Never before has Singapore’s consumer price index (CPI) been in contraction for so long. The last time prices fell for so long was back in late 1975, when the CPI went into 16 straight months of contraction in the wake of a world recession.

On the surface, this current prolonged bout of falling prices seems alarming. Previous episodes coincided with recessions in 1998, 2001 and 2008, when weak demand dragged prices lower. Often, a prolonged fall in prices is also a sign of deflation – a problem with dire consequences that are hard to reverse. In what is called a “deflationary spiral”, consumers, anticipating that things can only get cheaper, save rather than spend. Firms’ profits fall, wages stagnate, and so does growth.

Japan, which has had deflation for 15 years, is still struggling to stoke spending. Having exhausted better options, the Bank of Japan decided in January to set a -0.1 per cent interest rate on some deposits that banks keep at the central bank, to spur bank lending. Meanwhile, the annual interest rate on a regular savings account is just 0.001 per cent.

Is Singapore at risk of a similar plight?

Same symptom, different casesTo be sure, falling inflation can be good or bad, depending on the underlying demand and supply factors.

Back in 1975, Singapore was pretty glad to see prices cooling. Inflation then had hit a peak of 22.4 per cent in 1974, after the Arab oil embargo sent world oil prices quadrupling. So negative inflation meant that imported food and oil prices were stabilising, and that local efforts to stamp out profiteering had worked.

Today, negative inflation could be a good sign if it means that prices are falling because firms are using better technology to cut their production costs, or that healthy competition is driving down prices of some of the 6,600 goods and services in the CPI basket. But given the breadth of Singapore’s import markets, these effects are difficult to discern.

What we do know is that after the commodities price crash in 2014, Singapore imported oil at dramatically lower prices.

On the domestic front, government intervention, rather than sluggish demand, has been the main drag on inflation.

Cheaper certificate of entitlement (COE) premiums for vehicles, falling home rents and imputed rents (a proxy for accommodation costs) have been holding the headline CPI number down.Government administrative measures and lower imported inflation do not worry economists as much as a broad fall in prices that results from sluggish demand.

Not deflationWhat is clear is that Singapore is not facing deflation.

The complication lies with how the CPI basket is constructed. While direct oil-related items such as petrol and electricity comprise around 5 per cent of the CPI basket, accommodation and private road transport costs together account for more than a third of the index.

To give that weight some perspective, the MAS core inflation measure, which excludes accommodation and private road transport costs, has been climbing even as the CPI has fallen.

Although the official forecast is for inflation to remain negative throughout the year, the fall in prices has not been broad-based. Food prices, for example, have risen. ese reasons, Singapore is “not facing deflation”, Monetary Authority of Singapore(MAS) managing director Ravi Menon explained in great detail at a media briefing last July.

Deflation, as defined by former US Federal Reserve chairman Ben Bernanke, is “a general decline in prices, with emphasis on the word general”.

Sector-specific price declines, noted Bernanke, are “generally not a problem for the economy as a whole and do not constitute deflation”.

Likewise, the MAS prefers the term “negative inflation” to describe the Singapore price environment. The distinction is an important one.

Negative inflation acknowledges that prices are falling but not because of a wider economic malaise afflicting the economy, such as deflation. In fact, if it wished to, the Government could easily lift its policy levers to raise inflation again.

Just take the surprise move by the MAS to ease rules on car financing on May 26, shortly after Singapore crossed 18 months of negative inflation.

That weekend, car dealers saw a spike in showroom traffic. At the bidding exercise two weeks later, the COE premium for cars of up to 1,600cc jumped 14.2 per cent to a six-month high of $53,694. That’s definitely making an impact on June’s CPI reading.

And Singapore has more room to manoeuvre with the property cooling measures that were implemented from 2009 to 2013, after inflation hit 4.6 per cent in 2012. More importantly, the authorities have a firm handle over both the property and car markets through their control of land supply and vehicle quotas, as well as through property and car financing.

