By Saeed Azhar
A Dow Jones Newswires Column
SINGAPORE (Dow Jones)--An inevitable second term for Singapore Prime Minister Lee Hsien Loong may provide a test of whether the son of modern Singapore's founding father, Lee Kuan Yew, can loosen the state's grip on the island's economy.
Singapore's brand of state-led capitalism has had its notable successes. Within the space of a generation average incomes have risen to first world levels and some majority state-owned companies, such as Singapore Airlines Ltd. and Singapore Telecommunications Ltd., have become leaders in global and regional markets.
But as the S$193-billion economy matures, some analysts say that the reliance on state-owned companies and a government-directed strategy of attracting foreign multinationals, rather then homegrown entrepreneurship, will hamper Singapore's longer-term development.
"For Prime Minister Lee, his second term will need to reconcile state economic control with increasing expectations within the international business community of deregulation," said Garry Rodan, director of the Asia Research Centre at the Murdoch University in Australia.
Analysts say the problem with encouraging state-owned companies is it crowds out the private sector, which in other economies is the source of innovation and creativity. It also means there isn't as much diversity as there is in other economies where government-owned firms either don't exist or play a more minor role.
"This is not a great situation for the future - risk management for a small highly vulnerable economy requires having diversity - in the types of businesses, in the types of products and services produced, in the kind of export markets one relies," said Manu Bhasakaran, chief executive officer of consulting group and U.S. economic think tank, Centennial Asia Advisors.
"Not having sufficient diversity in the corporate sector is therefore a risk," he said.
A U.S. Embassy report in the late 1990s estimated that government-linked companies controlled 60% of the city-state's economy, though Singapore disputed this estimate, saying the real figure was 13%.
Testing Challenge
Prime Minister Lee emphasized in his budget speech last month that the government will support entrepreneurship, help local enterprises grow into global players and ease regulatory restrictions so as to promote enterprise.
But Singapore's existing economic model has generated generous rewards for the country and there are plenty of reasons why it may not want to diminish the role of government-linked companies.
Encouraged by the economic turnaround following the 2001 recession, Lee's budget for the fiscal year starting April 1 tapped healthy government finances to fund S$2.6 billion of cash handouts, largely aimed at low income Singaporeans, who bore the brunt of economic restructuring.
This largesse, combined with a fragmented and weak opposition, leaves little doubt the PAP, which has been in power for four decades, will win elections that could be called for as soon as this month or April.
Political analysts say the government's strong influence over the economy and the domestic corporate sector gives it greater political and social influence.
"What is at stake here is not just control of economic assets, but also the related capacity this control affords the government for domestic social and political influence," said Rodan. "This capacity won't be surrendered lightly".
Song Seng Wun, an economist at CIMB-GK, said it won't be easy for the government to reduce its ownership of the economy since the main goal of state-owned investment company Temasek Holdings Pte Ltd. (TEMAH.YY) is to maximize sustainable value for its shareholders.
This will especially be the case if state-owned companies continue to improve their profits, he said.
Temasek has majority stakes in Singapore's largest listed companies and complete ownership of many large unlisted companies such as ports operator PSA International.
Lee has said that Temasek aims to diversify its portfolio and reduce its exposure to Singapore by one-third to half over the long-term. But reducing the proportion of local assets in a growing asset base doesn't necessarily translate into lower government ownership of the economy.
Government Premium
Aside from profits the government earns from government-linked companies, the firms themselves enjoy other benefits that encourage rather than discourage continued government ownership.
An International Monetary Fund paper in 2004 found that Singapore government-linked companies are rewarded in financial markets with a market value premium of more than 20%.
Still, the IMF said then that this shouldn't be viewed as a reason to create new GLCs or expand existing ones.
`If the GLC premium is largely due to the market's perception of the benefits of being linked to the government, further proliferation of GLCs, which will tend to stretch the resources of the government, will only dilute these perceived benefits and, thereby, the premium," it said.
It isn't that Singapore's private sector hasn't grown. Contract chip manufacturer Venture Corp. (V03.SG) and water treatment company Hyflux Ltd. (600.SG) are among successful corporate names, but they remain relatively small.
On top of this, family owned businesses have a strong foothold in the property and banking sectors, with Oversea-Chinese Banking Corp. and United Overseas Bank Ltd., two of Southeast Asia's largest bank, being notable examples.
Lee said in his budget speech that entrepreneurship increased in 2005 but remained "modest" overall.
Sani Hamid, a sovereign analyst with Standard & Poor's Ratings, said Singapore's growth in recent years and its ability to recover from external shocks suggest that the economy remains nimble and that the present extent of government control hasn't been a drag.
"Overall, the government has and will continue to allow the private sector to take over the reigns of being the primary source of growth - but private entrepreneurship has only been actively promoted in recent years and will take time to become entrenched," the analyst said.
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