Singapore feels heat on economic agenda

John Burton
Financial Times
24 Jan 07

As Singapore has prospered as a trading centre in a region with its fair share of economic laggards, the city-state has often stood accused of economic imperialism. Especially as Temasek, its investment arm, has acquired a growing list of assets in often strategic industries in neighbouring countries.

In what Singapore's officials say are purely commercial investments by Temasek, local opponents have long seen "dollar diplomacy" at work and a political as well as an economic agenda.

But mounting efforts by Thailand's government to reduce Temasek's stake in Shin Corp, the telecoms group, have raised the regional political pressure on Singapore and Temasek to a new level. The stake was bought last year from the family of Thaksin Shinawatra, the prime minister ousted by Thailand's current military rulers.

Together with other emerging issues – such as a threatened anti-competition probe into telecoms ventures in Indonesia – Temasek's problems in Thailand have raised questions over whether it might be forced to focus its investments outside the region to where it provokes less controversy.

Chua Hak Bin, a regional economist at Citigroup in Singapore, said: "Recent events show that Singapore has to be cautious in investing abroad and not go into areas that are politically sensitive."

Just 12 per cent of Temasek's S$129bn ($84bn, €65bn) portfolio last year was invested in Singapore's neighbours in south-east Asia. A total of 44 per cent was allocated to Singapore and 20 per cent to OECD countries including Australia and Japan.

While Temasek's south-east Asian troubles have grabbed the headlines recently, the company has been welcomed elsewhere, including for its $4bn acquisition of a 11.5 per cent stake in UK-based Standard Chartered Bank last year, its single biggest deal.

Temasek would not comment on whether the controversy it faces in south-east Asia would affect its future strategy in the region. However, Manu Bhaskaran, the Singapore representative of US-based Centennial Group and a director of several Temasek-linked companies, said: "The bottom line is that Temasek will continue to make investments anywhere if the financial targets it has set are met."

But the problems in Thailand illustrate how political factors can influence Temasek's financial performance. The tax-free sale of Shin Corp to Temasek a year ago by Mr Thaksin's family drew protests that eventually ended in the prime minister's overthrow in September's military coup. The new military rulers argue that Temasek violated foreign ownership rules by acquiring a majority stake in Shin Corp using proxies. They want Temasek's stake reduced to 49 per cent.

Bangkok turned up the heat this month by suggesting that Singapore was using Shin Corp to spy on its communications to gain economic and military secrets, a charge Singapore's foreign ministry denies.

Temasek has suffered a paper loss of around $2bn on its $3.8bn investment as Shin Corp's share price has fallen sharply. The recent harsh rhetoric from Thailand's military chiefs has also led to talk that Shin Corp could lose its operating licences.

Even if Temasek is allowed to retain a 49 per cent stake, it may be forced to sell excess shares at fire- sale prices as buyers will be aware that it has to dispose of them in a limited space of time, perhaps a year.

Temasek's approach to doing business also has polarised opinion in Indonesia where, while some praise it for shaking up ineffective and corrupt businesses, others condemn it for perceived arrogance.

Critics allege that Singapore has tried to exploit Temasek's support for Indonesia in recent years – when other foreign investors shunned the country – to win concessions on other issues, such as greater access to the aviation market.

Indonesian officials are considering whether to act on a complaint by a local trade union of anti-competition allegations involving the country's two biggest mobile phone operators, which both have Temasek-owned companies as large shareholders.

ST Telemedia bought into Indosat, Indonesia's number two mobile operator, in 2002 and now holds 41.9 per cent of its shares while Temasek-linked SingTel has a 35 per cent stake in market leader Telkomsel. Temasek's stakes in both have long provoked accusations that Singapore was acquiring dominant influence in the Indonesian telecoms industry.

Temasek's ownership by Singapore's finance ministry and its management headed by Ho Ching, the wife of Singapore's prime minister, has not helped reduce nationalist suspicions elsewhere in the region that the investment group is acting on behalf of the Singapore government.

But a big test of Temasek's acceptance in the region could come with the recent thawing of Singapore's ties with Malaysia, which previously limited Temasek's investments because of bad feelings following the end of a brief union in 1965.

Abdullah Badawi, Malysia's prime minister since 2003, has allowed Temasek to take small stakes in key industries such as telecoms and banking. There is also talk that Temasek may soon be allowed to invest in a new Malaysian economic zone bordering Singapore.

Additional reporting by John Aglionby in Jakarta and Amy Kazmin in Bangkok.