So, while home rents and private road transport costs are dragging headline CPI down, what’s happening in those two markets is better described as the MAS moderating demand across time.

Balancing other objectivesThe CPI is the broadest measure of inflation, designed to include a wide variety of consumer items – 6,600 to be exact – which is why it is the most useful gauge of price pressures in an economy.

But the headline CPI number is not always the best measure of consumer demand. Most countries construct various measures of inflation to better understand the forces behind price pressures, and in Singapore, the MAS core inflation rate gives a better picture of the underlying trend in prices caused by demand-induced cost pressures.

Singapore has been stuck in negative inflation for the longest stretch on record, but that’s partly an administrative decision and partly the effect of the commodities cycle, which will swing.

More importantly, according to a research paper published last year by the Bank for International Settlements (BIS), a central bank think-tank, falling prices of goods and services are not by themselves worrying.

Instead, it is asset price deflation – property and equity price collapses in particular – that have historically given consumers a bigger squeeze and stymied growth.

The BIS research also asked if more debt in an economy has increased the costs of deflation. The answer was yes: Since property price crashes tend to follow when a price boom is fired by easy credit, said the report, “financial cycles deserve close attention”.

In this regard, Singapore’s tougher lending limits and negative property inflation are not all that undesirable.

Sustainable growth requires that prices are stable so that firms face less uncertainty over returns on long-term investments. That’s why the MAS has a mandate to maintain low and stable inflation.

But as the world faces the prospect of interest rate normalisation after rounds of monetary easing, the greater risk to sustainable growth is not a deflationary spiral, but a debt spiral, and it is good that the MAS has not chased inflation at the cost of higher debt.

Binh said the law, the draft of which was being made available for public comments, would contribute to realising the Government’s goal of doubling the number of small businesses by 2020 and expanding the private economic sector.

Further, he estimated that $10.5 billion in investment would be poured into business and production, which would help generate 8.5 million new jobs and collect an additional $19.2 billion in taxes for the State budget.

Currently, private firms pay VND200 trillion ($8.9 billion) in taxes to the State budget annually, noted Binh.

With a 5 per cent reduction on corporate income tax for start-ups, support in public procurement, banking loans and land access, Binh estimated that the Government’s support would be equal to VND18.7 trillion, or 1.6 per cent of budget spending.

The reduction in corporate income tax seeks to improve the capacity, as well as competitiveness, for SMEs in the long term, although this might cause drops in budget collections in the short term, according to the drafting agency.

However, several firms questioned the feasibility of the law.

According to Tran Thi Dep, chairwoman of An Giang Business Association, the law should provide realistic support. “Too much support along with implementation difficulties is not good,” she said.

For instance, the draft law stipulates that SMEs would receive a 5 per cent reduction on corporate income taxes in their first five years of operation. However, most SMEs often suffer losses in their initial years, Dep said, adding that in such cases the support would be meaningless.

Economist Vu Dinh Anh said that a reduction of corporate income tax might have positive impact on SMEs, but only enterprises that were earning profits could benefit.

In fact, over the past five months, 28,500 enterprises filed for bankruptcy and most were SMEs, he said.

“If enterprises want to have profits, they have to either cut costs or raise selling prices,” Anh said, adding that “price hikes are not a wise decision given the competition.”

Therefore, the Government should create favourable conditions for companies to expand markets and eliminate unnecessary costs, such as road tolls that erode profits, he said.

To Hoai Nam, deputy chairman of the SMEs Association, said that the supports should be more detailed to ensure that firms would benefit.

In the latest draft version, any discrimination in business conditions or administrative procedures against SMEs or deeds, which were intended to cause difficulties to SMEs, were banned. Criminal prosecution could be applied for violations.

Pham Thi Thu Hang, general secretary of the Vietnam Chamber of Commerce and Industry, suggested that the law should encourage firms by improving the overall business climate, rather than “subsidising” them.

This would be the first time Vietnam had a comprehensive legal framework to support SMEs, which made up for 97 per cent of Vietnam’s business community and contributed 45 per cent of the country’s gross domestic product.

