policies have always been very forward looking to continuously promote Singapore as a regional financial hub, if not a global one,” says Lee. “Market shares of financial centres in wealth management will always fluctuate in the short term, but the overall soundness and conduciveness of Singapore will make this centre a very important and relevant one in the long run,” adds Lee.

Despite a strong 24% increase in client assets, Singapore fell by one position and is now ranked sixth, with $0.5 trillion assets booked.

Source: Hudson

FIRST kitchen steward and climbed the ranks to reach his current position. In 2011, as Executive Sous Chef of Raffles Hotel, Chef Vijay was asked to be introduced to the former British Prime Minister, Sir John Major, who was impressed by the canapés prepared for an event.

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Meet Singapore’s 8 hottest hotel chefs aged 40 and under

M

eet some of the city’s finest hotel chefs and see how passion and motivation can steer aspiring chefs in the right direction. Most of them are expats who have made Singapore their home and have embraced its diverse culture. Singapore Business Review has compiled a list of the 8 hottest hotel chefs aged 40 and under. With their ages ranging from 32-39 years old, their carefully crafted meals are highly in demand with hotel guests.

1 Sam Chin, 32, Chef de Cuisine, Mandarin Orchard Singapore Chef de Cuisine Sam Chin was part of the handpicked culinary dream team which won gold for Singapore at the inaugural Dubai World Hospitality Championship in 2013. In 2014, Chef Sam was tapped to join the culinary team at ME@OUE where he is responsible for driving food quality, as well as maintaining stringent standards for kitchen operations.

Dubbed a rising ‘young star to watch’ with over 10 years of experience, Chef Sam specializes in modern European cuisine.

2 Angelo Ciccone, 33, Executive Sous Chef, Regent Singapore Italian Chef Angelo Ciccone has been with Four Seasons Hotels and Resorts for the last 15 years. Prior to this, he worked at a beach resort in Rimini, Italy, and in a few free-standing fine dining restaurant in Puglia, Italy. He moved to Singapore’s City In A Garden and launched Regent 16 SINGAPORE BUSINESS REVIEW | JULY 2015

Singapore’s Italian restaurant Basilico in 2008, elevating it to an award-winning establishment.

3 Vaibhav Suri, 33, Head Chef, Holiday Inn Singapore Orchard City Centre Delhi-born Head Chef Vaibhav Suri has worked in several celebrated hospitality establishments. He started his career in established Indian groups such as the Old World Hospitality and BJN Hotels.

He joined the Old World Hospitality in 2004 as a management trainee, before quickly rising to take charge of the widelyacclaimed Chor Bizarre at 22 years old.

4 Darren Ong, 34, Executive Chef, Royal Plaza on Scotts Prior to joining Royal Plaza on Scotts in 2006, Darren Ong worked at Meritus Mandarin Orchard for 4 years. He was recognized for his talents and received promotions from Junior Sous Chef to his current position of Executive Chef.

As part of the leadership team, he has played a key role in the creation of the world’s first life-sized race cars made out of chocolate, bread, macarons, pasta and seashells - an annual exhibit at the hotel to celebrate Formula One season.

5 Vijayakant Shanmugam, 35, Executive Chef, PARKROYAL on Pickering Chef Vijayakant Shanmugam’s 15-year career spans the kitchens of numerous 5-star properties in Singapore and across Asia. He began his culinary career as a

6 Soren Lascelles, 35, Executive sous chef, Grand Hyatt Singapore Prior to joining Grand Hyatt Singapore, Soren Lascelles was with Park Hyatt Saigon, where he worked from 2012 as chef de cuisine at Square One, a European and Vietnamese restaurant.

The young Australian first embarked on his culinary adventure at the age of 17, working as an apprentice. After moving to Sydney in 1999, Soren continued his training at the multi-award-winning restaurant Banc. His experience outside Australia includes stints at Nahm and The Ledbury, both Michelin-starred restaurants in London.

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Melvin Lim, 37, Executive Chef, Ramada and Days Hotels Singapore At Zhongshan Park Trained in classical French and Italian culinary arts, the 37 year-old native Singaporean has 21 years of culinary experience under his belt. Having spent the last 10 years of his career honing his craft and supervisory skills in the Shangri-La Hotel Singapore, Chef Melvin started out overseeing the hotel’s banquet culinary operations. He was subsequently tasked to helm the kitchen of The Line, the hotel’s then 6-month old all-day dining restaurant.

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Massimo Pasquarelli, 39, Executive Chef, The Ritz-Carlton, Millenia Singapore A Swiss-born Italian, Massimo Pasquarelli commenced his culinary career by joining Michelin starred Harry’s Bar in Venice, and in 1995 served as the personal chef to the Brigadier General of the Italian Armed Forces before heading to Cecconi’s, a 1-Michelin star restaurant in London.

In 2012, Chef Massimo joined The Ritz-Carlton, Millenia Singapore as Executive Chef from the Shangri-La Aberdeen Marina Club in Hong Kong.

Chef Massimo was the brain behind ‘SuperBrunch’, The Ritz-Carlton, Millenia Singapore’s biannual vintage champagne brunch extravaganza.

Living up to the Tradition.

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Placing sustainability and innovation at the core of the company strategy, we have been partnering customers and delivering value to stakeholders in our commitment to sustainable construction by further developing resource- and energy-efficient solutions. This is Holcimâ&#x20AC;&#x2122;s aim in Singapore with the recently launched first Centre of Excellence in Asia: to build more with less.

100 years of Strength. Performance. Passion.

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startups

CoAssets provides a platform for realty, crowdfunding enthusiasts

B

illing itself as South East Asia’s first real estate crowdfunding platform, CoAssets aggregates investors and connects them with opportunity providers, such as developers.

Despite the nuanced distinction between real estate co-investing and real estate crowdfunding, the team behind CoAssets have a clear vision of the true potential of real estate crowdfunding – leveraging the internet to aggregate like-minded individuals from different parts of the world to provide financial support for real estate projects, even in separate geographical regions.

Founded by Getty Goh and Dr

Seh Huan Kiat, CoAssets offers several unique value propositions.

The platform targets developers who are looking for amounts between S$1 million and S$5 million. According to the founders, they realized that there is a gap in the market, as financial institutions are not interesting in funding such small amounts. On the other hand, such figures are too large for most single funders to take on. By using crowdfunding for such amounts, CoAssets are making it possible for some developers to realize their projects.

CoAssets’ beta version launched in December 2012. After a trial period of almost one year, they officially launched in July 2013. CoAssets is incubated by Expara. They also have some private investors; one of its early investors is Dr Jeffrey Chi, chairman ofthe Singapore Venture Capital & Private Equity Association.

In January 2015, CoAssets closed their Series A funding of S$1 million at a S$13 million valuation. In terms of membership, CoAssets grew from 200 in July 2013 to more than 7,000 in February 2015. They have also brokered more than S$36 million in deals for various projects.

Ninja Logistics rolls out next-day deliveries

solve the last mile logistics problem via a multitude of strategic tie-ups and a cutting edge technology stack revolving around reactive and distributed systems.

According to Chang Wen, the Ninja Van service is an alternative, highly tech-driven approach for next day deliveries, focusing on enabling seamless order creation, real-time With a focus on e-commerce and integrated milestone updates, and technology, Ninja Logistics aims automated customer communications to enable deliveries with instant for its merchants. He says that all customer communication possibilities. these innovations serve to provide Ninja Logistics was founded by consumers with more control over Shaun Chong, a former algorithm their deliveries and also streamline engineer at BOA, and Lai Chang Wen business operations significantly, and Boxian Tan, who both came from ushering in the age of e-commerce in an e-commerce background, when Southeast Asia. they realized that a large gap exists Starting with seed funding of between the promise of e-commerce, S$200,000, Ninja Logistics recently and the actual deliveries. closed a Series A round of S$3.5M Ninja Logistics, which operates from Monks Hill Ventures and under the brand Ninja Van, seeks to Malaysia’s Insas Berhad.

18 SINGAPORE BUSINESS REVIEW | JULY 2015

Megafash lets indie brands shine

Megafash was founded to connect independent brands and creative projects to the world. This marketplace platform allows brands to seamlessly share, showcase and sell both their story and their products.

Megafash was founded by Ngeow Jiawen, a 27-year-old NUS alumna who has worked in multiple startups and played a key role in those startups before deciding to start her own company, Jeremy Khoo, 31, an e-commerce veteran who also founded Dressabelle, a leading womens’ fashion e-tailer in SEA, and Lee Jing Chuan, 27, a self-taught programmer who has been building websites since he was in primary school. The platform focuses on independent brands and helps them with their brand story-telling process in a high traffic environment.

According to Ngeow, they believe that the surge in e-commerce in Southeast Asia should not just be about big, established e-tailers, but should include the indie brands which make up the long tail. Being in similar e-commerce businesses, Megafash is intimately acquainted with the difficulties of marketing and operations of e-commerce.

“We started the business to tackle a prominent gap in the way local entrepreneurs and independent brands are facing difficulties marketing their brand story while showcasing their products. We believe that a good brand story endures the test of time and tide and is more likely to build up a loyal community of customers,” said Ngeow.

To begin with, Megafash had a few team members executing and testing new products without too much thought, but as they went along, they began to streamline their processes and build up an increasingly successful product. Megafash believes that a good brand story endures the test of time, and is more likely to build up a loyal community of customers.

It was not until after being around for 2 years and achieving significant results that they caught the attention of investors. By then, Ngeow said they are already profitable and so they looked for investors who were able to provide strategic aid in the company’s expansion.

Megafash bootstrapped until they generated enough traction to secure funding. To date, Megafash raised $400,000 from VC and angel investors.

The company plans to expand into Malaysia and Indonesia to tap into exponentially growing demand.

FIRST The Analysts’ call

Which of Olam’s segments flunked?

Keeping an eye on Olam’s synergies

Olam rolls with the earnings punches

W

hile Olam has made great strides in axing unprofitable businesses and acquiring new ones to strengthen its more lucrative divisions, it will take some time to lift the bottom line. This means that the agribusiness giant will have to weather a bumpy near-term earnings period.

A recovery in earnings will likely only be seen in the medium term, probably in FY16, according to Mervin Song, analyst at DBS. He says Olam currently has S$3.2bn worth of immature assets, S$0.7bn of which are gestating assets while S$2.5bn are partly

according to Ephrem Ravi, analyst at Barclays Bank in Hong Kong. He cautions, however, that the earnings boost could fluctuate depending on the company’s next moves. “We will look for Olam’s ability to extract synergies and expand margins to determine its success.”

With some analysts predicting a few more quarters before Olam regains its full earnings stride, this may mean further lacklustre results as seen in the latest 2QFY15. The results for the quarter were down due to adverse currency devaluations, lower trading volumes and underperformance in hazelnuts and dairy farming in Uruguay, says Carey Wong, analyst A recovery in earnings will likely at OCBC. only be seen in the medium term, Olam’s EBITDA also took a hit probably in FY16. due to challenges in the hazelnut business. “Staples and packaged foods also saw a hefty volume decline contributing assets. “As these assets reach due to discontinued operations in Australia their full potential and in combination with and South Africa, while the continued the recently announced acquisitions and underperformance of dairy farming interest savings from Temasek’s majority operations in Uruguay and the impact of ownership, we project a recovery in earnings currency devaluation affected EBITDA,” says from FY16,” says Song.

Wong.

One of the major Olam acquisitions is Olam’s overall EBITDA margin was flat the move to purchase the global cocoa year-on-year following Olam’s exit from business of Archer Daniels Midland non-core and unprofitable businesses, says (ADM) for US$1.3b, a deal which should Ravi, although the confectionery and nuts be concluded by June 2015, according to businesses continued to do well.

Carey Wong, analyst at OCBC. Announced With foreign exchange volatility in December 2014, the acquisition of ADM’s remaining a palpable threat to earnings and cocoa processing business was a key step the potential uplift from acquisitions still a in solidifying Olam’s cocoa platform, and long way off, all eyes are trained on Olam’s is expected to provide earnings accretion, performance in the latter half of FY15.

20 SINGAPORE BUSINESS REVIEW | JULY 2015

Wei Bin – Maybank Kim Eng For edible nuts, spices and vegetable ingredients, almonds had a good run, aided by higher prices. This was overwhelmed by lower Nigerian cashew processing and hazelnut contributions.

Confectionery and beverage ingredients was the best performer, spearheaded by favourable coffee and cocoa prices. Both products are well positioned for their coming peak season. Food staples and packaged foods underperformed, as expected.

