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Headwinds build as cost of economic restructuring bites

SINGAPORE — Faced with a severe labour crunch and rising business costs, Chye Choon Foods is uncertain about its future in Singapore.

Headwinds build as cost of economic restructuring bites

Restructuring has affected sectors such as manufacturing, which is losing its competitive edge globally. BLOOMBERG

SINGAPORE — Faced with a severe labour crunch and rising business costs, Chye Choon Foods is uncertain about its future in Singapore.

“We’re very close to relocating to a neighbouring country, likely before the middle of next year. We really can no longer sustain ourselves here, not with increasing worker levies on top of rising rentals and wages for local staff,” said managing director Mr Jimmy Soh, just two weeks after another round of foreign worker levy hikes was introduced on July 1.

Mr Soh, who is also the deputy president of the Singapore Food Manufacturers’ Association, added that many other companies are experiencing similar challenges stemming from the ongoing process to restructure the economy. “The labour and cost constraints here have forced many of the association’s members to shelf their growth plans,” he said.

The headwinds that are being experienced on the ground by companies such as Chye Choon Foods, which makes rice vermicelli and noodles, are increasingly being felt at the macroeconomic level, with recent data indicating that the push to transform the economy by raising productivity and reducing reliance on foreign labour is acting as a drag on growth.

On Monday, the Ministry of Trade and Industry (MTI) announced that GDP grew by 2.1 per cent in the second quarter, below the consensus estimate of 3.1 per cent.

While a number of factors contributed to the worse-than-expected result, many analysts said the restructuring was a key issue, with DBS economist Mr Irvin Seah pointing out that the process has created persistent supply-side constraints.

“Many have been too optimistic about our growth due to pockets of positive signs, but they forgot that we’re still going through the restructuring,” he told TODAY.

“And this will remain the key reason why we will continue to underperform in the region when it comes to economic growth.”

The weak GDP growth in the second quarter was mainly due to a slowdown in manufacturing, which grew on-year by a paltry 0.2 per cent while contracting on-month by 19.4 per cent, MTI data showed, while the services and construction sectors also slowed from the first quarter’s expansion.

“The costs of restructuring — coupled with an appreciating Singapore dollar and higher rentals — are making Singapore too expensive in terms of exports and an investment destination for multinational corporates,” said Mr Seah.

“Our manufacturers are losing their competitive edge globally, and that’s why the electronics cluster has performed badly.

“The impact is even more glaring on the services sector, which has seen on-year decline for the past four or five quarters because a lack of manpower has rendered many unable to function properly, he added. “Last but not least, the construction sector has been bearing the worst brunt of foreign worker levy hikes, and it’s not surprising if companies couldn’t grow.”

Reflecting on the same issues, the Singapore Business Federation’s chief operating officer, Mr Victor Tay, agreed that the collateral damage resulting from the restructuring process is a concern.

“Since the productivity push began in 2010, more companies have been unable to sustain the impact. Data by the Department of Statistics shows that company closures have doubled in 2011 and 2012 across all sectors. The mass casualty of companies means less contribution to GDP and weaker economic competitiveness,” Mr Tay noted.

“The government has aimed to achieve productivity-led growth by 2020, so this is really just the mid-way mark of the restructuring. Looking at the interim report card, we need to see GDP or at least productivity growth bottoming out this year or next,” he said,

“If not, the prolonged weakening will be bad news for everyone, and Singapore may have to rethink its strategies and policies — even though that has yet to happen despite the economy not reacting too well to the medicine.”

The Government has put in place a number of schemes to help companies navigate their way through the restructuring and raise productivity, but it is firmly committed to seeing through the process in the push to create a more robust economy.

“This will continue until we finally see a significant improvement in productivity,” said DBS’ Mr Seah. “Honestly, no one will know when the process will end — a process which we’re likely only halfway through.”

Despite the issues on the ground, restructuring has progressed well and businesses are changing their mindsets, the MTI told TODAY, adding that further improvements will take time.

Meanwhile, although pain is being felt by businesses and in the wider economy, the benefits of the restructuring should eventually be felt, Barclays’ senior economist Leong Wai Ho stressed.

“As far as I can remember, we have always lived and survived by economic restructuring — to make that quantum leap to put us in front. This time, the quantum leap has to be made in terms of productivity and innovation,” Mr Leong said.

“We can calibrate the pace of adjustment and restructuring to synchronise more closely with global business cycles. But whether we swallow slowly or quickly, we need to finish the full course of medicine.”

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