According to the drafting agency, the Enterprise Development Agency under the Ministry of Planning and Investment, SMEs needed support from the Government to overcome difficulties and develop, amid the country’s rapid integration, while the efficiency of existing support policies remained limited.

SMEs still found it difficult to access resources such as land, capital and policy updates, a recent report on provincial competitiveness revealed.

At a conference to seek comments on the draft, experts said the law should also pay attention to business households in Vietnam, which were estimated to number 4.5 million in the country, and played a significant role in the economy.

However, Ho Sy Hung, director of the Agency for Enterprises Development (AED), said that as the State budget was limited, the support policies would focus on SMEs. “The development of SMEs will promote the development of business households, as a result,” Hung said.

According to the draft, SMEs were defined as firms with revenues of less than VND100 billion ($4.5 million) in the most recent year, or fewer than 300 employees.

It was helped by signs that China’s economy was slowly steadying, the Thomson Reuters/Insead Asian Business Sentiment Survey found.

Its business sentiment index, representing the six-month outlook of 139 firms, rose to 67 for April to June, versus 65 three months earlier.

This continues a rebound from a four-year low of 58 in December.

A reading over 50 indicates a positive view.

During the quarter, China posted a marginal decline in May imports that was far less than market expectations, reflecting a pick-up in domestic demand as the government raises spending on infrastructure projects to support growth, the survey noted.

Corporate sentiment in China was the highest in almost a year, with respondents including China Jo Jo Drugstores producing a subindex of 75, up from 71 in the previous survey.

“What we are seeing today relative to the past two quarters is that Chinese risk has gone down. People are a little bit less worried about the possibility that something sudden will happen in China,” said Singapore-based economics professor Antonio Fatas from Insead.

Increased optimism was seen across Asean.

Sentiment in Singapore reached a two-year high at 63 from 50, while Indonesia recorded the quarter’s biggest rebound in sentiment with a 22-point jump to 64, also helped by government spending on public works. Sentiment in Malaysia swung positive from 45 to 55.

The two institutions join several existing government institutions, namely the Financial Service Authority (OJK), National Police, Communication and Information Ministry, Attorney General’s Office (AGO) and Trade Ministry. The government is working with a new joint-ministerial decree (SKB) to legally bind the cooperation.

“The Communication and Information Ministry will monitor internet-based fund-raising activities. The AGO and Police will monitor activities through permit issuance for crowd gathering,” said OJK chairman Muliaman Hadad in Jakarta on Tuesday.

The Cooperatives and Small-Medium Enterprises Ministry, he further said would monitor cooperatives attempting to offer illegal investments. The taskforce, formed in 2007, will also expand to the regional level where the local police will work with BKPM and OJK regional branches and their personnel.

Based on a public report to the OJK, as of June 11, there were 430 companies offering illegal investments with 370 of them without clear legal standing.

Based on the investment type, 388 companies offered equity, bonds and gold-based investments and 23 companies offered commodity-based investments. “Also there are 66 investment offers from fictitious cooperatives and money schemes,” Muliaman said.

The United States yesterday backed the centrality of Asean in the regional security architecture and to deal with China over the South China Sea dispute despite a recent diplomatic discord within the grouping following a special meeting in Kunming last week.

Asean for several decades has been a consistent voice for a rule-based system of international law and will continue to play that role, said a senior official at the US State Department. Amid pressure from China, foreign ministers of Asean had to retract their joint statement that expressed concern over the construction of artificial islands and military facilities in the troubled sea.

An Asean official revealed that the foreign ministers of the group had initially reached a common ground in Kunming to have a rare and candid statement over the Chinese territory, but Laos, which currently holds chairmanship of Asean, and Cambodia expressed dissent, which led to the withdrawal of the statement.

Laos and Cambodia heavily rely on economic assistance, trade and investment from China for their development. Cambodia’s Prime Minister Hun Sen on Monday rejected the allegation that his government had bowed to Beijing and broken Asean consensus.