Blame it on poor dairy farming in Uruguay and currency devaluation in Nigeria and Russia.

Carey Wong – OCBC Edible nuts saw lower volumes shipped as it had partially discontinued operations at its cashew processing facility in Nigeria, while lower EBITDA was also due to challenges in the hazelnut business.

Food staples and packaged foods also saw a hefty volume decline due to discontinued operations in Australia and South Africa, while the continued underperformance of dairy farming operations in Uruguay and the impact of currency devaluation affected EBITDA. Ephrem Ravi – Barclays The confectionery and nuts businesses continued to do well while the dairy business in Uruguay was a drag on the food staples division.

Per unit EBITDA in the nuts division increased year-on-year as profits were maintained despite lower volumes The food staples and packaged food business was the key source of underperformance, due to lower sales volumes and poor results from Uruguay dairy farming.

abacus

cabin class took two years to develop but CEO Goh Choon Pong said they decided to launch this year since the market is adequately educated in that product and demand is building up in some key sectors.

Why SIA’s aggressive game plan may be a little too late

What’s up with the SingPostAlibaba partnership?

When SingPost announced a collaboration with Alibaba last year, analysts hoped for a The national carrier is going all out with new double-digit improvement in the strategies, but it may not be that easy to take off. former’s FY16 bottomline. Why to the market and things have ingapore Airlines spent not? A joint venture with Alibaba become very challenging. In terms , ‘the world’s greatest bazaar’, the past four years flying of the route network expansion, through turbulent skies in sounds more likely to succeed Aziz notes that Bangkok is a terms of financial results, and than fail. competitive hub and the North analysts believe it is now taking A year after the on a more aggressive stance this Asian routes that NokScoot announcement, it appears that plans to fly to - Bangkok to year. SIA’s management plans not all that Alibaba touches Seoul, Tokyo and Osaka - are to rejuvenate its fleet in FY16quickly turns into gold. DBS overcrowded. He adds that 18 by deploying ultra-modern analyst Sachin Mittal notes Vistara Air should be loss-making that Alibaba business has been aircraft and spending USD325m to retrofit 19 Boeing B777-300ERs in the foreseeable future due slower than expected, as both to high costs and cumbersome with new seats and other cabin parties are still ironing out some regulations in India. enhancements. The national regulatory details. In the muchSIA will still have to overcome carrier also plans to carry out a publicized deal, Alibaba will multiple hurdles what with multi-hub strategy at Bangkok acquire a 10.4% stake in SingPost Airport via its 49% associate airline challenging conditions, soft for $313m.

NokScoot and in India via its 49% demand in key markets, and more “Business flow from the intense competition in the market. Alibaba partnership has been associate Vistara Air. Moreover, despite early signs of a slower than our expectations.

According to Mohshin Aziz, analyst at Maybank Kim Eng, SIA recovery in air cargo, cargo yields Singapore and Indonesia will act traditionally takes calculated risks are expected to remain under as pilot markets and volumes pressure. and conducts a limited number are likely to improve in the HSBC analyst Mark Webb of experiments in any given year. medium term. However, further concurs by saying, “Challenges This time around, it appears to plans are still under negotiation. remain for SIA given its relatively be going all out with business Therefore, we may not see a hardware, software and ventures high exposure to Europe and double digit improvement in the Australia where competition is into new businesses. “The past FY16F’s bottomline as previously four years of disappointing results stronger and demand weaker.” expected,” Mittal says.

Singapore Airlines recently might have forced it to take Mittal expects the postal rate unveiled its US$80 million a hard look at its conservative hike and acquisitions to drive Premium Economy Class service ways,” adds Aziz. bulk of the near-term profit which will be made available to However, he warns that this improvement. customers in August. The new aggressive strategy is very late Despite this, the partnership

S

appears to be strengthening.

SingPost will be the first logistics partner to participate in Alibaba’s new Merchant Delivery Scheme.

Under this partnership, Alibaba. com members registered in Singapore, including both Verified Members and Gold Suppliers, can enjoy a discount on SingPost’s ‘Speedpost’ services and International Mail services.

Ezion sued by AMS Ezion Holdings was put on the defensive after its bareboatcharterer Atlantic Marine Services BV (AMS) accused it of engaging with Maersk Oil in a conspiracy to breach charter agreements.

Together with this heavy allegation are two other claims: Ezion created the impression that AMS was in financial trouble, and that it agreed to pay inflated charter rates to Ezion to secure bigger loans.

Analysts bluntly refuted these claims. Pei Hwa Ho, DBS analyst, says that it does not appear very logical that one is knowingly paying a higher charter rate, especially when the rates appear reasonable for the harsh operating environment in the North Sea. RHB Group analyst Lee Yue Jer agrees and notes that ‘normal’ charter rates for liftboats are sufficient to secure bank loans up to 70-80% of the asset’s value, which refutes the third point.

“It was Maersk Oil that first approached Ezion on this issue of an under-performing operator, which strongly argues against the first point. It would be irrational to create such false impressions,” Lee adds.

SINGAPORE BUSINESS REVIEW | JULY 2015 21

FINANCIAL INSIGHT: mergers & acquisitions

Overall Singapore M&A deals dropped to US$10.2 billion

Singapore singled out in Asia for weak M&A appetite The city state’s forward price/earnings ratio dropped 3%, making it the only country in Southeast Asia to see waning appetite.

weak growth expectations from the large economies of China and Japan. Singapore, being an open economy, feels the effects of these likely headwinds faster than some of the other economies such as Thailand, Malaysia and Philippines,” says Sharma.

f Asia spent the past few years cutting back on mergers and acquisitions deals, then 2015 will be the year when it forgets the diet and feasts on more transactions – with one exception: Singapore. The country has been singled out for its weak appetite, caused by fears over rising interest rates and the slow growth of major economies.

“The Asia Pacific region, excluding Japan, is expecting the biggest increase in appetite,” says Vishal Sharma, Asia Pacific head of M&A at KPMG. Sharma points out that the region’s forward price/earnings (P/E) ratios – an indicator of corporate appetite – rose 12% over the last year, higher than the global increase of 7%, according to the latest KPMG Global M&A Predictor, a forward-looking tool

Relatively slow 1Q15 In line with these predictions of limited appetite, Singapore’s first quarter M&A activity has been relatively slow, compared with the same period in 2014.

Overall Singapore M&A has dropped to US$10.2 billion so far this year, a 67% decline from a year ago, says Elaine Tan, senior analyst, deals intelligence at Thomson Reuters. She adds that only three deals valued US$1-billion-and-above were announced so far this year compared with at least seven deals with a combined total of US$18.5 billion during the first quarter of 2014.

On the other hand, the dip in deal-making activity may be partly due to the high base in 2014, which set a new annual record. Tan also notes that the

I

22 SINGAPORE BUSINESS REVIEW | JULY 2015

The drop in Singapore’s forward P/E ratio is a reflection in some ways of the global concerns around rising interest rates.

that helps to forecast worldwide trends in M&A deals.

Asia Pacific ex-Japan’s capacity to transact is predicted to rise by 15%, indicating that corporates in this region will have the funds to satisfy this stronger appetite.

Singapore’s waning appetite Singapore, however, is bucking the upward trend in appetite.

Although the country’s capacity to transact is expected to increase by 11%, its forward P/E ratio dropped 3%, making it the only country in Southeast Asia to see waning appetite. Malaysia’s forward P/E ratio rose 5%, Indonesia’s by 19%, Thailand’s by 22% and the Philippines’ by 23%.

“The drop in Singapore’s forward P/E ratio is a reflection in some ways of the global concerns around rising interest rates and

FINANCIAL INSIGHT: mergers & acquisitions forecasted dearth of M&A deals could turn around, especially when factoring in a government bid to boost inbound M&A and the declining appeal of equity markets.

“With a lacklustre equity market, Singapore may continue to witness more privatization deals as highlighted by Keppel Corp’s recent bid to take Keppel Land private for a total value of US$2.5 billion,” says Tan. “M&A activity is expected to remain robust this year in Singapore as the local government’s 2015 budget announced in February included favourable tax policies for M&A that could spur overseas investments for local companies,” she adds.

Asia warms up to M&A Singapore is likely eyeing cashflush and growth-hungry Asian companies as possible M&A suitors – a wise move given that the region is showing its greatest appetite in recent years.

There are signs that large corporates, including those in Asia Pacific ex Japan and Southeast Asian regions, are hungry for M&A deals and will likely have more capacity to fund prospective transactions in 2015.

Southeast Asia’s forward P/E ratio echoed the global trend, increasing 10% over the past year, while capacity is expected to improve by 14%. KPMG data suggest large companies are paying down debt and stockpiling cash, putting them in a prime position to fuel their M&A dealmaking sprees.

“The data indicates a return of confidence in the M&A markets.

We are seeing an upswing after almost three years of decline,” says Sharma. “This confidence will drive M&A transactions activity, with both deal volumes and deal values moving in a positive direction during the second half of 2014.”

“The early indications for 2015 seem positive,” agrees David Cogman, partner at McKinsey &

Company. “Though we are not yet at the end of the first quarter, there has been a reasonable pipeline to date, and first quarter is always a bit slow due to the Lunar New Year.”

“We expect 2015 overall to be on par with or better than 2014 for the region, though of course it is early days yet,” adds Cogman.

Asia looks beyond the region While Singapore tries to make its local companies attractive for Asian corporates, the latter could spend 2015 looking outside Asia for M&A deals.

Thomson Reuters data show the value of announced M&A deals involving Asia Pacific companies, excluding Japan, hit a record high with US$802.2 billion in 2014 and surpassed the best annual period in 2010. But an expected increase in more lucrative targets in Western regions could lure attention away from Singapore and other ASEAN companies.

“We expect an increase in outbound activity from Asia Pacific, driven, in part, by a plethora of high-quality assets and real estate in the US and Europe coming on to the market and, in part, by Asian investors seeking growth opportunities,” says Samson Lo, head of M&A, Asia at UBS Investment Bank.

Cogman notes that there has been an uptick in outbound investment from Asia into the Americas, mostly Chinese companies.

“Chinese companies have grown considerably in confidence and financial capacity over the past few years. There are a few countries that are perhaps punching beneath their weight in the region,” says Cogman.

“There are plenty of cashrich Japanese companies, for instance, who are looking for growth opportunities, but are perhaps more cautious on acquisitions. Indian deal volumes are consistently much smaller, and they see more inbound acquisitions while in China outbound deals dominate the

Vishal Sharma

Elaine Tan

David Cogman

cross-border activity,” adds Cogman.

But looking at the broader region, Cogman says that the deal activity in Asia tends to be mostly intra-country and intra-regional, with 77% of deals by value being domestic wherein the acquirer and target are from the same country. Meanwhile, cross-border deals within Asia Pacific were 13% of the total, or roughly the same as in past years.

Real estate and other key sectors Of all the sectors, real estate is expected to prop up Singapore M&A activity. Lo believes that there is scope for more consolidation in Singapore’s real estate sector, as well as resurgence in Real Estate Investment Trusts (REITs) space. This is reflected in the strong showing of the real estate sector in the first quarter of 2015.

Singapore’s real estate sector has accounted for 37.9% of the country’s deal making activity so far this year, with US$3.9 billion worth of transactions, says Tan. The caveat is that this transaction total is 60.4% lower compared to the first quarter of 2014.

The top deal so far has been Keppel Corp Ltd’s pending unconditional tender offer to acquire the remaining 45.4% stake in Keppel Land Ltd for a total value of S$3.4 billion (US$2.5 billion). Aside from real estate, other sectors that will likely be active this year will be telecommunications, media and high tech – barring any major economic upsets, says Cogman.

Any Singapore Involvement Announced M&A First Quarter Volume Comparison

Source: Thomson Reuters

SINGAPORE BUSINESS REVIEW | JULY 2015 23

economic INSIGHT: growth momentum US were up just 3.9%, following a 6.8% decline in December,” says Baig.

Indeed, the US PMI’s new orders component has eased considerably in recent months, suggesting limited upside to Singapore’s exports for the time being, according to Baig. “The US recovery seems more inward oriented in this cycle, which is not good news for economies like Singapore,” he adds.

Singapore is at the mercy of global growth

It’s Singapore vs the world

After an anaemic 2014, the outlook for the economy remains uncertain due to unpredictable developments on the global front.

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ith an economy relying primarily on an uncertain external environment, Singapore is yet again heading for a year of subdued growth. The outlook for the city-state’s three main trading partners – China, Eurozone and Japan – remains unpredictable, and with the slow pace of recovery in the United States, a pickup in the country’s growth momentum remains unlikely.

