Update on Singapore's Economic Restructuring Efforts and Growth Outlook

Ms Foo Mee Har asked the Minister for Trade and Industry if he can provide an update on how Singapore is faring in its economic restructuring process and whether there is any change in its growth outlook in light of the latest manufacturing and export indicators.

Both Mr David Ong and Ms Foo Mee Har have asked for an update on the progress of our restructuring efforts.

From 2009 to 2013, labour productivity grew by 2.9% per annum. However, this aggregate figure masks some cyclical fluctuations. The high productivity gains in 2010 were due to a strong recovery from the 2009 downturn. Notwithstanding the strong performance in 2010, recent productivity growth has been weak, with labour productivity growing by 0.2%

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per annum from 2010 to 2013. However, this is primarily due to sectors, such as retail, F&B and construction, which saw declines in productivity of 2.1%, 0.6% and 0.2% per annum respectively over the same period. At the same time, there have been some bright spots of sustained good productivity growth over this same period. For example, the transport engineering and precision engineering clusters saw productivity growth of 8.1% and 4.1% per annum respectively from 2010 to 2013.

On the ground, the situation is improving. Based on our engagements with businesses, we observe that mindsets towards restructuring have shifted. Many have now accepted the need to restructure and are stepping forward to tap on Government schemes to improve their productivity. To date, more than 17,000 companies have benefited from the various productivity initiatives under the National Productivity and Continuing Education Council (NPCEC), with 7,000 companies in 2013 alone.

Mr Ong asked specifically about the take-up rates for the Productivity and Innovation Credit (PIC) and the Innovation and Capability Voucher (ICV) schemes. For the PIC scheme, which provides businesses with enhanced tax benefits and cash incentives to invest in a broad range of productivity and innovation activities, the number of companies making use of the scheme rose from 36,000 or 33% of all active companies in Singapore in the Year of Assessment 2011, to 50,000 companies or 40% of all companies in the Year of Assessment 2013. As of 28 February 2014, the aggregate tax savings and cash payouts to companies amounted to $1.5 billion under the PIC scheme.

Similarly, we have seen take-up rates for the ICV scheme increase over time. The scheme, which previously only supported consultancy services, was enhanced in March this year to also support the implementation of productivity solutions, such as the purchase of equipment, training of workers and the redesign of workspaces to enhance productivity. From 1 March to 13 June 2014, more than 2,700 vouchers were awarded to businesses.

While these numbers are encouraging, clearly, more needs to be done. Economic restructuring is a long-term effort. We must continue to press on with our restructuring drive. We have the capacity to fund more productivity improvement projects and hope that more firms will step forward to tap on the various productivity schemes. We remain confident that the economy will be able to restructure successfully over time to be more productivity-driven. This will ensure a more efficient use of labour, which will not only help to relieve our labour constraints, but also support higher real wages without eroding the competitiveness of our economy.

Ms Foo asked about Singapore's growth outlook in the light of the latest manufacturing and export indicators, while Mr Ong asked whether the economy would be able to ride on the global economic recovery. As you all know, in the second quarter of 2014, GDP growth

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slowed to 2.1% year-on-year, compared to 4.7% in the first quarter. This is largely due to a slowdown in the manufacturing sector. Specifically, the manufacturing sector's growth decelerated to 0.2% year-on-year in the second quarter, from 9.9% in the first quarter, due to a contraction in electronics output and slower growth in transport engineering output. In line with the slowdown in manufacturing, domestic exports grew at a slower pace of 3.2% in the second quarter, compared to 3.3% in the first quarter.

The weak performance in manufacturing and exports growth can be partly attributed to sluggish global economic conditions. In the US, economic activities are only slowly beginning to recover from the harsh weather conditions experienced earlier this year, while China's growth remains modest, given its ongoing restructuring efforts. Lacklustre global economic conditions have also, in turn, affected the exports of regional countries like Japan and Indonesia.

As an externally-oriented economy, quarter-to-quarter fluctuations in our economic growth can be expected. On average, GDP growth in the first half of 2014 remained healthy, at 3.4%. Looking ahead, leading indicators in the US and the EU suggest a modest recovery in the global economy for the rest of the year. In tandem with this, we expect externally-oriented sectors, such as our manufacturing and wholesale trade sectors, to provide support for growth. In particular, our manufacturers are expected to benefit from improvements in the global economy, with the new orders and new export orders sub-indices of the Purchasing Managers' Index rising to 51.8 and 52.0 respectively in the second quarter. Our domestically-oriented sectors, such as business services, are expected to remain resilient, but we can expect some of our labour-intensive sectors, such as retail, to see their growth weighed down by labour constraints.

