Mar 12, 2014

    Will rise in costs dull Singapore's edge?

    LAST week, Singapore captured headlines for an unsettling reason: The Economist Intelligence Unit (EIU) named it the world's most expensive city.

    The EIU study aims to help firms calculate how much to pay expatriates, so it may not have been a good reflection of costs for locals. But it still crystallises what Singaporeans have known for a while: This country is becoming more expensive.

    Inflation averaged 3.1 per cent in the last five years, from 2.4 per cent in the five years before that.

    The EIU's findings also underscored an intense discussion during the Budget debate in Parliament last week.

    Several MPs rose to plead the cases of local firms, which have been buckling under the weight of soaring labour and rental costs amid a manpower and space crunch.

    Between the third quarter of 2009 and the first quarter of last year, unit business costs rose 19 per cent for the manufacturing sector and 25 per cent for the service sector. For the whole of last year, overall unit business costs rose 1.5 per cent across all sectors.

    Singapore has long been an attractive destination for firms. But as living and business costs head ever higher, is the Republic in danger of losing its economic competitiveness?




    A number of factors are driving up costs faster here.

    Land is scarce, leading to relatively high property costs. Cars here are also among the priciest.

    Singapore also relies on energy and water imports, which raise utility costs.

    A more recent reason is Singapore's strong rebound from the 2008 global financial crisis.

    The economy is now operating at around maximum capacity. This has led to strong demand from firms for industrial and commercial space, and workers, raising these costs.

    Singapore has also attracted more investments, pushing up the Singapore dollar. At the same time, Singapore's central bank has kept the Singdollar on an appreciating path to guard against inflation. As a result, the Singdollar has hit all-time highs in the past few years, making it even more costly for multinationals here.

    Over the last decade, the Government has sold off industrial land to private-sector players such as real estate investment trusts (Reits).

    Only about 16 per cent of industrial space is leased out by Reits, but firms say this has led to rental hikes of up to three-fold when leases are renewed.

    Industrial rents have shot up by double digits each year from 2010 to 2012, although growth eased to 5 per cent last year.

    Since 2010, the Government has also been tightening the tap on foreign labour. This has raised unit labour costs by 5.3 per cent in 2012 and 3.1 per cent last year.




    OCBC Bank economist Selena Ling said firms know Singapore has never been cheap.

    The key question is whether the value Singapore adds to their business will continue to outweigh the growing costs of operating here - especially now that other regional cities are also steadily modernising.

    So far, the signs are still positive. For one thing, Singapore is not the only place where costs have been rising.

    Barclays regional economist Leong Wai Ho said: "Singapore has become pricier...but we are still noticeably cheaper than London or Switzerland. Fortunately, most Asian cities have also experienced cost increases."

    Despite awarding Singapore the cost crown this year, the EIU forecast last June that the Republic will be the world's third-most competitive city in 2025, behind New York and London but ahead of regional peers Hong Kong and Tokyo.

    The study ranked 120 cities based on their expected ability to attract capital, businesses, talent and tourists.

    In addition, the Lion City has been perched on top of the World Bank's league table as the most business-friendly economy for the eighth straight year, and also boasts the world's best airport and second-busiest container port after Shanghai.




    One major point in its favour is Singapore's persistent positioning of itself as a safe and sophisticated gateway to a rising Asia.

    This has encouraged a host of multinational giants to expand operations here recently, despite higher costs.

    ExxonMobil expanded its vast chemical plant on Jurong Island to the tune of an estimated US$5 billion (S$6.3 billion). Last year, Royal Dutch Shell relocated its global integrated gas business headquarters from Holland to Singapore.

    Cheaper is also not always better for business. In industries such as building oil rigs and ship repair, Singapore is still thriving despite cheaper alternatives such as China and South Korea.

    That is because Singapore's yards boast their own competitive edge - on-time delivery and costs that are kept within budget. These translate into substantial cost savings for clients.

    Experts also believe that there will be a reversal of the strong-Singdollar currency effect in the next few years, as countries like the United States unwind their massive money-printing regimes.

    Meanwhile, Singapore must continue to ensure its value-add keeps up with its rising costs.

    "We need to get productivity up as much as possible to create value," said Mr Leong.

    Ultimately, Singapore's natural constraints mean it cannot avoid being an expensive country.

    But the key is to make sure it is not more expensive than necessary.