“Nothing in the external environment suggests an improvement in growth momentum in the nearterm,” says Irvin Seah of DBS Group Research. “For 2016, we expect growth momentum in the US to pick up while the outlook for the Eurozone, Japan and China should stabilize. But potentially higher interest rates will restrict growth momentum in Asia and Singapore,” he says.

Taimur Baig, chief economist, Asia at Deutsche Bank, says trade remains an important part of Singapore’s economic fabric, and while it was believed that the country’s close ties to 24 SINGAPORE BUSINESS REVIEW | JULY 2015

The slowdown in China and a muted Eurozone are all expected to weigh down Singapore’s manufacturing sector in the coming quarters.

the US would offset the pull from the European Union and China, it has not followed this expectation.

“Exports growth remains rather modest. On a year-on-year basis, nonoil domestic exports (NODX) were up 4.3% in January, helped by the rise in both electronic and non-electronic NODX. In March, on a month-onmonth, seasonally adjusted basis, the NODX growth was 1.6%. Except for Indonesia and Japan, NODX rose to all major partners, but exports to the Benign inflation

Source: DBS Group Research

Manufacturing growth uncertain The slowdown in China and a muted Eurozone are all expected to weigh down Singapore’s manufacturing sector in the coming quarters, unless economic growth in the US gathers enough momentum to counteract this effect.

“The SEMI book-to-bill ratio, the leading indicator for global electronics cycle, has fallen back to around parity level again. Global semiconductor sales growth had moderated to 9.3% year-on-year as of December 2014, compared with 10.2% in June 2014.

The outlook for the manufacturing sector will remain tepid in the coming months as external headwinds remain strong. Pockets of downside risks in the global economy still exist.

Exports to the top three markets – US, Eurozone and China – may have hit bottom, but signs of a pick-up remain elusive,” Seah says.

ASEAN economist Hak Bin Chua of Merrill Lynch says weak global demand, especially from China, coupled with restructuring pains, continue to weigh down Singapore’s manufacturing sector. “In January-February combined, NODX contracted 2.4% year-on-year (vs 0.5% in 4Q14), a weak showing. Electronic exports contracted 3.5% in the first two months of the year, while non-electronic exports

economic INSIGHT: growth momentum fell 2%. Looking at export destinations, shipments to US, EU and Korea strengthened in January-February, but this was offset by contractions in exports to China, Indonesia and Japan.”

Weak labour productivity growth Meanwhile, in the labour productivity front, Nomura analyst Euben Paracuelles notes that the fall in both productivity and employment growth in 2014 will likely further pressure authorities to show that the productivity drive is yielding more tangible results, which requires more fiscal spending .

“Aggregate labour productivity growth continued to disappoint, remaining in negative territory in Q4 at 1.5% yearon-year, a third consecutive quarter of decline,” says Paracuelles.

The construction sector led the decline, followed by almost all segments of the services sector, except finance and insurance. “Even manufacturing saw a decline of 0.7%, following five quarters of growth. Overall, labour productivity growth fell 0.8% in 2014 after rising 0.3% in 2013,” he adds.

Headwinds for the services sector Seah says externally oriented services sectors such as transportation and trading services will face headwinds from the challenging global economic environment. “Business services will be weighed down by a cooling property market. Moreover, the labour market is expected to remain tight amidst the restructuring process.

“The unemployment rate will remain low, while the vacancy rate will continue to escalate. The difference between job vacancy and job creation, a reflection of the labour market tightness, has already reached unprecedented levels. The tight labour End of NODX slump

Source: DBS Group Research

market will remain the number one challenge for service providers in the quarters to come.”

Inflation to stay benign Singapore has a mixed bag of factors to thank for manageable inflation.

Owing to low energy prices, a significantly lower than expected increase in wage growth, a cooling property market, and a moderation in healthcare costs due to the introduction of the Pioneer Generation Package, Singapore’s inflation is expected to average 0.4% this year.

“Oil prices have fallen by about 50% over the past months. Being a net importer of oil, the island state will benefit significantly from a reduction in underlying costs, and henceforth inflation. As long as oil prices stay low, inflationary pressure within the domestic economy should remain muted,” says Seah.

While the country’s labour market has been tight, wage growth has not been as strong as anticipated. Average nominal wage growth in 2014 has tempered to 2.6% year-on-year, compared to 4.2% in 2013. The benign wage growth is seen to continue along with the sub-par growth of 3.2% in 2015, Seah adds. “As a result, the passthrough effects on consumer prices will consequently be modest.”

A cooling property market has been contributing to low inflation, with rents falling and expected to continue a downward trend, amidst the risk of higher interest rates and a supply glut in the property market.

In addition, the Pioneer Generation Package introduced by the government to ease the burden of healthcare costs for the elderly has weighed down healthcare inflation. “Not only

Overall, labour productivity growth fell 0.8% in 2014 after rising 0.3% in 2013.

is the base of the inflation trajectory for this year drastically reduced, the slope of this trajectory, in the form of sequential changes to prices, is likely to be significantly less than previously anticipated. Inflationary pressure, be it external or domestic, will stay relatively muted in the coming months,” Seah says.

Growth outlook For Seah, the various headwinds point to muted growth this year. “A cautiously optimistic outlook will emerge and this makes for a subdued growth pace of 3.5%,” he says. Chua, meanwhile, foresees a weaker economic performance for Singapore this year. “We see downside risks to our full year growth forecast of 2.8%, and believe there is a high likelihood that the government will have to reduce (GDP) growth forecast to 1%-3% before mid-year, from the current 2%-4%.”

Paracuelles shares this sentiment.

“Overall, we continue to expect broadly similar growth this year of 2.7%, from the 2.9% in 2014. This incorporates the ongoing labour market tightening (another round is scheduled for July), less synchronized global GDP growth, construction investment growth slowing further as the residential property market continues to soften, and still-weak private consumption growth as higher interest rates raise household debt servicing burdens. This is consistent with the Ministry of Trade and Industry reaffirming its full-year 2015 GDP growth forecast of 2-4%,” he says.

Paracuelles says he expects a more expansionary fiscal policy this year as Singapore celebrates its 50th year of independence and as elections approach, likely in late 2016.

Labour productivity growth

Source: CEIC, Nomura Global Economics

SINGAPORE BUSINESS REVIEW | JULY 2015 25

Analysis: SME FUNDING

Crowdfunding democratized access to capital

The crowning glory of crowdfunding in Singapore Is online community support enough to keep small and medium-sized enterprises (SMEs) in Singapore alive?

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hen Smaths Consulting could no longer rely on banks and grants, it tried many different ways to address rising business costs.

Smaths CEO Ian Gan said they attempted to employ an expansion strategy by introducing licensing and franchising services in 2011 and rolling out accounting, consulting, and training services in 2013.

While many banks are not currently interested in funding startups, some grants designed for SMEs have actually proved to be an additional burden rather than providing assistance. “Certain grants like the PIC (by IRAS) per se have requirements SMEs simply cannot meet – for instance, having to employ three employees from the get-go,” says Gan. His company is just one of

26 SINGAPORE BUSINESS REVIEW | JULY 2015

The conservative banking practices have created a gap in the market that is now being filled by alternative lenders, particularly P2P lending platforms.

the many SMEs feeling the strain brought on by weak financial provision. “Banks prefer longer term loans (above 1 year) to working capital loans, which are often sought after by SMEs. As a result, up to 80-90% of loan applications by SMEs are rejected by banks in Singapore,” says Pawel Kuznicki, CEO of Capital Match, a peer-to-peer (P2P) lending platform.

A report by the Organisation for Economic Co-operation and Development (OECD) explains that this current practice by the banks is rooted in the aftermath of the global financial crisis in 2008, according to Lawrence Yong, cofounder and CEO of MoolahSense.

Banks are trying to comply with Basel III capital and leverage ratio requirements through a combination of asset reduction and

capital raising.

“Broadly, this has resulted in the rationalization of capital by banks to expand business into lower risk-weighted areas. SME loans which are largely un-rated attract the highest risk weight compared to large and betterrated companies or sovereigns.

The corollary is a reduction of bank lending to retail and SMEs and/or high or sticky loan rates to compensate for the higher cost of capital,” Yong says.

The response to this has been a string of targeted policies to incentivize bank lending to SMEs through substantial risk-sharing by the state. Yong mentions programs, such as the Loan Enterprise Finance Scheme (LEFS), the Micro Loan Programme (MLP) and the Loan Insurance Scheme (LIS), that transfer the risks of default on SME loans from the banks to the state by 50-70%.

“In fact, with most of the underwriting risks being passed on to the state, banks remain wary of SME default risks. Without these policies, SME lending by banks would have witnessed a contraction,” explains Yong.

Opportunity in scarcity The conservative banking practices have created a gap in the market that is now being filled by alternative lenders, particularly P2P lending platforms. P2P lending is a form of crowdfunding, which works by pooling resources over the internet to fund a project or venture. For Yong, crowdfunding is about democratizing access to capital and expanding the sources of finance for SMEs. He adds that the Monetary Authority of Singapore (MAS) currently defines a SME as a corporation, partnership, limited liability partnership, sole proprietorship or trust with annual sales of less than $100 million.

“Crowdfunding would most naturally appeal to small

Analysis: SME FUNDING businesses with turnover of under $10 million who are looking to raise less than $1 million. As the business grows, more financing options would be available, including institutional funds from mainstream finance,” Yong explains.

Since crowd-financing relies on its holistic reputation and social network to gather funds, it is much cheaper than bank loans.

According to Yong, it’s a win-win situation because prospective investors can get a decent fixed yield that beats inflation by investing in the business, and on the other hand, the business benefits from the lower cost of funds. “As the business gains the trust of prospective investors, on MoolahSense, it translates to a lower cost of funding through a market-based auction mechanism,” Yong says.

The future of P2P lending “Peer-to-peer lending companies allow borrowers to apply for a loan on the platform. After a credit risk assessment is performed by the platform, the SME’s loan request is made available to the investors (both retail and institutional) to commit funds for the requested amount,” explains Kuznicki.

When at least 80% of funds have been secured, the borrower can accept the offer from investors.

The funds will then be transferred to his or her bank account, and the monthly loan repayment will begin.

This practice, according to a major study by Foundation Capital in the US, could become a onetrillion dollar industry within 10 years. It is being widely adopted in US, UK, and China. Comparing banks with P2P lending platforms, Kuznicki believes that the latter performs much better in terms of lower cost-to-loans ratio (2% versus 6% with bank loans), higher returns for savers, and a better value proposition for borrowers.

He points out that most of Lending Club’s investors are making a 6-9% post-default annual return versus 1-1.5% return on

Lawrence Yong

Ian Gan

Pawel Kuznicki

More SMEs are turning to P2P lending

a bank deposit. On the part of SMEs, they enjoy a better customer experience, a higher approval rate and faster processing time. “The key advantage to the borrower comes either through cost or availability (or both). Depending on the borrower’s credit risk profile and needs, he can either expect to have his loan application actually approved (if he was rejected by banks), or get terms that are better than or on par with those of banks,” says Kuznicki.

He sees P2P lending growing in countries like Singapore, because of the efficient legal system and vibrant economy, with a conservative banking environment focused on the medium-to-large companies. For Kuznicki, these factors form a perfect foundation for new financing products designed for SMEs. Yong echoes this analysis of the current situation. When asked what convinced him to start a crowdfunding campaign in Singapore, he says, “From my professional experience, I also observed that everyday investors have limited access and choices in investments when compared with accredited investors. Post crisis, I think the disproportionate allocation of capital to large firms was further exacerbated at the expense of small firms.”

He stresses that the 2008 financial crisis has resulted in heightened levels of investor protection. Since the need to control the agency problems that

contributed to the crisis emerged, investment opportunities for everyday investors have become more limited.

Another favourable condition for P2P lending is the use of technology. Yong says, “I was immediately drawn to the way it leverages community and technology to resolve the challenges of capital allocation. It serves a win-win solution as both the borrowers and lenders are empowered with greater access and opportunities through the platform. The natural question that followed was if it would be relevant to Singapore’s context – and our research and business activity show that it is.”

SMEs’ woes Gan believes that the main challenges they are experiencing are also felt by their business partners, including inaccessibility to financing from banks and rejections of their applications for grants by authorities. These difficulties are a result of their insufficient financial and performance track record.

Although he doesn’t have any complaints about the current tax regulations, Gan emphasizes the need for stronger support for SMEs. “The situation is not improving. For change to come, we feel that the horse should lead the carriage.” He believes that small firms should be given more relaxed requirements and better access to financing programs.