So, taken everything together, as usual, barring downside risks in the global macroeconomic environment, we expect the Singapore economy to grow by between 2% and 4% this year.

I thank the Minister for the clarification and update. I just want to ask three supplementary questions. The first is that we still have about 60% of the companies which have not embraced the incentive programmes. What else can be done to improve the take-up rate of the Productivity and Innovation schemes? Over the last few years, I think we have been unsuccessful in meeting the productivity target of about 2% to 3%. Can the Minister share with us the estimated productivity goal for this year? And at what point of not meeting the productivity target will the Government consider new measures or tweaking some existing ones that affect business, particularly manpower shortages and rising business cost?

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We have tried our best to encourage our companies, particularly the SMEs and the micro enterprises, to take up the schemes that are available. And we are approaching them through all the channels, particularly through the business chambers and trade associations. So, we are encouraged that the take-up rate is improving.

Productivity growth has been averaging about 0.8%, 0.9%, for the last few quarters. If this can be maintained, we hope to see productivity growth of about 1% this year. Our labour force growth should be growing at about between 1% and 2%. So, that is why we are confident that our growth target for this year will be between 2% and 4%.

I thank the Minister for his comprehensive answer and I fully agree that it is critical that we stay committed to the restructuring journey. I have three supplementary questions for the Minister.

First is, apart from dealing with challenges to raise productivity and the pressures of a tight labour market, many businesses have given feedback that they are also struggling to cope with new regulations that are being rolled out at the same time, for example, enhanced money laundering measures that are impacting the banking and the payment sectors, and the enhanced safety regulations in the construction sector. Whilst all these new regulations are very important and correct, they further stretch the manpower requirements and add operational cost and complexity. So, I would like to ask the Minister: how the roll-out of the new regulations could be paced better to help companies cope with a tight labour market as well as their own re-engineering efforts for higher productivity? So, that is the first question – layers of complexity and new things they have to do.

Second is, the increase in take-up rate in the broad-based schemes like PIC and ICV is clearly very encouraging. I am just wondering, given that the Minister has elaborated just now, that different sectors have different success rates with their re-engineering efforts, or different levels in terms of their productivity improvement, whether the Minister thinks it is the right time now to focus more on schemes that are more targeted because unique productivity challenges faced by different sectors require differentiated solutions. For example, can customised solutions be developed for specific sectors with the trade associations and Chambers of Commerce playing a more prominent role in supporting the Government and member companies to map out productivity strategies for the whole sector and develop platforms to migrate best practices quickly?

And the last one, very quickly, for many Singaporeans, company restructuring poses risk of job losses. So, could the Minister provide an update on how we are cushioning the transition for them, for example, re-skilling and preparing them for jobs for the future economy, especially for the senior PMEs? How can companies in the new economy be

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incentivised by Government schemes to play a greater role?

I thank the Member for raising the questions. New regulation is really a challenge because the different regulatory agencies have to put up new regulations based on their objectives. So, we are putting together a whole-of-Government approach to see how these regulations, first of all, do not run counter to one another and, secondly, also to be appropriately paced because we do recognise that this is imposing high compliance costs on the businesses and we are also concerned about it.

The second question is about whether it should be broad-based or it should be targeted. In fact, we are doing both. We have both broad-based schemes like the PIC, ICV and what we call horizontal schemes like IT support. At the same time, we have sectoral schemes that target the sectors working together with the trade associations, having champions in a sector to implement productivity schemes and the other companies would then take the cue and follow. And we have had a modest success. Some sectors are more amenable to quick changes in productivity. For example, in the furniture sector and the food manufacturing sector, we have had very good successes and the lessons that had been learnt are percolating to the other companies. Some other sectors face bigger challenges. For example, the construction sector, I think, faces a huge challenge; food services and retail sectors also face a bigger challenge and we have to work very closely with the trade associations to try and maintain the momentum.

On job risk, this is something that is very important to us because the key to all these is to make sure that the skill levels of the jobs are raised so that we can justify higher wages and, commensurate with this, the skill levels of the workers have to be improved. Again, we take this on-board, working closely at the sectoral level and together with NTUC. So, there are various schemes to upgrade the skills of the workers.