Investors Smiling, Even As Inflation Set To Rise

Source : TODAY, Tuesday, 28 Aug 2007

STELLAR economic growth in the past year may have investors smiling, but the Government is keeping a “tight watch” for potential signs of “overheating”— even as it revised its inflation forecast upwards.

Last month, the Monetary Authority of Singapore said inflation this year was expected to be at the upper half of its 0.5-per-cent-to-1.5-per-cent forecast range, and possibly as much as 2 per cent next year.

But yesterday, Trade and Industry Minister Lim Hng Kiang predicted that consumer prices could rise by between 1 and 2 per cent this year.

He said this yesterday while responding to five Members of Parliament’s (MPs) questions on the impact of rising business costs on Singapore’s competitiveness.

Citing last month’s “very high” inflation rate, Jalan Besar GRC’s Lily Neo wanted to know the impact of continued high inflation on Singapore’s economy and asked if restraining measures were in place. Holland-Bukit Timah GRC MP Liang Eng Hwa wondered if business costs would continue to rise “given the tight labour market and office space shortages”.

Mr Lim assured the House that the Republic remained well-positioned — with its lower costs vis-à-vis regional competitors — to attract foreign investments.

It also had a “very strong” pipeline of projects, particularly in the manufacturing sector where new chemical plants and wafer fabrication facilities are slated, he said.

For the first half of the year, inflation averaged between 0.5 and 1 per cent. But the Consumer Price Index (CPI) shot up in July by 2.6 per cent — a “blip” Mr Lim attributed to the impact of the Goods and Services Tax hike.

And even as inflation is set to rise for the second half of the year, it must be seen in context of the low inflation in the previous years — including the difficult economic conditions from 2001 to 2003.

Said Mr Lim: “If you ask me candidly, I’d say we have been enjoying practically 16 quarters of growth. In fact, I’m surprised our inflation numbers are as low as they are.”

Drawing comparisons to the pre-911 economic boom, Mr Lim pointed out that while unit labour cost rose by 5.8 per cent year-on-year in the first six months, it is “still 13-per -cent lower than in 2001″. Similarly, unit business cost for manufacturing increased 2.6 per cent year-on-year — which is still 11 per cent lower compared to six years ago.

“In the past three years, our CPI increased at an average annual rate of 1 per cent, while overall unit labour cost actually declined at an annual average rate of 2.2 per cent,” he pointed out.

Citing recent international surveys, Mr Lim added that Singapore “remains cheaper compared to other global cities in the region” such as Hong Kong and Tokyo.

“More importantly, competitiveness is more than just 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.”

In this regard, Singapore — with its pool of highly skilled talent, secure environment and “increasingly, vibrancy as well” — has many attributes “not easily replicated by other regional cities”, said the Minister.

Nevertheless, the Government has adopted a “proactive approach” to address the upward pressure on property prices and office rental rates, said Mr Lim, citing the efforts by the Ministry of National Development to increase transparency and supply.

Policy-makers are also working to contain the rising wage costs by not just easing the quota on imported labour, but also tapping female and mature workers.

Said Mr Lim: “The Government will continue to keep a tight watch on business costs. And most importantly, strengthen our competitive advantage and value creation to investors for Singapore to remain on its growth path.”

In a statement to the media, a Monetary Authority of Singapore spokesperson reiterated that “underlying inflationary pressures remain generally well-contained for the current advanced stage of the business cycle”.

The spokesperson added: “MAS’ monetary policy stance of a modest and gradual appreciation of the Singapore Dollar Nominal Effective Exchange Rate policy band remains in place.”

It will continue to “monitor closely the price and cost developments” and review the policy stance in October.