SINGAPORE BUSINESS REVIEW | JULY 2015 27

singapore’s hottest startups 2015

Hendra Gunawan’s Pandawa Dadu (The Dice Game from the Mahabharata Epic)

The changing taste of Asian art collectors bodes well for the Western art market Art is increasingly seen as a sound investment by collectors, and holding artworks gives pleasure to many, but significant risks are lurking in this volatile market.

L

ast November, Vincent Van Gogh’s 1890 still life, Vase with Daisies and Poppies, sold for a staggering $61.76 million at Sotheby’s New York – the highest auction price for a painting by the Dutch master in more than 15 years. The buyer was Chinese movie mogul Wang Zhongjun, chairman of Huayi Brothers Media Corp, a well-known collector who has turned his attention of late to Impressionist masters and already counts in his collection pieces by Pierre-Auguste Renoir and Camille Pissarro. He has not been the only Chinese billionaire flexing his muscles in the western art market.

In 2013, tycoon Wang Jianlin’s Wanda Group bought the 1950 Pablo Picasso painting Claude and Paloma for $28 million, more than double the pre-sale upper estimate of $12 million.

“In the last five years, we’ve seen a dramatic change in what collectors from Asia are looking to buy,” says Suzanne Gyorgy, global head of Art Advisory & Finance, Citi Private Bank. “Five years ago there was not much interest in western art, and that has changed. We go to auctions, bidding on behalf of our clients there and watching the room, and it’s undeniable that specialists representing Asian clients are very active in those sales of western art.”

“We also have clients from China going to New York,

28 SINGAPORE BUSINESS REVIEW | JULY 2015

The combined value of the collections of the top 10 art collectors from China and Hong Kong is worth about $2.57 billion, often a fraction of their net asset value.

where we organize for them tours of galleries, auction previews and museums. They are getting exposed to the best, and their interest is really genuine and really growing. I would say the knowledge and education of the Asian clientele [in western art] has grown in leaps and bounds,” Gyorgy adds.

The rise of rich art collectors in Asia Asia currently has an estimated 492 billionaires, with 184 living on the Chinese mainland, another 53 in Hong Kong, and 24 living in Singapore, according to the Knight Frank Wealth Report 2015, and art as an investment of passion remains firmly on their radar. A separate report by Wealth-X, released in March during Art Basel in Hong Kong, estimated that the combined value of the collections of the top 10 art collectors from China and Hong Kong is worth about $2.57 billion, often a fraction of their net asset value.

For example topping their collector’s list was Wanda founder Wang Jianlin, with assets worth an estimated $27.5 4 billion and an art collection worth an estimated $1.2 billion, while Shanghai Zendai Investment Group founder Dai Zhikang’s assets are estimated at $1.3 billion while his art collection is worth $80 million.

Magnus Resch, the founder of Larry’s List, an art mar-

singapore’s hottest startups 2015 ASIAN ART REPORT ket knowledge company, estimates that 18% of the global collector scene is now based in Asia, with more than one third of it in China. “Beijing is the largest collector city in Asia with a share of 14% of Asian collectors. Seoul comes second (12%) and Singapore third (7%),” he says, noting that “45% of the collections were founded between 2001 and 2010, and 5% in the three years since 2010.”

According to the TEFAF Art Market Report 2015, released in March, the global art market raked in over €51 billion ($53.9 billion) last year – a 7% year-on-year increase that finally took the annual sales figure above the 2007 pre-recession high of €48 billion – with three major art markets dominating activity: the US (39%), China (22%) and the UK (22%).

The author of the report, Clare McAndrew, noted the art market last year reached its highest ever level of sales with continuing strength in Modern and Post War and Contemporary art, but it continued to be a “highly polarized market, with a relatively small number of artists, buyers and sellers accounting for a large share of value,” though she also noted that,“a promising trend counteracting this to some extent is the growth in online sales, which has encouraged a greater volume of sales in lower-priced segments.”

International rivals have picked up some market share from Chinese mainland auction houses when

China’s art fund and art investment trust market slowed rapidly from an estimated $529 million in 2012 to an estimated $169 million raised in 2013.

Auction scene of the sale’s top lot – Plum Blossoms by Wu Guanzhong

Kevin Ching, CEO of Sotheby’s Asia and Mr. Wang Zhongjun at the presentation ceremony of Van Gogh’s Still Life, Vase with Daisies and Poppies

they entered the market. According to UK based art market research company ArtTactic, over the last two years, Poly Auction and China Guardian’s market share fell from 53.7% in 2012 to 47.8% of the market in 2014.

Yet Sotheby’s and Christie’s are still struggling to get a foothold in the Chinese mainland market, having failed to create any significant inroads into this market, it noted in a recent report.

Sotheby’s sale in autumn 2014 was 46% lower than its spring 2014 sale and 68% lower than autumn 2013, while Christie’s autumn sale in Beijing was 14% lower than autumn 2013.

ArtTactic founder Anders Petterson says, “Although we’re seeing more Chinese collectors buying western art, I don’t see this as the reason for the market slowdown [in China].” Instead, Petterson believes “slower economic growth, government anti-corruption measures and tighter regulations around the art investment trust market in China are the main reasons behind a dampening of the market.”

This is confirmed by data from the Art & Finance Report 2014, prepared by Deloitte Luxembourg and ArtTactic, which showed that China’s art fund and art investment trust market slowed rapidly from an estimated $529 million in 2012 to an estimated $169 million raised in 2013 (latest available figure), following stricter government regulations on the Chinese shadow-banking market.

The report pointed out that 76% of art collectors around the world are buying art for collecting purposes, but with an investment view (up from 53% in 2012), implying that the investment aspect of art buying is something that collectors are “increasingly concerned about.”

Drivers of the strong interest in art For Mohit Mehrotra, Deloitte’s Global Wealth Management Group leader, a couple of important developments are driving the strong current interest in art. “The first generation of wealth was really about creation and accumulation, the second generation is starting to react like their peers in the west, appreciating the finer things in life,” he says.

But Mehrotra also notes that arts and collectibles as part of one’s asset would allow a High Net Worth Individual to diversify his/her risks from being overly concentrated in capital market products. Art, he says, also gives investors a “different way of managing their portfolio out of keeping it all in liquid financial assets.”

Petterson notes that, while investment is a “strong motivation among Asian art buyers”, it is by no means a trend exclusive to the region, “but one that has evolved globally over the last 10 years.”

Gyorgy also points out, “For better or for worse, in the last five years, there has been a general ‘financialization’ of the art market.” The private bank offers clients advice on how to build an art collection that will stand the test of time, and she says art advisory has been a growing business for the bank around the world. But she’s also quick to add that, “we’re really not advising clients to SINGAPORE BUSINESS REVIEW | JULY 2015 29

singapore’s hottest startups 2015 ASIAN ART REPORT buy art as an investment. We’re all museum-trained and when we’re talking to clients we’re really advising them about how to build an important collection, so it’s the art for art.”

Petterson notes that an investment in art should be “a long-term endeavour, otherwise you are susceptible to being caught up in the fads and short-term cycles of the markets. Unless you can afford to take at least a 10-year view on the market, you should probably stay away from art as an investment. Art for pleasure and enjoyment is a different thing.”

Patricia Amberg, head of the UBS Art Competence Centre, points out that the art market remains heterogeneous and about which very little data are available.

“Only the hammer prices achieved at auction are public.

This excludes the larger part of the art trade: galleries, dealers, private treaty sales, online platforms and all the rest. Auction prices therefore only represent about a third of the art market at best, making it one of the most non-transparent markets.”

She adds, “We always recommend that clients collect art for the love for art itself.”

The Mei Moses World All Art Index, which is widely considered a key index, showed a compound annual return of 7% between 2003 and 2013, slightly below the S&P 500’s total return of 7.4%. But post-war and contemporary art, as well as traditional Chinese works of art, delivered compound annual returns of 10.5% and 14.9% respectively.

Over the last 40 years (1973-2013), the compound annual return (CAR) for the World All Art Index was 6.9%, below the S&P’s 10.9%. The S&P and post-war and contemporary art have very similar results, with a CAR of 10.9% and 10.8% respectively.

Outlook for the art market in 2015 According to the 2015 outlook report by ArtTactic, 65% of experts surveyed believe contemporary art market sales will level out this year, though 35% feel the market

Liu Dan’s Splendour of Heaven and Earth Est. HK$10 – 15 million / US$1.29 – 1.94 million

30 SINGAPORE BUSINESS REVIEW | JULY 2015

65% of experts surveyed believe contemporary art market sales will level out this year, though 35% feel the market has further upside potential.

has further upside potential. So far, no one expects an art market correction within the first half of 2015, which might come as a relief.

“Although weaker economic growth might lead to slower art sales in the mid- to lower-price segments, the ultra-wealthy are expected to continue their trophy hunting at the top end of the market,” Petterson says. “This is supported by the fact that 73% of experts are positive towards the $1 million+ segment. However, the higher end of the middle-market could rekindle, as buyers are picking lower-hanging fruits in the hope that these artists will be promoted to the millionaire league. Expect another year with new auction records,” he says.

By Sonia Kolesnikov-Jessop

Georgette Chen’s Self-Portrait Est. HK$500,000 – 700,000 / US$64,500 – 90,500

ANALYSIS: consumer debt

Low interest rates enticed some consumers to buy a car

Consumer debt in Singapore shows signs of stabilisation, but leverage is still high HSBC Global Research looks at risks posed to the financial system by the current debt dynamic.

S

ingapore has been ahead of the curve when it comes to addressing the vast accumulation of debt in the economy. In 2012, the government presciently started implementing various macro-prudential measures to slow the housing market and curtail the leverage of the most over-extended borrowers. In April 2015, the Monetary Authority of Singapore (MAS) provided an amended timeline for a rule intended to cut off further unsecured credit to borrowers with debt more than twelve times their monthly income –a group representing 5% of borrowers.

In this report, we look a bit more broadly at the country’s leverage situation and ask if we have been too sanguine about the risks posed to the financial system and the economy. Household debt, for example, stands at 76% of GDP and mortgages are a large chunk of the 32 SINGAPORE BUSINESS REVIEW | JULY 2015

The stabilisation in household debt will likely weigh on GDP, dampening household demand.

financial system. What risk does this imply?

Direct risks are small. The “overextended group” of borrowers represents less than 1% of system assets. However, in the end, what really matters for broader household debt sustainability is the strength of the labour market and the policy ammunition the government has to cushion a possible downturn.

Fortunately, on both counts, we believe Singapore fares well. Moreover, household debt growth has slowed (4Q14 saw the slowest growth in five years). All of this means that financial risks are manageable. Still, the stabilisation in household debt will likely weigh on GDP, dampening household demand.

Credit due for constraining credit Singapore policymakers deserve credit. The slew of macro-prudential measures has been quite effective

thus far at slowing the property market and addressing the risks posed by over-extended borrowers, even if the overall leverage stock has continued to rise. It was judicious to realise that the eventual reversal of quantitative easing-induced liquidity flows could put pressure on the domestic economy. “Bubbly” asset markets, above all the housing market, were clearly a source of concern for the MAS. Many years of abnormally low short-term interest rates enticed consumers to borrow more.

The story, by now, is a familiar one. Some bought second houses, while others finally were able to buy a car. Meanwhile, credit cards and condominiums multiplied. The time of low rates has ended. SIBOR and SOR have jolted up since the start of 2015, in large part due to expectations of USD appreciation vis-à-vis the SGD, in addition to expectations

ANALYSIS: consumer debt of higher rates in the US and tighter domestic liquidity conditions. We see rates continuing to rise regardless of MAS policy. HSBC’s property research analysts believe that a 200bp rise in SIBOR could lead to a repayment burden increase of 30-40% for most households – no small change.

At the time of writing, short-term rates have subsided recently as expectations of USD strength have abated. However, we still expect rates to increase as USD Libor eventually rises (note that it is the most important driver of SOR) alongside potential liftoff by the FOMC, which we expect to occur in September – although market expectations have moved out to January 2016 – with two 25bp hikes in 2015. This leads HSBC’s rates strategy research team to expect 6m SOR to rise to 2.0% by year-end 2015. In short, this is precisely what the MAS had been preparing for – and in no way is its mission over. Of all the measures, loan-to-value limits and total debt servicing ratios have been among the most effective as they prevent the incremental leveraging up of overextended borrowers.

