Singapore has a high-cost, high-wage and labour-starved economy. Across the Causeway, Malaysia beckons with lower land cost, lower wages and a youthful workforce. Political ties too have warmed. But some potholes remain in the road to economic cooperation.
SINGAPORE - Days before Malaysia's bitterly fought polls on May 5, former Malaysian prime minister Mahathir Mohamad took a few digs at Singapore's People's Action Party (PAP).
In an opinion piece in a Malaysian daily, the feisty former leader harked back nearly half a century to attack the PAP's 1964 election campaign to promote meritocracy in Malaysia as a bid to split the community.
His remarks were aimed at drawing a parallel between the PAP and Malaysia's opposition Democratic Action Party.
Such a diatribe was commonplace during Dr Mahathir's 22-year leadership up to 2003 which had led to somewhat frozen ties between the two countries.
But this time - although Dr Mahathir remains an influential figure in Malaysian politics - his remarks did not hold sufficient sway to strain bilateral ties.
Post-Mahathir, the leadership of both countries - Prime Minister Lee Hsien Loong and his Malaysian counterpart Najib Razak - have made significant efforts to build a bridge over past troubled waters.
"At the leadership level, things have only become better since Mahathir left, improving from (Abdullah Ahmad) Badawi, and getting better with Najib," says Dr Gregore Lopez, visiting fellow at Australian National University's political and social change department.
Many others agree. "The historic baggage of frosty ties in the 1980-2005 period has been largely set aside in the past four to eight years," says Mr P. K. Basu, Maybank Kim Eng regional head of research.
Bygones, be gone
ARGUABLY, at no other point in relations between the two countries has the path to building closer ties been more hurdle-free than now.
"Malaysia and Singapore are linked historically and socially, but the time is ripe for a tighter economic and financially symbiotic relationship to emerge," said Deutsche Bank's chief economist Taimur Baig.
It's a bond with far-reaching benefits, way beyond just the two countries.
Think Asean. As the two economies work on aligning their interests, there is hope that it will lead the way to Asean integration, says Mr Baig. By that, he means working towards a friction-free region with free flows of goods, services and capital.
With the Malaysian election and its aftermath out of the way and the Barisan Nasional (BN) coalition retaining power - albeit with a narrower margin - most expect continuity in their bilateral relations.
But even if the Malaysian opposition had won the election, not many think it would have derailed bilateral cooperation.
"The economic imperatives would have remained the same," says Mr Manu Bhaskaran, chief executive of Centennial Asia Advisors. "Even a new government in Malaysia would have recognised that."
A symbolic link
SINGAPORE and Malaysia can now continue from where they left off right before the Malaysian polls.
Indeed, that's a great point to work from. In February, Mr Lee and Mr Najib shook hands on a mega-plan to build a high-speed rail linking Kuala Lumpur and Singapore.
The rail link, described as a game-changer given its potential for immeasurable benefits, will cut travel time to 90 minutes from Singapore to the Malaysian capital, when completed in seven years' time.
Tellingly, in his first major press briefing since the polls, Malaysian Foreign Affairs Minister Anifah Aman talked about the rail link, fuelling optimism that the project, subject to more feasibility studies, could go full steam ahead. "It's looking very, very attractive," he remarked.
The high-speed rail fits in nicely with the proposed extension of Singapore's MRT train network into Iskandar - Malaysia's southern growth corridor which is drawing Singaporean investors in droves.
"It's not just about developing each other's infrastructure or opening up markets. Tourism and retail will also be galvanised on both sides of the Causeway," says Mr Leslie Chua, property research head, Asia-Pacific for Deutsche Asset and Wealth Management.
Visible proof of the vital alliance are the massive property projects led by no less than Singapore's Temasek Holdings and Malaysia's Khazanah Nasional.
In Singapore, M+S, a joint venture owned by both state-owned funds have two mega projects, one in Marina Bay and the other in Ophir-Rochor.
