Inevitable Recession

In mid April, the Monetary Authority of Singapore (MAS) paused its monetary tightening policy and maintained the current rate of appreciation of the Singapore dollar.  This meant that MAS will not strengthened the Singapore dollar further to tame inflation, in a bid to defend the slowly economy, which is facing a deeper risk of slowdown.  This is supported by advance estimates which showed that the Singapore economy just grew by 0.1% year-on-year in the first quarter, a sharp decline from the 2.1% growth in the previous quarter.  On a quarter-on-quarter seasonally adjusted basis, the Singapore economy shrank by 0.7% in the first 3 months of 2023.  This means that if the Singapore economy decline again in the second quarter of 2023, Singapore will be in a technical recession.

MAS believe the above policy is justified because while inflation still remains elevated currently, data shows that core inflation will continue to fall in time to come as the 5 successive monetary tightening moves since October 2021 have tempered the momentum of price increases.  However, Singapore's growth outlook appears even more challenging than it looked at the start of 2023, as the economies of its major trading partners such as the US and EU continue to slow, while recovery in China is still in early stages.

So, when MAS made such a move, it seems that recession in Singapore is inevitable.  What should I do in such a scenario?

1)    Have an Emergency Fund Ready

In my previous post on my Financial Pyramid, I mentioned that I only keep about 1 month of income as emergency fund.  This may be a little too low for personal income protection in times of recession.  So, I may need to buff up my emergency fund by saving a little more from my income, and retaining a larger percentage of the upcoming dividends to be collected, instead of immediately reinvesting them back into my dividend portfolio.  Since recession is imminent, it means that I can afford to be a little more patient, waiting for more correction in the share prices before I reinvest the dividends to buff up the portfolio.  At the meantime, no expensive meals, no buffets, no expensive coffee and no shopping.  Just stay at home and conserve cash.

2)    Buff Up My CPF Account

In an earlier post, I mentioned that I am changing my CPF strategy from contributing to 3 accounts in CPF to just contributing to only Medisave Account (MA) in CPF.  This step may be counterintuitive to many as it should be wiser to keep more cash during times of recession to preserve liquidity instead of locking up cash in such times.  However, in my perspective, supercharging my accounts to Basic Healthcare Sum (BHS) and eventually, Full Retirement Sum (FRS) later, is important for me to secure the basic retirement safety net.  This move will enable the total amount in MA and Special Account (SA) to compound at 4% (almost) risk-free.  In addition, being a "sufferer" of chronic disease, I am able to tap into my MA to pay for my medical fees when I go for review every 3 to 6 months, so the money is not entirely "out-of-bounds" for me.  However, in the event tide turns and for whatever reason, I become cash strapped, as a self-employed, I have the flexibility to choose to contribute just 9% of my net trade income (NTI) to MA, instead of 37% of my NTI to CPF, which is what I am doing currently.  As such, this option may not be applicable to many.

3)    Manage My Debts

Personally, I do not have any outstanding credit card debts or any high interest personal loans.  I have quite a few credit cards that I am using to earn miles, but I always make it a point to pay the outstanding amount in full.  The only debt I currently have is mortgage loan.  I believe that my mortgage is currently manageable, because I am currently lock-in on fixed rate at 1.45% for 1st year, and 1.55% for 2nd year until October 2024.  I cannot predict what the macroeconomic environment will be at that time, how high or low interest rates will be at that time, but what I know is I have about 18 months remaining for me to prepare my liquidity to do any form of partial pay-down of the outstanding principal amount for my mortgage in the event interest rates remain elevated even by that time.  At the same time, after I hit the BHS in my CPF, I can revert back to contribution to my Ordinary Account (OA) and SA, and the monies in OA can cushion any pressure I faced in the short term from my mortgage if ever the time comes.  As usual, always hoping for the best and be prepared for the worst.

4)    Maintaining My Active Income

Being a self-employed person, how much I can earn depends very much on how hard I am pushing myself.  Being a tutor, I can kind of console myself that in Singapore context, education is likely a recession-proof job.  However, I am also aware that tutoring job is not a "iron rice bowl" like a school teacher because a tutor can easily be changed when the student is not showing much improvement in his or her studies.  I have to ensure that I am keeping abreast with the latest changes in syllabus so that I can deliver the right content to students, and always remain in good contact with tuition agencies so that I can have a higher success rate of securing a new student when needed.  This ensures the sustainability of my active income, and the efficiency of active income replaceability when required.

5)    Continue to Build Up Passive Income Streams

This is one component beyond my control, because the main passive income stream that I have currently will be the dividends from my Dividend Portfolio.  The amount of distribution per unit (DPU) payable to investors like myself depends on the profitability and the net income that the companies earn.  However, I will keep a lookout on their profitability and remain nimble with the investment.  In times of recession, it is hard for businesses not to be impacted.  In this report, analysts are concerned about the finances and businesses of tenants of REITs, which in the worst case scenario of defaults or bankruptcies, will negatively impact the rental income and vacancy rates of REITs.  This further reinforces the importance of investing in quality REITs with quality assets, with very strong sponsors and has a very diversified tenant profile.  This ensures that any financial difficulties faced by any single tenant results in minimal impact towards the income of REITs.  For banks and financial institutions, the risks come in the form of non-performing loans (NPL).  How much NPL the banks and financial institutions need to account for, depends on how bad the upcoming recession turns out to be.  What is scary is recession is very much a self-fulfilling prophecy, so when many top investors, including Ray Dalio believe that recession is imminent, it will happen.  This will highly probably create a dent to my dividends for 2023 and 2024.  However, as these are very much beyond my control, I will just hold on to my portfolio and ride through the tough times.  Timing the market to sell and buy back is just a recipe for disaster for myself.

So, basically, just continue to work hard, earn more, save more and spend less to build up cash buffer and be prepared for the worst.  Meanwhile, slowly dollar cost average into the portfolio in the event of any crashes, to reap the rewards in the long term, while hanging on tight in the near term volatility and seemingly unfavourable investing conditions.  Probably, it is time to be nicer to all my students, be a little more patient with them to ensure that I get to keep my 'rice bowl' (just kidding).  Amidst all uncertainty, Barista FIRE, here I come...!