IMF 2014 review highlights risks to Singapore growth

Foreign labour policy, as part of economic restructuring, 'could lower competitiveness'
By Lee Su Shyan, The Sunday Times, 19 Oct 2014

Restrictions on foreign labour supply that could crimp Singapore's competitiveness, as well as the spillover effects of slowing global growth, are among the risks that could hurt the economy, the International Monetary Fund (IMF) has highlighted.

In its annual review of Singapore's economic and financial policies issued late last Friday, the IMF noted that the "slowing inflow of foreign workers, as part of the ongoing economic restructuring, could moderate potential growth and lower competitiveness".

With Singapore being an open economy, other risks include a protracted period of slower growth in advanced and emerging economies, as well as the continued build-up and eventual unwinding of excess capacity in China.

There could also be an abrupt surge in financial market volatility as investors reassess underlying risks, and geopolitical risks, added the IMF.

These concerns have come to the fore in the past week as global markets took fright and the Straits Times Index lost all the gains it had made in the year.

Concerns have mounted over the United States economy, which seems to be losing steam, while recent euro zone data has been weak. The moderating of growth in China is also another concern.

Advance estimates of Singapore's third-quarter gross domestic product growth came in at a lower- than-expected 2.4 per cent, while last month's export numbers edged up only slightly, as global demand slowed.

The IMF noted that as Singapore continues with its restructuring policies, tighter labour supply due to the slowing inflow of foreign workers and an ageing population will boost wages.

But as productivity gains are unlikely to fully compensate, this will lead to an increase in core inflation - a measure of everyday out-of- pocket costs - temporarily.

As the Monetary Authority of Singapore maintained its stance on a modest and gradual appreciation of the Singdollar last week, it forecast core inflation to pick up gradually into early next year before easing in the second half of the year. It is forecast to be 2 per cent to 2.5 per cent this year, and 2 per cent to 3 per cent next year.

The IMF noted that Singapore's ambitious restructuring efforts could "set the stage for a new era of sustainable growth".

But it cautioned that productivity improvements might take some time to materialise and may not fully offset the effects of declining labour force growth.

OCBC Bank economist Selena Ling said the IMF assessment is broadly in line with the Government's approach. "It is the domestic and structural challenges that confront Singapore at this juncture," she said.

The IMF's executive board of directors singled out Singapore's macroeconomic management for praise, along with its financial supervision and regulation frameworks.

But it noted that the country's dependence on trade flows has left it particularly vulnerable to a slowdown in the growth of trading partners, as well as to global financial market volatility.

Singapore should also continue to be vigilant for risks in the finance and housing sectors, it added.

Other recommendations from the IMF include further efforts to promote external rebalancing, which is to move from a reliance on exports to one on domestic demand, and reducing inequality.

Is Singapore's competitiveness on the slide?
There's a negative narrative taking shape and someone's got to rewrite the script
By Ignatius Low Managing Editor, The Sunday Times, 26 Oct 2014

Last week, the International Monetary Fund (IMF) in its yearly review of the Singapore economy known as the Article IV Consultations, flagged a concern over the country's further plans to slow the inflow of foreign workers.

It warned that the move, which is "part of the ongoing economic restructuring, could moderate potential growth and lower competitiveness". Meanwhile, a shortage of labour will raise wages in industries where the situation is most dire, and businesses will pass on these added costs in the form of higher prices.

Of course, the IMF was quick to reassure us that Singapore's restructuring programme could eventually "set the stage for a new era of sustainable growth". But it noted that the productivity improvements which justify wage increases and alleviate the demand for cheap foreign labour "might take some time to materialise and may not fully offset the effects of declining labour force growth".

So what the IMF was saying is that in the interim, all we may get from the restructuring is higher costs and higher prices - with little or no real growth. And Business 101 tells you that if you make your customers pay more for something but don't give them any real added value for it, then all you have really done is make yourself more uncompetitive.

