IMPACT OF RISING COSTS ON COMPETITIVENESS OF SINGAPORE

IMPACT OF RISING COSTS ON COMPETITIVENESS OF SINGAPORE: 3.

Mr Liang Eng Hwa asked the Minister for Trade and Industry (a) whether there is a risk of overheating in the Singapore economy; and (b) whether the recent price, rental and wage increases, coupled with our strong

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Singapore dollar, will impact our export competitiveness relative to our regional competitors.

4\. Mrs Josephine Teo asked the Minister for Trade and Industry (a) if there are signs of the economy overheating; and (b) apart from unexpected external shocks, what factors can limit the growth of the economy in the next three years.

5\. Dr Muhammad Faishal Ibrahim asked the Minister for Trade and Industry what are the effects of rising prices and property rentals on the competitiveness of Singapore in attracting foreign direct investments and as a place to live, work and play.

6\. Mdm Halimah Yacob asked the Minister for Trade and Industry (a) whether he can give an assessment on the impact of the rising cost of commercial and residential properties on the cost of doing business in Singapore; (b) whether this situation has eroded Singapore's competitiveness; and (c) what measures the Government intends to put in place to ensure that the overall cost of doing business, not just labour cost, remains competitive.

The Minister for Trade and Industry (Mr Lim Hng Kiang): Mr Speaker, Sir, may I have your permission to take Question Nos. 3 to 6 together?

Mr Speaker: Yes.

**Mr:

**Mr: Lim Hng Kiang: ** Sir, Members have asked about the impact of rising costs on Singapore's competitiveness.

The current cost pressures are reflective of our competitiveness and resultant strong economic growth. The economy has grown at above 6% for the past three years, and is projected to grow by 7-8% for the current year. In addition, growth is broad-based across both the manufacturing and services sectors. As a

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result of continued efforts in restructuring, we are also well positioned to ride on the new growth trends and favourable economic conditions ahead.

Despite our sustained strong growth in the recent years, we have been operating in an overall low-inflation environment. In the past three years, our Consumer Price Index increased at an average annual rate of 1.0% while Overall Unit Labour Cost actually declined at an annual average rate of 2.2%. However, in recent quarters, we have seen increases in property prices and rentals, as well as wages. We have to maintain vigilance over our costs, as excessive cost increases would dampen our growth prospects.

We have taken a proactive approach so far. To address immediate space constraints, we have introduced some interim office space supply, and HDB flats for rent. The Ministry of National Development has also released additional information on property prices and rents to allow the public and businesses to make more informed decisions on property purchases or rentals. This will increase awareness that attractive housing options remain available for foreign talent beyond the central districts. For longer-term demand, MND has been putting out ample supply of land, with more than 42,000 private residential units and 640,000 square metres of office space to be completed by 2010.

On the manpower front, with a near full employment trend, we are looking into ways to help more Singaporeans, such as older workers and women, take advantage of the strong employment market and rejoin the workforce. Reskilling efforts will also continue to allow Singaporeans to obtain better-paying jobs, while we supplement our workforce with foreign workers. Our

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focus is to create better jobs for Singaporeans and better opportunities to attract global talent.

Even as we take concrete steps to alleviate short term tightness in the resource markets, we should distinguish facts from impressions given by media reports of sky-high rentals in selected locations or transactions. For instance, the median prime office rent in the second quarter of 2007 (2Q07) was $9.50 per square foot per month (psf pm). However, median rent in other locations, which account for about 80% of office space in Singapore, was less than half of that, at $4.50 psf pm. Similarly, residential rents are also highly location dependent. In 2Q07, the median rents in 156 private condominium developments across the country published by URA ranged from $1.40 psf pm to $6.30 psf pm. In this regard, MND's recent release of additional information on property prices and rents will facilitate more informed decisions on property purchases or rentals.

Our Overall Unit Labour Cost has increased by 5.8% year-on-year in the first half of 2007, although it is still at a level which is 13% lower than 2001. Similarly, Unit Business Cost for Manufacturing has increased by 2.6% year-on-year in the first half of 2007, but remains at a level which is 11% lower than in 2001.

Singapore remains cheaper compared to other global cities in the region. According to ECA International's comparison of 2006 monthly rentals for 3-bedroom apartments in areas equivalent to Singapore's districts 9, 10, 11 and East Coast, Singapore's rental was less than half that of Hong Kong and Tokyo. In a comparison of global office market rentals by CB Richard Ellis in May 2007, Singapore's office rental was found to be 30% lower than that of Hong Kong and 50%-60% lower than that of Tokyo.

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More importantly, competitiveness is more than offering lower costs alone. It is about value creation. London, Tokyo and New York are high cost locations, but they are thriving global hubs because they offer good value for businesses. Singapore has many attributes that enhance our value proposition to investors, which are not easily replicated by other regional cities. We have a pool of highly skilled talents that enable us to engage in high value-add activities. We are renowned for our liveability, clean environment, security and, increasingly, vibrancy as well. In June this year, Monocle (European lifestyle magazine) rated Singapore as the most liveable city in Asia outside Japan, and cited Singapore as being "extremely affordable" despite our "first world living standards".