The 2013 measure that has been recently amended is destined to cut off additional unsecured credit lending to borrowers with debt worth more than 12x their monthly income (if it is the case for three consecutive months). The timeline was amended so that by June 2015, those with leverage exceeding 24x their monthly income – across all financial institutions – will be cut off. In 2017 and 2019, the rules will apply to those with unsecured debt of 18x and 12x their monthly income, respectively.

The change is meant to ease the transition period, but is in no way a policy reversal. There is little likelihood that the principal macroprudential measures are eased in 2015 – even if the housing market deflates by up to 10%, which we believe is within the government’s comfort zone. What is possible, however, is that we may see the removal of the additional buyer’s stamp duty (ABSD), especially for Singaporeans.

This measure was intended to stunt demand for property, which is already anaemic. There is little

macro-prudential risk from removing it, and in any case it is unlikely to have a large impact.

Impact As we mentioned earlier, risks from over-extended borrowers on the financial system is small. There are 84,000 borrowers with debt worth more than 12x their monthly income – and 32,000 with more than 24x.

That’s not insignificant in a population of just 5.3m, translating to approximately 5% of total borrowers.

However, this debt corresponds to 0.4% of system financial assets – a relatively small amount. Even if the entirety of the group were unable to service its debt, it would still leave NPLs at manageable levels.

What is perhaps of more concern is if the continued easing of house prices along with a weaker domestic economy translates to a larger group of borrowers running into payment difficulties. A stress test by the MAS revealed that under a worst case scenario of short-term rates jumping 300bp, about 10-15% of households would be considered over-leveraged (Monetary Authority of Singapore, 2013 Financial Stability Review, Macroeconomic Surveillance Department, December 2013).

While the broader financial system should remain in reasonably robust shape, we believe that higher short-term rates and the deflating property market are the biggest downside risks to growth in 2015.

Private consumption is by far the weakest part of the economy and has been softening continually over the past few years. With weak growth externally, a further slowing of domestic demand, reflecting slowing leverage among households, could push GDP growth down further (we forecast growth of 2.6% in 2015).

Any respite?

From a macro-economic perspective, we think the best way to ascertain the potential for a rise in NPLs – thus representing the impact on the financial system – is to observe labour market conditions. The trend between unemployment and NPLs is clear, both in Singapore and abroad.

Let’s look back at history. Though

Household debt has reached 76% of GDP

Source: CEIC, HSBC

There are 84,000 borrowers with debt worth more than 12x their monthly income – and 32,000 with more than 24x.

we don’t have lengthy data sets, we can still see the relationship in the recent Global Financial Crisis.

Unemployment before the crisis was at a level similar to where it is now – though for different reasons.

The current conditions are reflective of the policy efforts to restructure the economy away from cheap labour and certain types of manufacturing towards a more innovative, productivity-driven economy. The authorities have made clear their intention to see through this process – the small changes to foreign worker levies in 2015 should not be interpreted as a policy reversal.

Another indicator we can look at is the household balance sheet.

Household currency and deposits minus total household leverage has reached a record high by end-2014, implying that the asset side of household balance sheets is robust as ever.

However, one key problem with this measure is that it is the total stock, without any indication of the distribution. Accordingly, it is possible that the top 10% of the population owns a sizeable portion of these assets; with many homeowners on the bottom half of the spectrum without a sufficient stock of non-housing (and CPF) related assets.

Lastly, the government has the policy flexibility to provide measures to soften the impact of any economic downturn – similar to the expansionary fiscal stance in FY2009 – which likely cushioned the rise in unemployment following the Lehman Brothers crisis. The government still has fiscal flexibility following the estimated primary budget deficit for FY2015. By Joseph Incalcaterra, economist, HSBC Global Research SINGAPORE BUSINESS REVIEW | JULY 2015 33

Singapore’s 50 largest Serviced Residences

Lower private home rents provide more options for relocating expats.

environment at home, has simply reduced the appetite for long-term accommodations.

In fact, if they can, firms will limit their expatriates’ stay in Singapore for, at most, only half a year. “Challenges ahead include a decreased demand for six-months-and-more rentals, with companies cutting costs and controlling expatriate housing expenditures globally,” Low says.

With declining demand for longer leases, demand has grown for serviced residences offering shorter stays and better lease flexibility, “compared with private housing and maintenance-free living, specifically for business travellers posted on a shorter assignment,” Low adds.

Nevertheless, despite a decline in numbers, travellers staying longer in Singapore will continue to form a significant part of the industry’s market. “Generally speaking, we look forward to the growth opportunities for serviced suites in 2015. We continue to receive enquiries from corporate relocation companies and individuals looking for long stays,” Sun says.

f you are a foreign businessman looking to do business in Singapore for an extended period, you can expect to be signing shorter leases on serviced residences, as companies spend less and the government tightens its grip on foreign labour.

Over the years, Singapore has seen its fair share of serviced residences, thanks to an influx of business travellers taking advantage of economic opportunities in the country.

According to Ryan Sun, general manager (Hospitality) at UE Park Avenue International, “the trend these days is to combine hotel service together with the comfort of apartments.” With corporate travel evolving from being a mere necessity to that of a working lifestyle, the demand for serviced residences has seen significant growth in the recent years,

Who made it onto the SBR list?

Capri by Fraser of Frasers Hospitality has topped Singapore Business Review’s ranking of largest serviced residences in the city, based on the number of units. This list highlights the 50 largest serviced residences in Singapore, with a minimum stay ranging from 1 day to 2 years.

Data compiled by SBR show that Capri in Changi, with 313 units, is ahead of its closest competitor, Great World Serviced Apartments by Kerry Residence (Kuok Group) by just 9 units. Another of Frasers Hospitality’s serviced residences, Fraser Suites River Valley, took the third spot, with 255 units.

The fourth and fifth spots were taken by Orchard Parksuites by Far East Hospitality and Treetops Executive Residences, with 225 and 220 units respectively.

Appetite for long-term accommodations wanes

Demand for longer leases in serviced residences declines

I

34 SINGAPORE BUSINESS REVIEW | JULY 2015

Challenges ahead include a decreased demand for six-months-andmore rentals, with companies cutting costs and controlling expatriate housing expenditures globally.

according to Choe Peng Sum, CEO at Frasers Hospitality.

This year, however, the service industry is expected to post slower growth, duplicating last year’s similarly poor performance. This comes on top of typical challenges to the industry such as a tough labour market, slim profit margins, and ballooning costs.

“Unlike 2012 and 2013, we have observed that the service industry grew at a significantly slower pace in 2014 and we project this slowdown to continue into 2015.

One of the reasons for this is weaker growth (and even a drop) in the private property rental market, which in turn churns out more housing options for relocating expatriates,” says Lorna Low, director of sales at The Forest

by Wangz.

A fragile economy abroad, combined with a stricter labour

Singaporeâ&#x20AC;&#x2122;s 50 largest Serviced Residences Serviced Residences

Units

Hospitality Management

Minimum Stay

1

Capri by Fraser - Changi City Singapore*

313

Frasers Hospitality

1 day

2

Great World Serviced Apartments

304

Kerry Residence (Kuok Group)

1 week

3

Fraser Suites River Valley, Singapore

255

Frasers Hospitality

7 nights

4

Orchard Parksuites

225

Far East Hospitality

7 nights

5

Treetops Executive Residences

220

DTZ Debenham Tie Leung Hospitality

1 week

Management Services 6

Orchard Scotts Residences

207

Far East Hospitality

7 nights

7

Orchard Grand Court Singapore

203

Orchard Grand Court

1 day

8

Park Avenue Rochester

201

Park Avenue Hotels and Suites (United Engineers)

1 day

9

Somerset Liang Court Singapore

197

Ascott Limited

7 nights

10

Wilby Bukit Timah

181

Wilby Estate International

1 week

11

Pan Pacific Serviced Suites

180

Pan Pacific Hotels Group

3 nights

12

Fraser Place Robertson Walk, Singapore

164

Frasers Hospitality

7 nights

13

Citadines Mount Sophia Singapore

154

Ascott Limited

7 nights

14

Residences at Reflections

151

Keppel Land Hospitality

6 months

15

Park Avenue Clemenceau

150

Park Avenue Hotels and Suites (United Engineers)

7 nights

16

Ascott Raffles Place Singapore

146

Ascott Limited

1 day

17

Far East Plaza Residences

141

Far East Hospitality

7 nights

Beach Road, Singapore**

18

Wilby Central

138

Wilby Estate International

1 week

19

Village Residence Clarke Quay

128

Far East Hospitality

7 nights

20

Shangri-La Apartments

127

Shangri-La Hotel

7 nights

21

Pan Pacific Serviced Suites Orchard, Singapore

126

Pan Pacific Hotels Group

7 nights 1 month

22

Fortville Apartments

109

Forthavens

23

Somerset Bencoolen Singapore

107

Ascott Limited

7 nights

24

Redwood West Apartments

106

Redwood Residences

6 months

25

International Service Apartments

102

E. Millennium Investments and Fontainebleau (ISA)

1 month

26

Le Grove Serviced Apartments

97

City Developments Limited Group

1 day

27

PARKROYAL Serviced Suites, Singapore

90

Pan Pacific Hotels Group

7 nights

28

Somerset Orchard Singapore

88

Ascott Limited

7 nights

28

Regency House

88

Far East Hospitality

7 nights

30

8 on Claymore

85

Preferred Hotel Group (Royal Plaza on Scotts)

7 nights

31

The Club at Capella Singapore

81

Capella Hotels and Resorts

7 days

32

Park Avenue Changi Business Park

80

Park Avenue Hotels and Suites (United Engineers)

1 day

33

Village Residence Hougang

78

Far East Hospitality

7 nights

34

Darby Park Executive Suites

75

Sime Darby Hospitality

1 day

35

Village Residence Robertson Quay

72

Far East Hospitality

7 nights

(former Central Place)

(former Riverside Village Residences) 35

Fraser Residence Orchard

72

Frasers Hospitality

30 nights

37

Lanson Place Winsland Serviced

67

Lanson Place Hospitality Management

1 day

51

Far East Hospitality

7 nights 7 nights

Residences, Singapore 38

Village Residence West Coast (West Coast Village Residences)

39

Fraser Place Fusionopolis

50

Frasers Hospitality

40

Alocassia Apartments

45

DTZ Hospitality Management Services

1 week

41

The Forest

38

Wangz Hotel

7 Nights

42

Riverdale Residence Singapore

37

Ascott Limited

1 year

43

Park Avenue Robertson

36

Park Avenue Hotels and Suites (United Engineers)

7 nights

44

The Heritage Singapore

33

Ascott Limited

2 years

45

Kembangan Lodge

27

Santa Grand Hotels

1 month

46

La Residenza

24

Millennium Hotels and Resorts

1 day

47

Global Residence @ St. Thomas Walk

22

Global Residence

1 month 6 months

48

Redwood @ Central

20

Redwood Residences

48

Cayden Riverfront Residences

20

Cayden Residences

7 days

50

Serviced Suites @ Emerald Hill

7

Expats Services

1 month

Source: Publicly available data and company survey. *Capri by Fraser is a hybrid of serviced residence and a hotel. **Pan Pacific Serviced Suites Beach Roadâ&#x20AC;&#x2122;s minimum stay for weekdays is 3 nights, and 2 nights during the weekends.

SINGAPORE BUSINESS REVIEW | JULY 2015 35

legal briefing

VIE legalization favours SG investors

Reforms in China’s foreign ownership policies seek to rationalize VIEs for investor confidence.

C

hina’s restricted industries, such as telecommunications and internet, are goldmines for prospective clients. Up until recently, foreign investments into these limited enterprises have been hindered by laws and regulations, leading to extralegal entities called variable interest entities (VIEs). Now, as China relaxes its foreign ownership policies, Singaporeans have a prime opportunity to cash in on a market with literally a billion customers ripe for the picking.

What are VIEs? A VIE is defined as a legal business structure often used as a workaround to restrictive laws and regulations regarding foreign ownership of key industries. It sees mainstream application in countries such as China, where businesses are turning to foreign investment for financial support.

The VIE structure has two mutually dependent main parts: the offshore company where foreigners can buy shares; and the smaller VIEs that are wholly local-owned. The smaller entities take care of any legal matters including licences and business permits, all the while being contractually obligated to pay royalties to the offshore entity, thereby making a profit for investors.

“This should also give regulators in Singapore more comfort, as the laws will legitimize and provide clarity that such structures are allowed under Chinese laws.”

How have VIEs affected the Singapore market?

Though VIEs have existed in Singapore listings for more than a decade, they have not really gained traction in the market. Pong Chen Yih, a principal at Baker & McKenzie.Wong & Leow, recalls that the first VIE structure to list in Singapore was in 2004.