Now, competitiveness is multi-faceted and includes elements that are difficult to measure, so it's hard to put a finger on the concept.

On the face of it, however, Singapore seems to be holding up well.

Last month, Singapore was named the world's second most competitive economy for the fourth year running by the World Economic Forum. It came in only behind Switzerland in the annual Global Competitiveness Report, which measures more than 100 different indicators that include everything from tax rates to mobile broadband subscriptions and the quality of maths and science education.

In another influential ranking compiled by Swiss business school IMD, Singapore fell from second in 2010 to fifth last year. But it climbed back up to third spot in this year's ranking and recaptured the title of Asia's most competitive economy from Hong Kong.

Yet, despite the on-the-record accolades, more people are raising concerns about Singapore's continued competitiveness.

One reason is the passage of time. The big 10-year economic restructuring plan launched in 2010 is now approaching its halfway mark, and the results so far have been hardly inspiring. The stated objective was to lift productivity growth by 2 per cent to 3 per cent per annum and median incomes by 30 per cent over the next 10 years.

But while income growth has been largely on track at roughly 3 per cent per annum, productivity growth has been flat in the first four years, averaging just 0.2 per cent from 2010 to last year.

While there may have been the odd story of a productivity breakthrough involving the washing of dirty construction trucks or the automating of restaurant orders, no one has the sense yet that a big change has happened on the ground.

Maybe people have unrealistic expectations of fast results, but a weariness is setting in. Everyone seems to have a story to trade about someone they know who had to turn away business or close down because they either could not find the manpower, or had to pay so much more that the numbers became unviable.

Meanwhile, the labour crunch has fed into a larger and more general narrative about the high cost of operating in Singapore. To combat inflation, the Monetary Authority of Singapore (MAS) has kept the Singapore dollar on a steadily appreciating path against the country's main trading partners.

A new report by DBS Bank this month shows that Singapore's real effective exchange rate has risen steadily against the average of eight Asian economies since 2010, and the gap is widening. A stronger local currency makes its exports more uncompetitive and raises the costs of locating expats here.

Property and rental prices have been reined in for now, but various other reports, citing how high retail rents are feeding into the high price of goods and services here, are not helping the situation.

It all adds to a composite picture many see as slightly worrying, even if not alarming yet.

At an informal lunch I attended recently, the regional chief executive of a multinational bank, who is based here, said people know that Singapore is not a low-cost location and can never be. In that sense, corporations still by and large get good value from locating here, and top talents still want to live and work here.

But the country's competitiveness is also now appearing on the horizon as a potential future problem. The foreign manpower for necessary mid-tier jobs in information technology (IT) and back- room compliance, for example, is becoming increasingly difficult to get and local equivalents are becoming expensive to hire.

At another lunch I attended, it appeared that cost has already become a deal breaker. The regional CEO of a global firm in the publishing industry said the company looked at Singapore but eventually decided to locate its Asian operations in Vietnam. This is despite the fact that its English-speaking, largely expat workforce would arguably be more comfortable in Singapore, a place where excellent telecommunication and air links would also be great for its business.

So while the facts and methodology behind the world rankings don't lie, a narrative is slowly building up about the effect of economic restructuring on Singapore's competitiveness.

Academics like Singapore Management University's Dr Augustine Tan are already drawing comparisons with the failed productivity experiment in the 1980s, where a similarly well-intentioned national drive for higher wages and incomes was also carried out against the backdrop of a strong currency. When external conditions deteriorated in the mid-80s, Singapore's vulnerable economy fell into a deep recession.

The comparison was also raised at the start of the current exercise, but people were more willing to give Singapore's economic policymakers the benefit of the doubt, especially given their excellent track record in the past.

But as exports continue to flag and the harvest of yet another year is anaemic economic growth, policymakers must do something to alter the trajectory of a narrative slowly going awry, lest it take hold and become a self-fulfilling prophecy.