Despite increased costs, the World Competitiveness Yearbook ranked Singapore as the second-most competitive economy overall among 55 countries, second only to the US, in May this year. Beyond the multi-billion investment projects such as the two integrated resorts that are being developed, our project pipelines for 2007 remain strong. For example, Mitsui Chemicals has recently announced that it will invest $240 million to expand its elastomer plant in Singapore. Qimonda will be building its first fully-owned 300 millimetre wafer fabrication facility in Singapore, and estimates that it will invest approximately $4 billion over the next five years. Singapore's tourism industry also hit record highs in the first half of 2007, achieving an estimated $6.4 billion in tourism receipts and welcoming 4.9 million visitor arrivals. These suggest that Singapore is still an attractive location for economic activities for investors, talents and tourists.

Having said this, we cannot afford to be complacent. The Government will continue to keep a tight watch on business costs and, most importantly,

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strengthen our competitive advantage and value creation to investors, for Singapore to remain on its growth path.

**Mr Liang Eng Hwa (Holland-Bukit Timah): ** Sir, the Minister mentioned about the low inflation environment. I would like to ask the Minister whether the CPI numbers have fully captured the rising cost, particularly in those items that reflect our population's now more affluent lifestyle.

Secondly, in the Minister's view, will our business cost continue to rise in the coming quarters, given the supply bottlenecks that we are facing, particularly the tight labour market and the office space shortages?

Mr Lim Hng Kiang: Mr Speaker, Sir, this is a perennial question, whether our CPI effectively captures the cost of living here. As you know, we follow international standards in working out and monitoring the CPI. We have a basket of goods which reflect the different segments of the population, the top 20%, the middle and the bottom 20%, and this basket of goods which represents the different income levels is regularly updated once every five years. So I would say that the numbers do reflect the spending patterns of the different groups in Singapore.

Dr Muhammad Faishal Ibrahim (Marine Parade): Mr Speaker, I would like the Minister to share with the House on the current assessment of the investors as well as prospective investors with regard to the importance of cost of living as well as cost of property and land ownership relative to the other factors that they consider when they invest in Singapore.

Mr Lim Hng Kiang: It depends on which segment of the investor community we are looking at. If you look at the manufacturing sector, we still find a very strong pipeline of investments coming to

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Singapore and both EDB and the various agencies, like the JTC, are very conscious of cost in their investment promotion activities. They engage actively with the prospective investors to make sure that they understand the situation in Singapore and we take proactive action to mitigate these cost increases. Let me give you an example. We must see these cost increases in the context of what has happened in the last five years. For the last five years, the property rentals and prices and, in fact, cost in general had been kept very low in Singapore. In the construction sector, for example, there has been a shake-out for contractors. As a result, there is a shortage of capacity. So when the economy takes off and there are a lot of construction activities - in part, also because of the global shortage of resources and higher steel prices and other commodity prices, plus the smaller contractor capacity that we have in Singapore - all this adds to the construction cost. So we are very conscious of this and the various agencies and Ministries try to take proactive action.

Investments also come in cycles. For example, in recent years, we have been watching a very strong interest in the petrochemical sector and, together with the reduced capacity in the construction sector, it results in the process industry facing higher costs. One of the ways we try to mitigate this is to liberalise some of the labour constraints by allowing bigger allocation of foreign worker quota so that the contractors can take that into account and knowing that they can expand the construction capacity, they are then prepared to bid at a more competitive price. These are some of the dialogues that we have with the prospective investors and some of the proactive actions that we take.

Mr Speaker: Dr Neo, last question.

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Dr Lily Neo (Jalan Besar): Thank you, Mr Speaker. The Minister earlier mentioned about the inflation rate. May I ask him whether he is concerned about the very high inflation rate in the last quarter? And how would this affect Singapore and Singaporeans as a whole if this should continue? Are there measures that he would plan to take to contain this increase in the inflation rate?

Mr Lim Hng Kiang: If you ask me candidly, I would say we have been enjoying practically 16 quarters of growth and, in fact, I am surprised that our inflation numbers are as low as they are. This partly reflects the more benign global inflation rates - Singapore is of course enjoying this - and partly our low inflation in the past was also because of the economic conditions in 2001 up to 2003. But, as I said, in the last 16 quarters, we have been enjoying highly robust growth, the higher end of our potential growth. So one would expect inflation in fact to pick up. And, indeed, it may well pick up. In the first half of this year, our inflation rates were very low, between 0.5% and 1%. I think Dr Lily Neo probably refers to the July numbers which show a blip of 2.6% for the month of July. We are of course watching this closely.

We do expect inflation for the second half of this year to go up, partly reflecting the global inflationary trends. If you watch the inflation trends in US and Europe, you will notice that there is a lot of strong pressures on cost, and China recently has also reflected higher inflation numbers. So we expect, generally, cost to go up higher than the first half. Then, of course, we also have the one-off impact of the GST. But our experience shows that in the past when we had similar increases of GST this was a short-term impact and that, over time, the impact on cost would be mitigated. So, overall, we still look at an inflation forecast of between 1% and 2% this year, which is a little higher than our

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previous years, but definitely still very reasonable considering that this is already more than 16 quarters of growth.