“The group was a provider of products and services primarily based on broadband satellite technology, which was a restricted business under China law.”

Director Elizabeth Kong and Dr Qiu Yang of Stamford Law affirms the virtual non-existence of Chinese VIEs on the Singaporean radar, noting that these legally risky contracts will depend on Chinese courts for upholding if ever the VIEs cannot fulfil their obligations.

As VIEs are circumventing Chinese laws in the first place, petitioners don’t really have a leg to stand on. However, this doesn’t stop Singaporeans from enquiring about VIEs. According to Ch’ng Li-Ling, a partner at RHTLaw Taylor Wessing, “Some clients 36 SINGAPORE BUSINESS REVIEW | JULY 2015

approached us for advice on investments into the restricted industries in China, such as education and tourism. Some clients also explored the VIE structure for the listing of their assets and businesses in Singapore, HK or the US.” Ch’ng Li-Ling

Pong Chen Yih

Elizabeth Kong

Dr Qiu Yang

How will China’s recent move to legitimize and regulate VIEs impact Singapore?

As part of China’s efforts to adopt internationally practiced regulations, the Ministry of Commerce (MOFCOM) has drafted a revised Foreign Investment Law (FIL) that seeks to legitimize existing VIEs. It effectively eliminates the structure by identifying businesses according to who has majority control.

Through the FIL, existing VIEs will be granted pardon once they have filed a record or obtained business approval from MOFCOM. The recognition is awarded only if the business and its subsidiaries are evaluated to be fully Chinese owned and controlled.

The FIL also entails the adoption of a ‘negative’ list wherein foreign investments will only be subject to MOFCOM scrutiny if the project is included on the list, or if it could potentially impact national security.

Experts predict that China’s list will be similar to that of the US’ and EU’s with the governments engaged in bilateral talks.

“This should also give regulators in Singapore more comfort, as the laws will legitimize and provide clarity that such structures are allowed under Chinese laws and regulations,” adds Pong.

What are the prospects for a Singapore listing of Chinese businesses in restricted industries?

The proposed policy reform is also expected to give the Singapore Exchange and the Monetary Authority of Singapore a better understanding of the legality of VIE structures related to restricted Chinese industries.

“With the Singapore Exchange’s recent move of relocating its head of listings to lead its China business, there is increased emphasis on the Chinese market for Singapore listings,” says Pong.

In fact, according to Kong and Qiu, a company based in Singapore can issue shares bearing varied voting rights. This enables a structure that gives Chinese holders majority control of a Singaporeanfunded entity dealing with restricted industries.

However, there are still some reservations regarding this topic. Most stem from the clearance and liquidity issues mentioned above.

“The issue now is not so much the prospects for a Singapore listing of Chinese businesses in restricted industries, but the prospects for a Singapore listing of any Chinese businesses,” says Ch’ng.

2015

CORPORATE PERFORMANCE AWARDS JULY 8, 2015 SHANGRI-LA HOTEL SINGAPORE

CMO Briefing

How to maximize your image marketing plans Marketing heads in Singapore reveal how they use Instagram and Pinterest to their advantage.

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hen Cheryl Gan, founder of Barn & Potter and Mt Sapola, wanted to experiment with a social-media based in-store experience in 2014, she experimented with an augmented reality campaign called “Scent Up with Jolly” at Christmas. Customers could use their smartphones to interact with a virtual snowman mascot, and snap pictures with it. Additionally, it helped them find items they were looking for within the store. They were surprised at how positive the response was, with customers taking photos with the virtual mascot, and then sharing it on their social media pages with a unique and festive post.

“Emotive visual imagery has been core to Mt Sapola’s omni-marketing strategy since we started 8 years ago. We believe strongly in promoting holistic living and wellness through our products, and we felt that the right visuals would be most impactful to bring this vision to life,” says Gan. Social media views are great, but they don’t mean much to marketers unless they translate to increased customer engagement. The question now is: how should one approach using this channel to replicate the engagement brought about by campaigns such as “Scent Up with Jolly”? And how should one create and select content to capitalize on its reach? We spoke to a few marketing professionals harnessing the power of image marketing in social media to find out what strategies work, and what makes content effective.

What is the right approach to image marketing?

Many marketers today make the mistake of approaching social media as a free broadcast medium, posting anything and everything they

38 SINGAPORE BUSINESS REVIEW | JULY 2015

Timing is everything with social media, and it’s important not to bombard users with content.

can, in the hopes of reaching a wide audience.

Terence Teh, CMO of furniture store Journey East, avoids this error. He never uses Instagram to repost stylized magazine-grade shots, but prefers to share moments and point-of-view type shots. “The true value of Instagram lies in its original intent of conveying immediacy and authenticity, almost as if the customer is seeing the product with his/her own eyes,” says Teh. Additionally, the social media strategy must be in line with what the brand is doing both online and offline, in order to communicate a clear message to customers. Gan notes that her brand seeks to promote holistic living and wellness through their products. All channels, online and offline, use similar lifestyle-related visuals to communicate their vision to customers.

Sharon Wong, marketing manager of Madame Tussauds Wax Museum in Singapore, explains that a great deal of thought goes into the shots that they post online. “We are very particular about the images we post on social media and try to select fun, playful shots of celebrities with their figures that will resonate with our audience,” she says.

One very popular recent post on Facebook showed Singaporean singer-songwriter Stefanie Sun getting her wax figure made. The post included shots of her getting her face measured, her hair colour checked, and even Stefanie playing around with some of the materials for the figure.

How do we leverage social media’s unique capabilities?

Social media has a number of features that cannot be found anywhere else, which can be used to maximize the reach and impact of each post.

For example, aggregators such as hashtags allow content to reach users who were not necessarily browsing a company’s page or profile. Wong says, “The key to creating effective image content is to be selective about the image chosen and also ensure that you pick the right hashtags to go alongside it.”

She advises marketers to use trending hashtags to capitalize on the current interest from followers.

Timing is everything with social media, and it’s important not to bombard users with content.

According to Wong, the best times to post seem to be early in the morning when people are on their way to work, during the early evening, or at lunchtime.

Most importantly, marketers should exploit the interactive nature of social media. As technology plays an increasingly integral role in customers’ lifestyles, social media becomes a more important avenue of engaging with your target market. As Teh says, “brands that approach consumers via social media should always be sure that it is done in a manner that adds value to the consumer. Good content, besides being attractive, also gives ‘social points’ to those who share it.”

regional economy briefing: india

Weak international demand for India’s top exports, including rice

How weak exports are threatening the looming Indian current account surplus Will tumbling oil prices be enough to sustain India’s drive toward an account surplus?

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f other Asian countries took a closer look at the Indian economy today in comparison to a year ago, they would see a country poised for substantial economic growth, determined to close the gap between its savings and its investments. But can India manage to achieve a current account surplus its first after many years in the red? To be sure, India continues to enjoy its reputation as one of the region’s up-and-coming economies amid the underwhelming economic performance of its neighbours. Deutsche Bank Research, which monitors the economic vulnerabilities of 10 Asian countries using 20 indicators, has noted this particular resilience.

“Since our last update in October, 6 out of the 10 Asian economies under surveillance have seen their vulnerability assessments worsen, while India is the only economy that has undergone a substantive 40 SINGAPORE BUSINESS REVIEW | JULY 2015

Edward Teather

Pranjul Bhandari

improvement,” says Taimur Baig, chief economist at Deutsche Bank.

One such positive indicator of India’s growing economic muscle has been its balance of payments; specifically its current account deficit.

On 17 March, the Ministry of Finance announced that, thanks to the recent decline in oil prices, it has managed to ease its current account deficit to 1.6% of its gross domestic product (GDP) for the October to December period last year – a marked improvement from the 2% recorded in the previous quarter.

What drove India’s narrower current account deficit?

“The improvement in the current account deficit was a positive surprise thanks partly to stronger-thanexpected services exports, which is likely to be linked to buoyant demand from the United States, (a key market for India’s services trade),”

says Pranjul Bhandari, chief India economist at HSBC Global Research.

On the other hand, Radhika Rao, analyst at DBS Group Research, notes that the narrower account gap “underpinned the balance of payments position and underscored that India’s external balances are no longer a flashpoint.”

Typically, a country’s current account indicates its status as either a global lender or a global borrower.

“Countries with current account deficits have to borrow abroad to finance domestic spending. Countries with current account surpluses lend funds (savings),” explains Edward Teather, economist at UBS Global Research.

In India’s case, running a current account deficit isn’t exactly new.

“Historically, India has tended to record current account deficits,” notes Teather. Data from the World Bank shows that in the past 10 years, India’s

regional economy briefing: india current account has been firmly in the red, with little attempt to cross over to surplus region until now.

“As gold imports normalize and oil imports fall further, we expect the current account to post a surplus in the ongoing January-March quarter, after 32 consecutive quarters in deficit,” Bhandari says.

Gold imports rose by nearly 50% to $1981.53 million last February versus $1331.86 million in the same month last year, according to data from the Ministry of Commerce and Industry.

On the other hand, oil imports for February 2015 amounted to $6101.23 million, 55.49% lower than $13706.89 million in February last year, as the price of crude oil fell sharply through most of 2014.

How will India’s current account look in the year ahead?

In the meantime, analysts are upbeat that the continued tapering of India’s current account deficit will be sustained for the rest of the year.

“Incorporating the latest data and our forecast for January-March 2015, we think the current account deficit for fiscal year 2015 will be about $20 billion (1.0% of GDP) vs $32.4 billion in fiscal year 2014 (1.7% of GDP),” Baig says.

Bhandari and Teather are more optimistic: India’s current account deficit this year, they say, may narrow to even less than 1% of the country’s GDP. “Looking further ahead, despite higher non-oil-imports (especially in capital goods, as domestic demand begins to inch up), lower remittances from the Middle East, and sluggish outlook on exports (due to weak global growth outlook and a strengthening rupee), we believe the power of lower oil imports will be sufficient to halve the current account deficit to 0.6% of GDP in 2015/16 from 1.1% in the previous year,” Bhandari says. Teather cites “lower oil price[s] which [are] still feeding through as of the February trade numbers,” among other reasons, as the drivers behind a likely 0.5% current account deficit this year.

Did India’s trade deficit have any impact on its current account?

Interestingly, Bhandari notes the

tapering of India’s current account deficit comes even as the economy posted a slightly higher trade deficit on the back of weak exports and robust demand for gold imports, as the government recently relaxed certain curbs on imports.

Indeed, the Ministry of Commerce and Industry recently reported that from April 2014 to February 2015, India’s trade deficit climbed to an estimated $125220.94 million, from $124844.53 million in the same period the previous year. The figure is definitely higher but not so high that it renders a current account surplus impossible. “Given the latest benign trade deficit figures, it is likely that India’s current account balance will turn into a surplus in the JanuaryMarch 2015 quarter,” Deutsche Bank’s Baig affirms.

How will falling exports affect India’s current account deficit?

However, challenges may hinder India in its quest to narrow its current account deficit in the form of shrinking exports, which in turn may signal a decline in the country’s manufacturing sector, despite the country’s overall economic uptick.

“The main spoiler to this merry outlook would be a sustained decline in exports given falling commodity prices, sluggish global growth, and a strengthening rupee,” Baig warns.

Indian exports for February dropped to $21.55 billion versus $25.35 billion a year ago, according to the data released by the Ministry of Commerce and Industry on 13 March. Accordingly, the rupee has been aggressively appreciating, trading within R60 territory in the past six months, and effectively pushing back against the US dollar.

In addition, global growth forecasts this year have not been so optimistic.

Most international lenders have forecast the world economy to grow by mere single digits this year, with the International Monetary Fund and the World Bank making the most dismal forecasts at 3.5% and 3.0%, respectively.

This translates into possible weak international demand for India’s top exports, which include refined petroleum, automobiles, and rice.

India’s current account balance heading for a surplus

Source: UBS, Haver, CEIC, CSO, RBI

Monetary policy framework gets govt nod

Source: DBS Group Research

Taimur Baig

Radhika Rao

Excluding exports, how will a current account surplus affect the Indian economy?

Firstly, a surplus will likely boost overall investor confidence, given that the RBI (Reserve Bank of India) is also likely to maintain its strategy of building up its foreign exchange reserves as part of its monetary policy. “With the balance of payments surplus growing amidst strong inflows, we expect the RBI to continue building its war-chest of foreign exchange reserves,” says HSBC’s Bhandari.

Latest RBI data show that as of March 6 2015, the RBI’s foreign exchange reserves amount to $337793.1 million, a variation of $42344.4 million over last year.