However, the US official told Southeast Asian journalists in a telephonic briefing yesterday that the retraction of a statement did not change Asean’s stance on the controversial issue.

Asean over the last several months had made a number of statements, including a statement by foreign ministers back in April, that the activities in the South China Sea and in the area are of concern and that they would like to see peaceful management of the disputes. The way forward is based on international laws and a rule-based system, the official said.

Asean’s unity and centrality are questioned as some members of the group have overlapping claims and territorial disputes over the islands and shoals in the South China Sea with China for years. While there have been calls for the group to speak in one voice, members have used different approaches to deal with the case. The Philippines took the case to the Permanent Court of Arbitration in The Hague in 2013 in a bid to invalidate the vaguely drawn territorial line.

No US position on claims

China dismissed the case saying the international tribunal has no authority to rule on the case and the 1982 United Nations Convention on the Law of the Sea (UNCLOS) does not provide any legal ground for the court to rule on territorial disputes.

The US, which actively commented on the development in the South China Sea, did not take a position on the claims on land features but Washington was mindful of how those claims are advanced and how countries behave in the important international space, the State Department official said.

The court would not decide on sovereignty over the land feature but it will potentially provide an important degree of clarity over the control and sovereignty over maritime space, the official said and noted that the verdict was due in weeks.

The donation, which was witnessed by US Ambassador to Vietnam Ted Osius and representatives from various ministries, is part of the company’s established support for the education and training of Vietnamese students majoring in automobile technology.

The company expected that with this donation, students would have the chance to better understand the technology and thus play a crucial role in shaping the national automotive industry in the future.

Speaking at the ceremony, Ambassador Osius said, “Business and education partnerships are incredibly important for developing the next generation of talent, spurring economic development and making the world we live in a better place.

“These cars and new engines and transmissions are an opportunity for you to explore your passion for engineering, understand the best technology available today and unleash your creativity. You will be innovators of tomorrow,” Osius told the students.

GM Vietnam, for many years, has joined social and charitable initiatives, such as donating helmets and disseminating road safety instructions to students, cleaning Do Son Beach, providing scholarships and supporting underprivileged households.

At 30 years of age, Moukdao is currently serving as assistant managing director of the hotel and working to build its reputation in Pakxe town, Champassak province and throughout Laos.

She spoke to Vientiane Times in a recent interview.

“The hotel is our family hotel, so to help my father to develop the hotel I worked here during my holidays while I also studied for two years after we established the hotel in 2009,” she said.

Moukdao explained that she fell in love with tourism after studying abroad. But the more she studied the more she felt like her knowledge was limited. So she decided to continue her studies by completing a postgraduate diploma in hospitality administration at Glion Institute of Higher Education in Switzerland from 2010 to 2011.

Prior to that she studied at the Han Chiang High School of Malaysia from 1999 to 2003 before graduating from Monash College English Language School in Australia, where she studied from 2003 to 2005.

Then she continued her studies and graduated with a Bachelor of Business and Commerce Specialising in Marketing at Monash Univesity in Australia, where she studied from 2006 to 2009.

“What I saw during my studies in Switzerland and other countries is that many people want to learn about our culture and our traditional style. Many different countries study together and so you have to adjust yourself to meet each other and to exchange culture as well as to know each other’s minds,” Moukdao said.

It was her ambition to use what she learned abroad for the further development of her hotel back in Laos by offering the best service to her guests and ensure their satisfaction.

Moukdao said that she didn’t only study at schools in Thailand but she also practiced by working as an employee at a five-star hotel in Thailand. During her practice, nobody knew she was the daughter of a hotel owner in Laos, so she was employed washing dishes, washing clothes, serving food and other hospitality related tasks.

Then, when she first started working at the Champassak Grand Hotel she also didn’t tell the other employees that she was the owner’s daughter because she wanted to be friendly with them and for them to know that she was also one of their co-workers.