These tie-ups arose from a historic land swop between the two countries over the KTM railway land, turning a longstanding dispute into an era of cooperation.
The Iskandar factor
THE massive Iskandar project has been a linchpin factor in strengthening the Singapore-Malaysia alliance. Singaporeans are the largest foreign investors there - and the largest buyers of real estate in the area.
This has led to a property boom in Iskandar, as prices rise.
But this has caused some disenchantment among ordinary Malaysians as soaring property prices push mid- to high-end properties out of their reach. This was a hot button issue at the recent polls.
Some observers partly attribute Barisan's weaker performance in Johor, a traditional stronghold, to this factor.
Could this lead to further tightening of foreign ownership rules in the country?
There are already rumblings.
Over the weekend, Johor Menteri Besar Mohamed Khaled Nordin said foreigners who own properties in the state will have to endure higher taxes to be imposed by year end to plump up the state's coffers.
The extent of these higher taxes and whether they will be followed by more restrictions on foreigners buying real estate in the state could dampen expectations that the spate of Singaporean buying of Malaysian properties will be galvanised with the high-speed rail linking Kuala Lumpur and Singapore.
THE macro-economic and demographic differences between the two countries make a strong case for further cooperation.
Mr Baig says the many factors that set both economies apart are the very things that make an "intriguing rationale for deeper engagement".
In a recent report, he set out these disparities in great detail to push his case for greater cooperation between the two nations.
For instance, Singapore is considerably wealthier than Malaysia yet it faces constraints such as soaring rents, wage pressures, policy-induced labour tightness and an ageing demographic.
On the other hand, Malaysia, with abundant land, labour and a younger demographic, offers the Republic the opportunity to plug these gaps.
Since 1980, Singapore's real gross domestic product (GDP) or national income per person has risen by about 0.7 per cent a year higher than Malaysia's.
This is set to change. Based on projections by the International Monetary Fund, Malaysia could chalk up a slightly higher growth in per capita income than Singapore in the coming years.
Still, a wide income gap exists between the two. In purchasing power parity terms, Singapore's per capita GDP was US$56,500 (S$70,000) last year, compared with Malaysia's US$17,000.
Mr Baig expects this gap to remain substantial even if Malaysia's economic growth rate begins to outpace Singapore's.
The real exchange rate relativity between the two has also thrown up some opportunities.
Singapore's real effective exchange rate has sharply appreciated since 2011 - by about 15 per cent - which has led to concerns over its competitiveness. On the other hand, Malaysia's currency, using the same measure, has been flat over this period.
A strong Singapore dollar makes a sweet proposition for Malaysians to invest here - since their returns will go further in their home country.
The escalating cost of doing business in Singapore will compel local firms to move some of their operations to Malaysia.
Malaysia's demographic dividend - it's blessed with a favourable working age population - is another visible lure for rapidly ageing Singapore.
"Given that a relatively youthful population is perched right next door, with continuously improving infrastructure and amenities, it is easy to see why it makes sense for Singaporean manufacturers to begin to drift northward," Mr Baig adds.
Potential weak spots
THAT'S not to say the road ahead is devoid of potholes. Residual concerns linger after the May 5 polls.
BN's narrow margin of victory and loss of the popular vote to the opposition have led to concerns that Mr Najib could face resistance in his bid to retain the Umno presidency at its annual general meeting in October.
In other words, the political dynamics in Singapore's northern neighbour remain frothy.
"If hardliners prevent Mr Najib from being re-elected as head of Umno, problems could intensify," says Mr Robert Broadfoot, managing director of Hong Kong-based Political and Economic Risk Consultancy. "There is going to be a great deal of uncertainty between now and then," he says, adding that this could test Singapore-Malaysia relations.
Yet, there is resounding optimism that these may not be relationship spoilers. Says Mr Bhaskaran: "Most of the emotive issues have been settled. Over time, new ones may emerge but none are likely to carry the emotive tones of the old problems."