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Companies face higher costs as Singapore cuts foreign workers

State wants to improve productivity but weak economic outlook weighs on its plans

Singapore sets foreign worker quotas for each sector to control labor inflow.   © Reuters

SINGAPORE -- The government's plans to cut the ratio of foreign workers in the services sector could hit Singapore's businesses at a time of slowing growth, analysts said.

The government said on Monday it plans to cut the ratio of foreign workers to the total workforce in the services sector by five percentage points to 35% by 2021. It said this was to encourage companies to use new technologies and cut reliance on foreign labor.

As a small city-state with a total population of just 5.6 million including foreigners, the country has relied heavily on overseas workers who totaled 1.37 million in 2018. This marked an increase of 50,000 over the past five years.

Analysts said that a move to cut low-cost labor could saddle companies with higher prices that they cannot afford. “In a period of low inflation, most businesses are struggling to raise prices," said Howie Lee, economist at Oversea-Chinese Banking Corp. "At the same time, the economic gloom this year will provide challenging headwinds to these sectors as consumers tighten their purse strings. Affected businesses will have to tread very carefully in their shifts from labor dependency to investing in capital under such an environment.”

Lee said labor-intensive service sectors, particularly restaurants, are going to feel the pinch under the new policy. Singapore, once referred to as one of the four Asian tigers, is struggling to reinvent itself after its rapid industrialization from the 1960s to the 1990s. The Ministry of Trade and Industry said recently that this year's economic growth in the open and trade-reliant country will likely slow from the 3.2% posted in 2018 due to U.S.-China trade tensions and the global technology slump.

Minister of Finance Heng Swee Keat said in a budget speech on Monday: “Relying on more and more foreign workers is not the long-term solution,” he said, noting that other economies are also rapidly developing. “What we need is to have a sustainable inflow of foreign workers to complement our workforce, while we upgrade our Singaporean workers and build deep enterprise capabilities in these sectors.”

The new measure is in line with the government’s ongoing measures to transform Singapore into a knowledge-driven economy and move away from its reliance on technology manufacturing and services. 

A quarterly government survey of business sentiment in the services sector in January showed that 16% of companies believed that business conditions would deteriorate in the next six months, the largest number in two years.

Economists at Citigroup also said that the lower quota of foreign service workers would have the effect of pushing wages, and as a consequence company costs, higher. “The implied reduction in labor supply in the services sector could maintain upward pressure on services wage growth…This measure is likely to contribute to an upstream cost factor in the medium term.”

Finance Minister Heng said the government had factored in cost pressures for companies and stressed that it was a needed long-term measure: “If we do not take action early, our firms will find it harder to compete in the years ahead, and our workers will be left behind.”

The large number of foreign workers has also become a source of complaints from locals who feel that the country is not equipped with the infrastructure to deal with the explosion in the population. Over the last few years, traffic has become significantly more congested and is a source of discontent among Singaporeans.

Singapore sets foreign worker ratios by sector to control labor inflow. For the manufacturing sector, for example, foreign workers can form up to 60% of the workforce, while the quota for construction is 87.5%. It did not announce any changes for non-service sectors on Monday.

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