Business Times - 20 Feb 2012
Budget measures carry inflation, risks
Higher wages may drive up prices; companies may not be able to find local staff
By CONRAD TAN
(SINGAPORE) THE Budget measures to spur increased productivity and sustainable long-term growth for Singapore carry short-term inflation and other risks for businesses and the economy, say analysts and business leaders.
In particular, some businesses are likely to face difficulties finding local replacements for mid-skilled foreign workers in time to meet the Government's deadline.
The focus on boosting wages for lower-income Singaporeans and using more local workers is also likely to drive up prices for goods and services as businesses pass on cost increases to consumers, economists said.
'Frankly, I think inflation is going to stay elevated for the next one to two years, at least,' OCBC economist Selena Ling said. 'Economic restructuring, income growth, using domestic rather than foreign labour - you can imagine what will happen, even to the prices in food courts.
'If foreign cleaners aren't there and locals do the job, the pay will go up, and the cost of your plate of chicken rice is going to go up. Same thing for your hairdressers, nurses, and other service staff. It's inevitable, but I'm not sure everyone realises that.
'In the end, whether your income growth outstrips inflation or inflation outstrips your income growth will be the key determinant of whether your real wealth goes up or down.'
Barclays Capital economist Leong Wai Ho agreed. 'Core inflation will not recede this year, even if growth slows. We think the cost adjustment will persist over the next two years. Services such as retail, restaurants, healthcare, education and recreation will see the most significant cost pass-through to prices,' he said.
Citigroup economist Kit Wei Zheng warned of other risks. 'Inflation aside, if the productivity drive fails over the longer term, a loss of competitiveness and relocation and job losses could result.'
Meanwhile, businesses are fretting over new rules that will further restrict the hiring of foreign workers from July 1, measures that are likely to hit smaller firms the hardest.
The new limit on hiring mid-skilled foreigners on the S Pass permit is 'my biggest concern', said Moh Chong Tau, deputy president of the Singapore Manufacturers' Federation.
'They're basically PMETs (professionals, managers, executives and technicians) - they're not easily replaceable,' said Dr Moh, who is also president and chief executive of precision engineering company Makino Asia.
The workers required for some of the specialised jobs now done by S Pass holders - such as manufacturing supervisors or skilled machinists - 'are not readily available among the local people', he said. 'You need the skills plus the knowledge to manage the operations as middle management.'
From July 1, manufacturing companies will be allowed to fill at most 60 per cent of their workforce with foreigners, down from the current 65 per cent. For services firms, that dependency ratio ceiling will be cut to 45 per cent, from 50 per cent now. And for all sectors, the maximum proportion of S Pass holders in a firm's staff will be cut to 20 per cent, from 25 per cent now.
Companies that already exceed the new limits when they take effect on July 1 will be given until June 2014 to comply with the new rules.
But some firms will feel the impact much sooner. Companies that now have a quarter of their staff comprising S Pass holders won't be able to hire new S Pass holders to replace those who leave from July 1, Dr Moh said. 'It will be a big problem.'
Measures to attract older workers and homemakers into the workforce 'look promising' to address the labour shortage in the medium to long term, said Phillip Overmyer, chief executive of the Singapore International Chamber of Commerce. 'But in the short run, companies may be disadvantaged as certain jobs and industries remain unattractive to local workers. There is no certainty that companies' efforts in redesigning and enhancing recognition for these jobs will help to attract and retain Singaporeans.'
Finally, there is the less obvious, but real risk of driving away even skilled foreign labour, PwC Services warned.
'While the fine print makes it clear that the reductions are for work permit and S Pass holders, the broad reference to 'foreign workers' could send a mixed signal to the foreign talent and multi-national companies that Singapore is seeking to attract. They may perceive from the headlines that they are no longer welcome in Singapore, and may look elsewhere.'