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Singapore’s pollution haze may engulf its economy — Part 2

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Continued from Part 1

The forest fires causing the problem may continue to burn much longer

The dry season in Sumatra usually lasts until September, which means that the forest fires in Java could continue to burn much longer before the rain comes. Several fires result from the slash-and-burn of forests or woodlands to create agricultural fields.

Estimating the impact

A similar crisis occurred in 1997, costing Southeast Asia close to $9 billion in business impact, including lost sales, travel disruptions, and large health expenses. The crisis back then lasted three months.

Several analysts have estimated that the damages from the present crisis could rise into the hundreds of millions of dollars—and some predictions even approached $1 billion.

Nonetheless, even $1 billion in costs translates to approximately 0.35% of Singapore’s $270 billion GDP. While this figure sounds low, the economy is projected to expand no more than 3%, which would imply a 10% drop in GDP expansion. This drop means lower demand growth, lower revenues, and lower profitability.

Outlook

This crisis comes at a time when exports are slowing due to China’s slowdown and emerging market fund flows are fleeing international markets due to a strengthening dollar and “risk on” mentality because of the tapering of quantitative easing in the United States. Amid all this activity, Europe shows no pulse.

While the smoke could dissipate and business could go back to normal within a week, the downside seems much greater than the gamble to invest right now. The haze is just one of many factors in play, so unless you’re investing in the companies selling the facemasks (though it’s likely too late anyway), the short-term risks are high.

However, the market is down over 13% from the height of May and down almost 8% since the haze started and Bernanke spoke. May’s PMI (Purchasing Managers Index) was favorable, so it will be interesting to see how the June value will come out. Additionally, the overreaction of the market may soon recede as investors decide what should fairly price in.

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