Moukdao said when the Champassak Grand Hotel was first built it was only seven stories but as it gained a reputation among guests it quickly grew to become one of the biggest and most famous hotels in southern Laos and served as the venue for a number of domestic and international meetings.

As it grew, the hotel was upgraded from five floors to 12 floors to cater to the increased demand. Now it has 215 rooms and nearly 200 employees.

“However, the management, facilities and hospitality also need to be improved to further upgrade the standard of the hotel and then this year we will also improve our rooms to meet the further standards, especially improving 32 suite rooms and other categories,” Moukdao said.

The hotel is now rated as a four star hotel but there are plans to upgrade to a five star rating in the near future, she added

“It is not easy to train employees on how to be good at hospitality. Most of them here don’t have any experience working at hotels before.”

“However we can still can train them through work experience and study tours at other hotels in the country and abroad, especially in Thailand.”

Each year, Moukdao sends 10 staff to train at a five star hotel in Thailand which is very good at hospitality.

She said that via Vientiane Times she would like to thank the government for believing in her hotel and choosing it as the venue for the first Asean Eco Tourism Forum that will be held today.

Moukdao wished the forum every success and hoped all the guests would be impressed with the standard of the hospitality on offer.

Moukdao has two younger brothers and one older sister, who happens to own the biggest shopping mall in southern Laos, the Friendship Mall in Pakxe district.

Meanwhile, one brother just graduated from his studies in England and another brother is studying in Singapore.

Her father is an architect and also owns a construction company.

The Champassak Grand Hotel is ideally located on the edge of the Mekong River close to the Laos-Japan Friendship Bridge.

The hotel is situated in the town centre so it is easily accessible and guests are content to pay for a room that gives them a night or two of sweet dreams in comfortably furnished rooms.

It has 215 rooms in six different categories, with prices ranging from 437,000 kip to 1,725,000 kip (US$53 to US$210) a night.

The Champassak Grand Hotel is a 15-minute ride from Pakxe International Airport. Its many attractions include its easy access and friendly staff.

Over the past decade, banks in Asia Pacific have grown to amass a profit pool that hit more than US$1 trillion last year, the firm noted.

However, this “golden decade” is ending and the financial industry should be prepared to face an era of slower growth rates and increased challenges in generating profits, it added.

The industry faces three main threats:

First, the economic slowdown rolling across the region will affect banks and their customers, especially in the corporate sector, McKinsey noted.

As a result, it expects banking profit growth to slow from 10 per cent annually between 2011 and 2014 to 3 per cent between 2016 and 2021.

Second, financial technology, or fintech, start-ups offering financial products such as payment systems and lending platforms, as well as established companies from outside the industry, such as Chinese e-commerce giant Alibaba, are encroaching into traditional banking territory.

Third, an increasing volume of non-performing loans is putting added stress on banks, as interest-coverage ratios are declining at large companies throughout the region, especially in China and India, McKinsey said.

McKinsey analysis indicates banks in Asia need to raise US$400 billion to US$600 billion in additional capital by 2020 to cover losses from non-performing loans while maintaining capital adequacy ratios.

“Banks that simply try to wait out the storm will likely find themselves struggling for survival, but those that take action can uncover growth opportunities and measures that could help rekindle their momentum,” McKinsey said.

McKinsey advised that banks focus their strategies on three “clear pockets of growth” – services for the unbanked and underbanked, an expanding affluent middle class, and the emerging importance of small- and medium-sized enterprises to corporate banking.

With margins under pressure, banks must also rapidly drive digitisation, especially to control costs, the consultancy added.

Meanwhile, banks must also find ways to strengthen their balance sheets by addressing the growing volume of non-performing assets. Banks can explore creating asset management companies as a short-term solution, while working to improve risk management provides a longer term fix, McKinsey said.

And banks must rethink their organisational structure and culture, it added.

For example, they should form alliances with fintech firms and others to create and enable a digital ecosystem.