Secondly, analysts say that with a current account surplus on the horizon, a highly anticipated rate cut by the central bank may not be too far behind.

A rate cut should prove beneficial, given that such a move is generally considered a catalyst for economic expansion, as personal and corporate borrowing activities take place left and right.

SINGAPORE BUSINESS REVIEW | JULY 2015 41

Event coverage: netevents global summit

Thought leaders engage in a debate session at the event

How deploying virtual infrastructures address security concerns in the cloud

As hackers become more sophisticated, virtual machines with firewall may just be the right solution.

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hen source code hosting company Code Spaces became the target of a DDoS attack in June 2014, it suffered the ultimate cloud nightmare. The hacker managed to gain access to its Amazon Web Services control panel account and demanded money in exchange for releasing control back to the company.

When Code Spaces didn’t comply and tried to take back control over its own services, the intruder began deleting most of the company’s data, storage volumes, machine configurations and offsite backups. With just a few clicks in the keyboard, the attacker has effectively destroyed Code Spaces and obliterated everything the company has achieved for the last seven years.

The incident is almost similar to a scene in a movie where someone breaks into an office building threatening to destroy the main server data 42 SINGAPORE BUSINESS REVIEW | JULY 2015

“A Current Analysis poll revealed that out of the 874 enterprises it surveyed around the world last year, 66% of the respondents are currently using cloud services.”

center if demands were not met, the only difference is, it is actually much easier to penetrate a cloud-based platform than to physically breach a corporate data center. What happened to Code Spaces only highlighted how critical security architecture is especially when enterprises are slowly moving towards cloud.

Cloud computing may have gained prominence in the last few years with market observers believing it will be the future of business, but not everyone is keen to move and store their critical information and data to the Internet as risk on network security remains the number one issue.

A Current Analysis poll revealed that out of the 874 enterprises it surveyed around the world last year, 66% of the respondents are currently using cloud services, 28% plans to use cloud services in the next 24 months, while 7% have no plans to use. The survey also noted that 58%

of the enterprises are using private cloud (cloud services that the companies built and manage themselves), 28% used hybrid solution (a mix of Internet-based cloud solutions as well as their own private-based cloud solution) while 15% are into public cloud.

Add to that, data from the Current Analysis 2014 Enterprise Investment Plans Survey showed that 44% of enterprise customers placed security as their main reason why they are wary to move and store their critical information to a public environment right away. Aside from security, reliability issues came in second with 29% votes, followed by data privacy concerns with 25%. Controlling costs (24%) and data residency concerns (20%) rounded out the top five concern.

In a keynote session presented during the two-day NetEvents Global Cloud Innovation Summit held in

Event coverage: netevents global summit “Sophisticated hackers are often active behind the firewall for several months, waiting for opportunities, sniffing credentials and looking for ways to get into additional servers.”

Guido Appenzeller, CTSO for Networking and Strategy, VMware

Tiburon, California last April, entitled “The Next Horizon for Cloud Networking and Security,” Guido Appenzeller, Chief Technology Strategy Officer for Networking & Security at VMware, discussed how deploying virtual infrastructure or virtual machines could be a new approach in tackling security concerns in the cloud.

“So, security in 2014 was a terrible year. The pattern that we’ve seen in 2014 is that the attackers have gotten a lot more sophisticated. Typically an attacker will first manage to break into one server behind the firewall and often times, this initial server is not a very sensitive server as it may be a standby system,” Appenzeller said. He added that nowadays, sophisticated hackers are often active behind the firewall for several months, waiting for opportunities, sniffing credentials and looking for ways to get into additional servers.

“And as they do this, they deploy sleeper payloads, so even if they get detected and cleaned from some of their hosts, these sleeper payloads will wake up and give them a second bite at the apple. It sometimes takes months just to clean them up because it’s very hard to find out where they are located,” Appenzeller said.

However, looking at this, one could ask, couldn’t we just put firewalls everywhere in the data center?

Appenzeller explained that putting firewalls everywhere would be very costly, as you need to have the same firewalling capacity per rack. Add to that, the management of rules would also be difficult. But, he stressed that if a virtual machine is deployed and that virtual machine has a firewall

associated with it, it would automatically push out the firewall rules to the hypervisor. And in the hypervisor switch, there’s a little firewall running in pure software, it could intercept items that are not supposed to be send out.

“With this distributed firewall, one of the big advantages is that if you move around the virtual machines, the firewall rules always move with the virtual machine. And if you delete the virtual machine, the firewall rules go away as well. The net result is you get a firewall for pennies to the dollar compared to a physical solution that scales out as you scale out your infrastructure,” Appenzeller said. He further noted that although this move “will not necessarily help with the initial infection, it basically means that an attacker that has gotten in cannot spread further inside your data center, which is a huge step forward in security.”

Clouded Leopard Den 2015 Aside from the insightful discussions, another highlight of the two-day summit was the announcing of the winners for the inaugural Clouded Leopard Den 2015 competition, which recognizes top innovative startups in two categories namely early-stage innovators and later-stage pre-IPO companies.

With security being the main concern of enterprise customers, it did not come as a surprise that the winner for the early-stage startup category was TapLink.

Security startup TapLink was founded when serial entrepreneur Jeremy Spilman’s own password was comprised in the LinkedIn data

breach in 2012. The incident kicked off the search for a better way to completely protect passwords from an offline attack, even if the password database was stolen. “Being named a finalist for the Clouded Leopards Den award validates the scope of the password database security problem we are addressing and our unique, cloudbased solution,” Spillman said, adding that the Blind Hashing Technology that the company designed enables organizations to eliminate password database theft once and for all.

TapLink’s patented Blind Hashing Technology is a solution that entangles password hashes with a massively large block of data. It is a simple back-end API call; invisible to the end-user, easy to integrate with existing authentication frameworks, and perfectly secure against offline attacks.

On the other hand, the winner for the later-stage, pre-IPO company was Viptela, Inc., a Software-Defined WAN company, whose Secure Extensible Network (SEN) product enables large enterprises to centrally manage and secure multiple networks and transport technologies as if they were a single system.

Amir Khan, CEO of Viptela, said: “Being recognized as the top pre-IPO company for the Clouded Leopards Den award provides further validation for the market opportunity that Viptela is addressing and the value our technology provides to both enterprises and carriers.”

Clouded Leopards Den Winner - Taplink

SINGAPORE BUSINESS REVIEW | JULY 2015 43

regional analysis: Deflationary Pressures

Economic growth has been slipping in the region

Key debate in Asia still about deflationary pressures and central banks’ response Morgan Stanley says the lower real rates and improvements in capital allocation are needed for growth.

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n our view, the key macro debate in the Asia ex Japan region will remain that of deflationary pressures and whether central banks will be able to respond to these deflationary pressures by cutting policy rates and bringing real rates in the region down. The deflationary pressures have resulted in slowing corporate revenue and nominal GDP growth and higher real interest rates, creating pressures on corporate balance sheets, the most levered entity in the region.

Consequently, corporates have had to cut back on capex and also on wage growth, leading to a slowdown in domestic demand. More importantly, high real rates are serving as a deterrent for the private sector to invest, which is therefore holding back the region from its much needed transition towards a new productive and sustainable growth cycle.

Over the past 4-6 months, the 44 SINGAPORE BUSINESS REVIEW | JULY 2015

“Headline CPI inflation has also begun to slip into deflation in Singapore, Taiwan and Thailand and has remained at low levels in China, Korea and Malaysia.”

further slippage of economic growth in the region has led to intensification of deflationary pressures. Indeed, producer prices, which have been in deflation for many economies in the region, have widened in early 2015.

Moreover, both commodity and non-commodity segments of the producer price index have slipped further into deflation, suggesting a loss of corporate pricing power. At the time of writing this note, 9 out of 10 economies in the AXJ region have producer prices in deflation, with Indonesia the only exception.

In addition, headline CPI inflation has also begun to slip into deflation in Singapore, Taiwan and Thailand and has remained at low levels in China, Korea and Malaysia. Taking these developments into account, we believe the GDP deflator slipped into deflationary territory in many economies in the region in 1Q15.

While central banks in the region

have cut policy rates, these rate cuts have not been fully transmitted to market-oriented interest rates due to a combination of elevated levels of loan to deposit ratios, concerns over asset quality in the banking system and capital outflows adversely impacting domestic liquidity conditions. Moreover, the central banks’ policy actions are still more of a reactive nature rather than being pre-emptive.

Against this backdrop, real interest rates in the region have risen to a 13-year high, curtailing domestic demand growth. We are concerned that the intensification of deflationary pressures and a relatively slow response from central banks will feed into a loop of higher real rates and weaker domestic demand. The key to watch for is therefore whether central banks in the region will step up the pace of monetary easing and take real rates lower. While our base case

regional analysis: Deflationary Pressures assumption is that central banks will indeed be able to manage real rates lower, the risks appear to be tilted towards the potential outcome of this response being slow, in our view.

GDP growth outlook: Stable in 2015, modest uptick in 2016 GDP growth in the region is expected to remain stable at 6.5% in 2015, vs 6.5% in 2014. While the growth recovery in developed markets should lend some support to external demand for the region, this improvement will likely be offset by continued deceleration in growth in China and sluggish domestic demand amid the challenges from weakening demographics, elevated debt, and intensification of deflationary pressures.

The weaker incoming activity data in terms of growth deceleration in retail sales, capex-related activities, and non-commodity exports over the past three months suggest the region’s growth momentum may have slipped further in 1Q15 due to sluggish domestic and external demand.

While we do expect a slight pickup in growth in the quarters ahead, the growth recovery is unlikely to be vigorous, in our view, given the slow domestic demand growth outlook and only a slight pickup in external demand.

Growth slowdown in China should pose as a drag for the region We expect China’s growth slowdown to be a key drag on the region’s growth, given its importance as a source of end demand for the region.

Over the past 12 months, there has been significant deceleration in economic activity in China, as MSCHEX (our China economics team’s proprietary growth indicator) and non-oil import growth trends have slipped in recent months to closer to 2009 lows. High levels of debt, excess capacity, weak productivity and a sluggish property market have led to slower investment, while slower wage growth continues to weigh on consumption growth.

Moreover, the disinflationary trend has pushed nominal GDP growth lower and real rates higher, increasing the challenge for policy makers to manage both debt and growth

dynamics. While we expect policy makers to adopt more monetary, fiscal and property easing measures later this year, GDP growth should still decelerate to a 25year low of 7.0% in 2015-16, from 7.4% in 2014.

We expect this weakness in growth to transmit to economies with close trading ties with China (Hong Kong and Korea) and also weigh on growth in Australia, Indonesia and Malaysia due to their status as commodity exporters.

Inflation outlook: Prevalence of disinflationary trends in the region Weak domestic demand, persistent overcapacity issues, and weaker commodity prices have led to entrenched deflationary pressures in the region.

As it stands, 9 out of 10 economies in the AXJ region have producer prices in deflation. In recent months, deflationary pressures have also transmitted to consumer prices, with 6 economies in the AXJ region having CPI inflation below 2% and the region’s aggregate GDP deflator estimated to have dipped into deflation in 1Q15.

We expect the deflationary pressures to persist in the region through 2015, given the excess capacity, sluggish domestic demand growth outlook and the absence of supply-side pressures (reflected by weak commodity prices). In our view, CPI inflation in the region will decelerate to 2.4% in 2015 as compared to 3.4% in 2014, with the deceleration widespread across all economies in the region. China’s CPI inflation is expected to decelerate further from the post-credit crisis low of 2.0% in 2014 to 1.3% in 2015 on the back of persistent overcapacity issues and anemic domestic demand growth. In Singapore and Thailand, we expect CPI inflation to remain in deflation this year and average -0.2% and -0.3%, respectively, compared to 1.0% and 1.9% in 2014. In Taiwan, we expect the current CPI deflation to be transitory and expect CPI to average 0.5% in 2015, though still lower than 1.2% last year.

In India, CPI inflation has been decelerating towards the central bank’s inflation target, and we expect this deceleration to continue due to a

“CPI inflation in the region will decelerate to 2.4% in 2015 as compared to 3.4% in 2014, with the deceleration widespread across all economies in the region.”

combination of supportive domestic (moderation in rural wages, slowdown in government spending, positive real rates, moderation in property prices) and global factors (lower global commodity prices). We forecast a sustainably lower inflation path and expect inflation to decelerate to 4.75% by end-2015, lower than the consensus estimate of 5.75%.

Will central banks act enough to ward off deflationary pressures?

