Singapore pulls no punches in bid to maintain competitive edge

A third batch of 100 Singapore production workers were given their marching orders by Japanese manufacturer Matsushita Electronic Motor last week, joining the swelling ranks of the unemployed.

For more than a decade Singapore regularly enjoyed 7 to 9 per cent annual growth and effectively full employment.

Now it has entered its first technical recession in 13 years and latest jobless figures this week showed unemployment ballooning to 4.5 per cent, with 20,000 workers retrenched in the first nine months of this year.

The regional currency crisis has blown Singapore's industrial competitiveness out the water.

Matsushita is shifting its low-end electronics manufacturing capacity to cheaper environs on the nearby Indonesian island of Batam.

Some high-end production will remain.

The company's move is part of a growing trend which has forced the Singapore Government into action.

Yesterday, a government-appointed committee commissioned to review Singapore's competitiveness recommended an aggressive package of cost and tax-cutting measures aimed at stemming the slide.

The centrepiece of this was a proposed 15 per cent cut in wage packages, including chopping the amount employers are expected to contribute to their workers' pension funds from 20 per cent to 10 per cent of their monthly salaries.

National Trades Union Congress deputy secretary general Lim Swee Say, who sat on the panel, said: 'It is not easy to go through a process of wage reduction.

'But it is better to see a 15 per cent cut in wages than to see many more Singaporeans lose their jobs.' The proposed package - which includes utility charges cuts, lower government property rentals, tax breaks and a reduction in levies on foreign workers - should reduce business costs by about S$10 billion (about HK$46.69 billion) a year, or 7 per cent of gross domestic product.

Trade and Industry Minister Lee Yock Suan, who chaired the Committee on Singapore's Competitiveness (CSC), said: 'We think this package will make a significant difference.

'It will help restore confidence. Business has been waiting for government to take strong action.' The Singapore Government announced a S$2 billion off-budget cost-cutting exercise earlier this year.

Mr Lee said more stimulative fiscal measures were being considered, including a further acceleration in government construction and infrastructure projects which could result in a budget deficit next year.

The crux of Singapore's problem has been the sharp devaluations in the currencies of many of its neighbours. This has given them a greater international marketing edge when pricing their products.

For instance, Singapore's share of electronics exports to the United States dropped from 9.3 per cent in the second quarter of last year to 7.4 per cent in August this year, whereas Malaysia, the Philippines, Mexico and the mainland have all seen their market share increase.

Singapore once regularly featured at the top of international competitiveness league tables as the best place to locate a business. Its far higher productivity, stability and amenities traditionally outweighed its higher labour, property and utility costs.

The 30 to 80 per cent currency depreciations seen over the past year among its neighbours have proved impossible to compensate for through increased productivity alone.

Singapore is increasingly losing manufacturing business to Thailand, Indonesia, Malaysia, the Philippines and the mainland.

Average labour costs in Singapore are US$7 an hour, five times higher than in peninsular Malaysia, and several times higher than in Thailand and the mainland.

Labour typically costs US$1.60 an hour in Shanghai and US$1.20 in Thailand.

In Singapore, labour typically comprises 49 per cent of a manufacturer's production costs.

There are similar disparities in other cost areas.

For instance, water costs twice as much in Singapore as in West Malaysia, and 10 times more than in Shanghai or Thailand.

The 12 to 18 per cent depreciation in the Singapore dollar against the greenback has provided some compensation.

But if Singapore is to further restore its competitiveness it needs to either see its currency slip further or to cut costs.

Mr Lee said: 'Our view is that it is better to have a strong Singapore dollar so as to preserve the value of savings and assets.

'That is why we have taken this approach of cutting costs instead of tinkering with our exchange rate.' Standard & Poor's MMS International general manager and currency analyst Andy Tan believes some further Singapore dollar weakness may be inevitable because of the deflationary effect of salary cuts on demand.

Mr Tan said: 'In order to maintain price stability, the Singapore dollar will have to depreciate.' Another concern is the potential impact of lower salary and provident fund packages on Singapore's suffering property market.

There are fears it could result in greater mortgage defaults.

Overseas Union Bank president Peter Seah, who sat on the review panel, said: 'I am confident that banks and finance companies will respond to any problems mortgage borrowers have by rescheduling payment terms.

'It is in their interests to improve borrowers' liquidity.' The CSC report was commissioned by Prime Minister Goh Chok Tong in May last year, before the currency crisis hit home. Great efforts were made to consult both industry and unions, with representatives from both sides invited on to the panel.

Esso Singapore chairman Kwa Chong Seng said: 'It was a very healthy dialogue.

'At the outset, the government was focused on longer-term measures. As the recession bit, the government became more concerned about competitiveness on a short-term basis.' Mr Kwa said the private sector stressed the need to continue looking at longer-term measures into the next millennium because of the long lead times taken with direct investment.

The CSC's recommendations include leveraging on science, technology and innovation; developing a world-class work force; strengthening small and medium-sized local enterprises; better allocating Singapore's scarce resources; and strengthening and diversifying Singapore's external economic wing.

Even though this latest package may slow the tide of multinational corporations, like Matsushita, shifting manufacturing capacity offshore in the short-run, it is seen as inevitable over time given Singapore's limited resources and size.

As a result, the CSC acknowledged the need to focus the Singapore economy on more high-end and high-yielding activities, both on the manufacturing and services side, a process that has already begun to take hold.

Our view is that it is better to have a strong Singapore dollar so as to preserve the value of savings and assets. That is why we have taken this approach of cutting costs instead of tinkering with our exchange rate