STRONG SINGAPORE DOLLAR POLICY AND MANUFACTURING SECTOR

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STRONG SINGAPORE DOLLAR POLICY AND MANUFACTURING SECTOR: 2.

Mr Liang Eng Hwa asked the Minister for Trade and Industry (a) whether the Government will continue to adopt a strong Singapore dollar policy in view of the weaker GDP and non-oil domestic export data; and (b) whether the weakness in the manufacturing sector will extend beyond the pharmaceutical segment, leading to weaker employment prospects.

3.

Mdm Ho Geok Choo asked the Minister for Trade and Industry (a) how can Singapore avert the further shrinkage of economic growth as manufacturing exports fall in volume; (b) what measures are being taken to ensure that job losses in the manufacturing sector are minimised; (c) what is being done, either through retraining or other means, to soften the impact of retrenchment for those in the less knowledge-intensive manufacturing sector.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, may I have your permission to take Question Nos. 2 and 3 together?

Mr Speaker: Yes.

**Mr Lim Hng Kiang: ** Mr Speaker, Sir, Singapore adopts an exchange rate-centred monetary policy to maintain price stability for sustained economic growth. In setting the exchange rate policy, the Monetary Authority of Singapore (MAS) seeks to strike the right balance between inflation and growth.

Since 2004, MAS has adopted a policy of targeting a modest and gradual appreciation of Singapore's trade-weighted exchange rate, amidst robust economic growth. In its last two policy announcements in October 2007 and April 2008, MAS announced that it would allow a stronger appreciation of the Singapore dollar, through a steeper slope

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and an upward re-centring of its policy band, respectively. These were considered and measured responses to counter the inflationary pressures that were building up in the economy and the sharp increases in global food and fuel prices. If left unchecked, these price pressures could erode Singapore's cost competitiveness and derail our economic growth.

Mr Liang Eng Hwa has asked whether the Government will maintain the policy of an appreciating Singapore dollar, in view of weaker GDP and export figures. We recognise that a strengthening Singapore dollar could have some restraining effect on exports in the short term. There is therefore a limit to how strongly the Singapore dollar can appreciate to offset the effects of global inflation passing through to the Singapore economy.

At this stage, the current monetary policy stance remains appropriate in the context of achieving low inflation for sustained economic growth over the medium term. MAS will analyse inflation and growth data in a holistic assessment to determine the appropriate policy at its next scheduled policy review in October.

Mr Speaker, Sir, let me now proceed to answer the questions on manufacturing. The manufacturing sector contracted by 5.2% in the second quarter of 2008 because of weaknesses in pharmaceutical and electronics output. Mirroring the slowdown in these two key exporting segments, our non-oil domestic exports contracted by 5.7% in July.

A large part of the recent downturn in manufacturing can be attributed to volatility in the pharmaceutical industry. Significant swings in pharmaceutical output occur quite regularly due to changes in product mix, but these do not reflect fundamental weaknesses in the industry. In fact, employment in the pharmaceutical industry has grown steadily over the years, as has the value-

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added. Nonetheless, the short-term outlook for biomedical manufacturing will remain weak due to global trends such as competition from generic drugs and delays in government approvals for new drugs.

Besides pharmaceuticals, we are also seeing some slowdown in other industries. The electronics industry grew by just 0.2% in the second quarter of 2008; the chemicals industry by 1.2%. Precision engineering fell by 1.7%. All these sectors depend crucially on external demand, especially from developed countries like the US, Japan and Europe. But demand from these countries has come down considerably and is expected to remain weak for some time to come.

Notwithstanding these short-term difficulties in some manufacturing segments and exports, we have not yet seen significant numbers of retrenchments besides those arising from the closure of a Motorola plant earlier this year. In fact, employment went up by about 144,000 in the first half of this year, of which 22,000 were attributed to the manufacturing sector. But we should expect that job creation will slow down and some retrenchments may be inevitable in the manufacturing and export-oriented sectors, as they adjust their employment with the falling global demand. It is still too early to tell whether there will be significant retrenchments, and we are monitoring the situation closely.

Mdm Ho Geok Choo asked what measures the Government is taking to minimise job losses in the manufacturing sector.

Realistically, we cannot seek to protect every manufacturing job or to prevent job losses when the industry restructures or adjusts to slower business demand. Nevertheless, we can reduce the effect of cyclical job losses to the minimum by ensuring that we have a

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strong pipeline of investments. Some existing jobs will be lost, but new and better paid jobs will also be created.

Our investment commitments for 2008 remain strong. In the first half of 2008, we attracted S$12.9 billion of fixed assets investments and S$4.8 billion of total business spending. These projects are expected to generate S$9 billion of value-added and more than 10,000 skilled jobs. We are therefore confident that there is strong sustained investment momentum as evidenced by the recent project announcements, including 3M's new facility to produce film coatings, Wyeth's expansion of its nutritional manufacturing facility, and Procter & Gamble's new perfume manufacturing facility. Many of the new investment projects that we are bringing in will create quality jobs for Singaporeans. We will continue to pursue such high-end investments from both established industries as well as from new growth areas such as clean energy, environment and water.