The onset and subsequent intensification of deflationary pressures have led to elevated real rates in the region, which poses additional stress on the region’s domestic demand in the context of the high debt-to-GDP ratio. In response to these deflationary pressures, 6 out of 11 economies in the region (Australia, China, India, Indonesia, Korea, and Thailand) have cut nominal interest rates so far this year, while the Monetary Authority of Singapore has eased monetary policy by reducing the appreciation slope of the S$NEER. However, tight liquidity conditions have meant that these rate cuts have only been partly transmitted to market-orientated rates.

Moreover, the pace of policy rate cuts continues to lag the pace of disinflation, keeping real rates elevated.

Given our forecast of continuing deflationary pressures, we expect further rate cuts this year. We see further reductions of 75-100 bps in India by the end of Mar-16, 50-75bps in Indonesia, 50bps in Australia, China, and Malaysia, and 25bps in Korea and Thailand. These rate cuts should help bring the region’s real policy rates down to 2.2% by end-2015, from 3.0% in end 2014. By Chetan Ahya, analyst, Morgan Stanley

Corporate sector has been the most levered entity in the AXJ region

Source: CEIC, Haver, Morgan Stanley Research. *Morgan Stanley Research estimates for China’s and India’s 2014 debt to GDP data, and actual data for other economies

SINGAPORE BUSINESS REVIEW | JULY 2015 45

REGIONAL analysis: EL NIñO IN ASIA

Lack of rainfall signals widespread crop damage

The impact of El Niño on Asia in 2015

US, Australian and Japanese meteorological agencies warn that a full El Niño effect is developing around the Pacific Rim, which raises the risk of sharply higher food prices in 2H15.

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ver the past year, weather forecasters and analysts alike cried wolf several times when it seemed El Niño was about to return. For example, in June 2014, official forecasters in the US warned about warming waters in the Pacific, implying that an El Niño effect was forming. A few weeks later, however, it became clear that the temperature increase was not enough to trigger to the full effect. Asia was thus spared a spike in food prices last year.

Once again, agencies in the US, Australia and Japan warn of warming water temperatures, with their caution carrying a higher degree of conviction than last year.

Investors had better listen: while it may be easy to shrug off the risk of a food price spike amid widespread CPI disinflation, in the past the weather phenomenon has proved highly disruptive. This is even more the case when a rise in food prices is coupled with an increasing oil price.

At particular risk from an inflation perspective are India, Indonesia and the Philippines. However, we note that this is not a “positive” inflation shock, with rising prices likely to depress demand, especially among consumers. Read on for data on the latest on El Niño and our views on specific markets. Let’s hope that this is another false alarm.

A relatively complicated matter In a nutshell, El Niño occurs when warm water heats up around the Equatorial Pacific in conjunction with 46 SINGAPORE BUSINESS REVIEW | JULY 2015

“There is a 90% chance El Niño will continue through the summer and an 80% chance it lasts through 2015.”

a change in trade winds. Meteorological agencies tend to declare El Niño conditions when the criteria such as above-average sea-surface temperatures are met for three consecutive months, and an “episode” when the conditions persist for seven consecutive months. As of 14 May 2015, the NOAA (National Oceanic and Atmospheric Administration) stated that there is a 90% chance El Niño will continue through the summer and an 80% chance it lasts through 2015.

The direct – and most important – impact for Asia is that most of Equatorial Asia (ASEAN) and Australia will receive less rain, cutting into agriculture output and yields.

In extreme cases, the lack of rainfall may cause widespread crop damage and turn Indonesian land-clearing forest fires into massive conflagrations, with smog clouds choking citizens of Singapore and Kuala Lumpur.

As for India, the impact channel is via the seasonal – and crucial – monsoon season that lasts between June and September. The rains are now forecast by the India Meteorological Department (IMD) to be slightly below average, but the monsoon is expected to arrive slightly early, with substantial rains at the outset. However, early forecasts are typically unpredictable and, in the past, El Niño has had a strong impact on the monsoon cycle – indeed, some of the worst monsoon seasons of the past 20 years coincided with El Niño. If the monsoon is worse than feared, this will severely constrain the RBI’s ability to ease policy over the

REGIONAL analysis: EL NIñO IN ASIA medium term, seeing that its CPI targets would be at risk (that said, we still expect the central bank to cut by 25bp in June given the current growth and inflation dynamic – what is at risk is any additional easing). More on India and monsoons in a bit.

As history shows, the impact on Southeast Asia is severe, chiefly because drought-like conditions impact some of the region’s most important crops, such as palm oil, rubber, rice, soybean and coffee. There is also the effect from outside the immediate ASEAN region. For example, wheat production in Australia would likely take a hit from El Niño while fishmeal prices would see a spike due to disruptions to the fishing industry off the South American coast. Meanwhile, supply-side constraints and “self-sufficiency” agricultural policies (above all in Indonesia and the Philippines) can exacerbate the impact of even a mild increase in food inflation, especially given the high weighting of food in CPI baskets, and a sizeable amount of food imports (as a percentage of total).

In recent memory, the worst occurrence of El Niño was in 1997-98. The health-related impact of the fires in Sumatra is estimated to have had large human and economic costs. As for inflation – estimating the direct impact of El Niño on prices is difficult, precisely because it coincided with the Asian Financial Crisis and the rapid depreciation of most ASEAN currencies. Accordingly, it is difficult to adjust for the impact on inflation from the rapid weakness of the currency.

“Even in the event that a full El Niño impact materializes and lasts into next year, it is hard to conjure up too alarming of a picture.”

What about this time around?

Let’s start with the positive. Even in the event that a full El Niño impact materializes and lasts into next year, it is hard to conjure up too alarming of a picture. The reason is that Asia has perhaps never seen such benign food prices (especially outside of recessions). Sure, you might say that disinflation is a broad theme that applies to most sectors of the economy. However, for food CPI it goes a step further. Global agriculture commodity supply buffers are immense. The US grain harvests over the past years have been relatively strong while output from other wheatproducing areas such as Canada, Russia and Ukraine were also ample.

It’s not just grain: pork, beef, fish prices are all at cyclical lows (although the price of pork has lately ticked up in China, a trend that bears watching over the coming months given the importance of pork for the local Emerging Asia: El Niño tends to correspond to a pick-up in food CPI prices (% y-o-y)

NB: simple regional average Source: CEIC, HSBC

cuisine). Over the past decade, the commodity super cycle and strong EM consumer demand for “finer foods” resulted in farmers around the world rushing to increase their output to take advantage of the higher prices. However, due to consecutive years of substantial harvests and a cyclical lull in demand, prices have declined notably.

A bit more locally, food “defences” in Asia are robust, especially rice stocks. Obviously, this is in part thanks to the Thai government policy under former Prime Minister Yingluck Shinawatra, which saw the government purchase massive amounts of rice at above-market prices (with the current administration having signalled its desire to sell off the excess inventory). It’s not just Thailand, though.

Vietnam has increased both its yields and its stocks while favourable monsoons over several consecutive years have enabled India to build up substantial reserves, helping to bring rice price inflation to near-record lows.

Supply constraints On the other end, the Indonesian and Philippine governments have prioritized rice self-sufficiency policies, which have resulted in a broad reluctance to increase imports (in spite of the low prices). This has led to relatively low domestic stockpiles that arguably leave the countries vulnerable. With high transportation costs in these archipelago nations and supply bottlenecks due to limited infrastructure, even if the governments decide to import grain stocks from surplus countries such as Vietnam or Thailand, there is a considerable lag during which prices can spike. India is another country with significant supply issues.

However, in the latter case, the Modi administration has sought to improve “food chain management”. For example, the Modi administration has eased export and import restrictions on food items – historically a sensitive issue in India. Essentially, if there is a surplus of food supply, authorities can expeditiously export the crop to avoid the risks of rotting. However, when there are signs of impending drought or undersupply, the government can enable quicker imports. Of course, without the imperative improvements in infrastructure, the benefit will be limited, but at least the government is addressing the issue.

So, what to make of all this?

If there won’t be a return of 1997-8, what will be the impact? Well, we believe that even a slight pick-up in food inflation can be significant. Asia headline CPI will be vulnerable to any sequential momentum starting in 3Q15, when the low base effect from last year’s decline in oil prices is likely to result in y-o-y figures surprising on the upside.

Moreover, consider that Brent crude oil is approaching USD69 at the time of writing, which will feed through to inflationary pressures especially in Indonesia, Malaysia and India, where fuel subsidies have been either abolished or liberalized in the low-oil price environment of the past year. In fact, rising fuel prices can also push food costs higher, with fertilizer and transportation becoming more expensive.

This means that El Niño disruptions could feed directly into some of the calculus central banks will take into conSINGAPORE BUSINESS REVIEW | JULY 2015 47

REGIONAL analysis: EL NIñO IN ASIA sideration for policy. We think the most tangible impacts will occur in the three countries most susceptible to food price shocks – India, the Philippines and Indonesia.

India and Indonesia El Niño directly impacts India’s monsoon season. Essentially, the changed wind patterns from Equatorial Asia to the Indian Ocean lead to a weaker monsoon in the Indian Ocean. The monsoon is crucial for India’s summer crop (Kharif), and weak monsoons exacerbate inflationary pressure given the country’s relatively poor agricultural infrastructure and supply bottlenecks (although the historically tight relationship between food prices and monsoon rains has weakened slightly as of late).

In India, the monsoon impact is pervasive and has a direct impact on rural income, where the majority of the population resides. Accordingly, it has a direct impact on growth and GDP levels. Yet the most tangible impact is through inflation. Seasonality in Indian inflation shows an increase in sequential momentum every summer, regardless of the type of monsoon. In the case a monsoon materializes, inflation readings tend to drift higher or spike in severe cases until December.

Over the years, the Indian CPI (or WPI) basket has shifted from grains towards fruits, vegetables and meats as rural incomes have risen. Accordingly, price shocks of these perishables have a greater impact on inflation (not to mention that grain stocks are already substantial, implying that there shouldn’t be much of a price impact to begin with). Essentially, a weak monsoon will result in overall inflation just barely meeting the 6% target by January 2016 while a significant disruption would overshoot it by a wider margin.

BI easing is ostensibly closely linked to expectations of meeting the year-end inflation target of 3-5%. We think this will likely be front-loaded in 2Q – likely before any El Niño impact is felt, if it does materialize. However, complications via higher food inflation could prompt the central bank to reverse policy – or, worse, may see the government face pressure to undo some fuel subsidy reforms from last year.

According to our calculations, the impact of a moderate El Niño on agricultural prices could make this target hard to achieve, especially when we factor in the supply-side issues we talk about above. In fact, in both the “moderate” and “strong” El Niño events, inflation is above the BI

Typhoon Haiyan wreaked damage to food supply chains

A weak monsoon [in India] will result in overall inflation just barely meeting the 6% target

by January 2016.

The intensity of the monsoon will have a direct bearing on the RBI’s monetary policy considerations

Source: CEIC, HSBC

48 SINGAPORE BUSINESS REVIEW | JULY 2015

target. This could limit BI’s flexibility, and the central bank would likely need to focus squarely on inflation risks – especially as higher energy prices feed through to consumers following the reduction of subsidies by Jokowi.

The Philippines and China The Philippines is no stranger to food price disruptions due to natural considerations. In this season alone, the country has already been hit by a few. Moreover, the Philippines had to deal with the sizeable impact of Typhoon Haiyan well into 2014, due to widespread damage to food supply chains.

The Bangko Sentral Pilipinas is accustomed to dealing with food inflation shocks, and accordingly does not tend to act on the back of single food shocks, instead preferring to take a medium-term picture. That said, a significant El Niño would put headline CPI well over the 2-4% inflation target by 2016, ostensibly putting the BSP in a difficult position that could force it to hike rates sooner than expected.

We now expect two rate hikes in 1Q and 2Q16, but food inflation risks could bring this into late 2015.

China doesn’t necessarily fit into a conversation on El Niño, as it is largely spared the weather-related impacts and the domestic food market is seldom impacted by international prices. That said, in terms of broader risks to food inflation, China is an interesting case. China followers will note that the main reason the April inflation print edged up to 1.5% y-o-y in spite of broad disinflation was a spike in food inflation, specifically on the back of pork and vegetable prices (8.3% and 7.2% y-o-y, respectively).

It seems that an inflationary cycle in pork and vegetables is on an upswing. While it may be strange that Chinese pork prices are rising while globally prices are at multiyear lows, it remains a fact that China’s agriculture is relatively impervious to outside influences. By Frederic Neumann, co-head of Asian economic research, HSBC Global Research