“The organisation also needs to become more flexible and nimble to bring out new products and services much faster than in the past. And finally, banks must revise their approach to talent and culture, creating room for innovation.”

The coming storm is potent and is a clear threat to most banks in Asia Pacific, but it may also provide the kind of significant industry disruption that creates opportunity for those that recognise it, McKinsey said.

“The most aggressive banks will not merely survive the turbulence; they will be strengthened by it.”

Such cooperation and economic promotion plans have pushed strong growth in the trade and investment value of the two countries, with China now the top foreign investor in Laos.

Laos’ Ministry of Planning and Investment (MPI) reported recently that in the period since 2011 to last year, the trade value between Laos and China increased annually from about 10.5 trillion kip (US$1.3 billion, Bt45 billion) in 2011 to $1.7 billion in 2012, about $2.7 billion in 2013 and $3.6 billion in 2014.

“However trade value declined to around $2.78 billion last year due to the impact of the global economic slowdown as some product prices dropped globally, such as mining ore and rubber,” the report noted.

The trade also includes that between Laos and China’s Yunnan province, which had a value of $203 million in 2010 and increased to $1.37 billion last year, covering 40 per cent of the trade value of the two parties.

The main important factor pushing the trade growth is that the two parties often hold discussions on any problems and find solutions to facilitate imports and exports at the border.

Laos is also invited to various trade fairs in China to promote trade and investment cooperation.

The two parties also cooperate on checking agricultural-product quality before it is exported to China, including rice, dried cassava chips, bananas and watermelons.

In the investment sector, the MPI reported that in 2011, Chinese investment in Laos saw 160 projects under way valued at more than 22.27 trillion kip, including joint-venture investment within the local sector.

“Now Chinese investment in Laos has over 760 projects under way with a value of about [$6.7 billion], making China the top-ranked foreign investor in Laos, followed by Thailand and Vietnam,” the five-year report noted.

Investment cooperation also included Laos and Yunnan. Currently Laos is the No 2 in terms of overseas investment by Yunnan with a value of $1.04 billion.

Many companies from Yunnan completed construction projects in Laos, including the development of roads, electricity-transmission lines, water supplies, and economic zones.

Liu Zhi, deputy division director of the Department of Asian Affairs under China’s Ministry of Foreign Affairs, while addressing a recent seminar in Beijing on production-capacity cooperation, said China’s investment in Laos mainly focused on infrastructure development that helped improve people’s livelihoods.

The main project in Laos is the China-Laos railway, while in the telecommunications sector China is partnering with Laos on the country’s first satellite project. In the energy sector, China is helping Laos to build power plants. The two countries have also established cross-border economic zones to support free-trade-agreement projects, especially the Yunnan-Laos project.

These projects will play an important role in terms of improving people’s livelihoods. China is still looking forward to deepening cooperation with Laos in the future. It boasts advantages in production capacity including equipment, technology and managerial experience.

Laos is in need of advanced production capacity. In the short term, Laos needs more technological support and technology transfer in the areas of energy, manufacturing, agriculture, education, medicines and services. In the long run, Laos is looking for help with the development of human resources.

The chamber’s recent survey of about 1,000 businesses indicated that 78 per cent of them are aware of the TPP trade deal, up from 68 per cent in 2014.

The rising figures reflect that businesses are ready for the pact, at least in attitude, said director of the chamber’s WTO Centre Nguyn Thu Trang.

She referred to those as reasons to be optimistic about the success of the deal.

It is also reported that, by the end of last year, 70 per cent of domestic enterprises showed understanding of the pact – lower than 86 per cent of FDI companies from TPP member states and 82 per cent of those from TPP outsiders.

However, local firms expressed the strongest approval for the trade deal at 73 per cent, compared to 67 per cent of the FDI companies from TPP members and 65 per cent of those from outside the pact.

The TPP was concluded on October 5 of last year after seven years of negotiations among 12 countries – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam.

It was signed on February 4 and is in the process of being ratified by each member state, which will take about two years.