It is important that our existing workforce can be trained to meet the needs of these new industries. The Government is committed to investing in training programmes to ensure that the skill-sets of workers fully meet industry requirements.

There are joint initiatives put in place by the Singapore Workforce Development Agency (WDA) and the National Trades Union Congress (NTUC) to equip our workers with portable skill-sets to meet the needs of growth sectors. For example, the Employment and Employability Institute (e2i) is an initiative that was launched in February this year by NTUC in partnership with WDA and the Singapore Labour Foundation. It is a one-stop shop that provides employability assessment and coaching, skills training and job placement opportunities for workers. It reaches out to a broad spectrum of

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existing and displaced workers with different needs and challenges such as the retrenched workers, the lower-wage workers and older workers.

Mr Speaker, Sir, to sum up, we remain confident that manufacturing as a whole will still generate good employment for Singapore. Our strategy of constantly upgrading the sector and workforce will ensure that manufacturing remains a key part of our economy, with meaningful and well paying jobs for Singaporeans.

Mr Liang Eng Hwa (Holland-Bukit Timah): Sir, in the second quarter economic survey, we have seen unit labour cost and inflation rose but productivity fell. I would like to ask the Minister whether we are seeing some early signs of wage inflation; and if this trend continues, coupled with our weak economy, we would be seeing more job losses as a result of this reduction in our competitiveness. What more could we do to reduce our overall business cost to retain our competitiveness?

Mr Lim Hng Kiang: Mr Speaker, Sir, we track our competitiveness, in particular, our cost structure very carefully. What we are seeing in recent months of our unit labour cost going up and productivity coming down is partly due to the cyclical changes. As you know, the economy performed extremely well in the last few years and employers have been building up their workforce. Now, with the sudden, abrupt reduction in demand, this has caused productivity to drop. Overall, we believe we still remain competitive as evidenced by most of the international competitiveness reports. Also, our EDB offices overseas, the companies that they deal with, look at the value proposition of Singapore and they remain very confident that Singapore is a very attractive investment location, as is evidenced by our strong pipeline of investments. But, nevertheless, we are always watching our cost structure and we will continue to do so.

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Mdm Ho Geok Choo (West Coast): I would like to ask the Minister what strategies are being put in place for our pharmaceutical industry to meet the delay for approvals for new pharmaceuticals and stiff competition posed from the generic drugs industry, especially since the pharmaceutical industry is the largest contributor to the manufacturing industry, making up 22% of the total output, and since Singapore's high cost structure will not enable us to compete with the generic drugs industry.

The second question is: do we have a sense of how many employees will be affected and released from the workplace in the pharmaceutical industry?

Mr Lim Hng Kiang: Mr Speaker, Sir, as I mentioned in my earlier response, in fact, we are quite confident about the prospects of the pharmaceutical industry. The characteristics that are shown by the pharmaceutical industry represent the very lumpy nature and very high capital intensive nature of the investments. We are still in the early stage of building up the sector. The companies that we have here have sunk in very heavy investments. They produce active pharmaceutical ingredients for the global market, particularly for the developed markets. And so every time they change the production mix, we get this impact on our value-add but the workers remain there. In fact, as I mentioned in my response earlier, the employment figures are going up. And because these are very highly capital intensive, high value-added, the wages in this sector are very high and, therefore, the employment prospects of our workers there are very good. So far, we have not seen significant retrenchments in the pharmaceutical sector.

The slowdown in output in this quarter is just reflective of the volatility of the production mix. Another contributing factor which I mentioned was the delay in

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the introduction of new products because of delays in government approvals for new drugs. But this is something that the drug manufacturers have taken in their stride and they have readjusted their production schedules accordingly. So, going forward, we remain very confident about the prospects of the pharmaceutical sector.

Mdm Halimah Yacob (Jurong): Mr Speaker, Sir, apart from labour cost, companies have also complained that other costs also affect their competitiveness, like rental of office spaces and factory spaces and also accommodation for foreign workers. Is the Ministry also looking into these areas to ensure that we continue to remain competitive and attractive to investments?

Mr Lim Hng Kiang: When I said that we track cost, we track cost holistically, not just labour cost but also facilities, whether it is office space, commercial space, industrial space or accommodation for foreign workers. Also, a very important part about cost is utility cost. Because of the high dependency on energy imports, we have to pay world prices for utilities. In fact, utility cost is one of the key components of our cost structure. But, nevertheless, despite all these components, I believe we are still competitive. Recently, we commissioned EIU to look at our structure and their primary feedback to us is that investors look at the two sides, not just the cost but also the value that you bring to the table. This is where we also have to continuously work hard at to raise the skill-sets of Singaporeans, raise productivity and all the other things that we put onto the table – connectivity, our stability, and all the other attributes. So, on balance, the value-add that we can bring vis-a-vis the cost, I believe, we remain competitive and EDB is confident

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that the investment pipeline will continue to be strong.