Monday, January 24, 2011

Avoiding bubble trouble

AS with the rest of the region, inflation is one of Singapore's key challenges in 2011. We expect inflationary pressures this year to be due to domestic factors such as higher residential property rental and services costs, as well as external factors such as higher commodity prices which translate into higher food and energy-related costs. Although the most direct way to help low-income groups is to provide a one-off direct income supplement, other measures that will be appreciated by those most affected by rising prices would be rebates in utilities and conservancy charges.

More healthcare and education assistance can also be offered to low-income households as the costs in these two areas are also expected to be on an upward trend in 2011. Perhaps the coming Budget can take the above into consideration.

THE current round of inflationary pressure in Singapore stems from four main areas: agri-commodities, energy, base metals and real estate.

Commodity and energy inflation tend to be imported, with a direct impact on the lower-income group. One way of softening this could be by temporary one-off subsidies. I support Singapore's commitment to focusing on education, skills upgrade training and increased productivity. Another area of focus that I believe is important is the quality of education for children of lower-income families.

Inflation of real estate has a small impact on low-income groups. The HDB concept works as a superb stabiliser.

Rapid real estate and other forms of asset inflation cannot be left unchecked. Otherwise, non-performing loans will increase and the health of the financial sector would be at risk with an effect on the real economy.

WHEN the financial crisis hit, there were concerns of 'stagflation' - stagnant economic growth accompanied by inflation. However, the inflation that Singapore is now experiencing is a result of steep economic growth and strong confidence from investors. This is a problem that other countries would happily have.

The continuing focus on productivity measures will take time to translate into increased wages across all income levels. Meanwhile, the lower-income groups need more immediate help in coping with rising prices. The challenge would be to channel the right level of financial assistance, such as utilities and transport rebates, to this group.

In the longer term, it is education of the young and reskilling of the mature that will enhance productivity and raise incomes. Financial incentives could aim at encouraging parents to keep their children in school. For instance, the Edusave scheme could be enhanced for children from low-income families to pay for enrichment programmes in primary and secondary schools. There is also a Ministry of Education Financial Assistance Scheme which pays for school fees, text books, school attire and exam fees. Schools could extend the scheme to transport and meal allowances to keep kids in school.

Reskilling incentives are currently directed at employees, and benefit only those employees who have supportive employers. Incentives could be made available to employees directly, encouraging them

to raise their skills and have more choices in employment opportunities.

I WOULD recommend relooking at the current GST policies and their impact on the lower income groups of our population. Our current GST at 7 per cent is a hefty amount, considering that it is applied to every household item including basic necessities. Rather than having just a one-tier GST system, we could consider applying different GST rates to goods and services that are classified on a continuum of necessities and luxury items. This could be a mammoth task but it is worth taking small steps to make a direct and huge difference to our poorer households.

As Singapore is a small and open economy, inflation affects our national and global competitiveness - and it is important to manage it carefully. The current method of measuring inflation using a single index is also far too simplistic. Rather than bundling all items into one consumer price index (CPI) figure, economists could consider dissecting it further to account for differences in inflation for again, different categories of goods and services to derive a more accurate picture of how it is affecting the lives of people on the street. This would then give policymakers much better information to target specific areas for positive actions and change.

THERE are certain inalienable truths in life, and inflation is but one of them.

One of the key concerns of inflation affecting the general population is soaring food prices, which has been pushed up by increases in the prices of raw materials and higher manufacturing costs around the world. Government rebates and food vouchers are some temporary solutions.

However, I believe that we need to start at the root of the problem. Teaching Singaporeans to be more financially savvy, and equipping them with strong money management skills will certainly be a more effective way to address the issue than trying to curb the unavoidable phenomenon of inflation.

The government can help to promote financial education among Singaporeans by allocating a part of the Budget towards financial courses to teach people how to better manage and even grow their money through wise investments. Perhaps the government could conduct campaigns to raise Singaporeans' awareness of the importance of financial education, as well as subsidise and even sponsor such financial courses at community centres to make them more accessible to the general public. I strongly believe that a strong financial education is the first step in helping these low-income groups break free from poverty.

Apart from this, the Budget could also offer more grants for social enterprises that reach out to these low-income groups. At Glow International, for instance, we are developing a beauty and spa academy to specifically benefit underprivileged women - women from troubled backgrounds, young unmarried mothers, etc - and equip them with a skill set to help them improve their quality of life.

AN environment of high or unpredictable inflation is challenging for consumers and businesses. Purchasing power declines, while companies feel pinched and will often pull resources from areas like product innovation to cover short-term losses.

Typically, monetary authorities respond by raising interest rates, so as to curb borrowing and entice consumers to save more. Given Singapore's buoyant property market, authorities could also consider additional property-cooling measures.

But moves that are too extreme could have serious ramifications. We're currently operating in a 'new normal', where the Asian consumer - especially the financially strong Singaporean - is a growth engine and essentially driving global economic recovery. We still need to continue monetary flows responsibly and within our means, to pay back debt.

The other consideration of interest rate hikes is whether existing consumer and SME credit is based on variable rate products. This will cause payments to rise where no new credit is being issued and where income is static. If this increases defaults at a time when less credit demand is seen, bank delinquency and loss rates will increase, putting pressure on net income and stock prices.

So do we disregard an interest rate increase? Perhaps more property-cooling measures? Not necessarily. But now, it's more important than ever to balance those types of actions with additional measures that allow continued access to credit for responsible borrowers (which, it bears mentioning, aren't necessarily only wealthy individuals as FICO's research has shown no link between income and ability to repay debt).

Fortunately, Singapore's leadership has shown an unrivalled ability to calmly and comprehensively assess this type of situation and act prudently. As Finance Minister Tharman Shanmugaratnam told Parliament recently, inflation is likely to rise further this quarter before moderating in subsequent quarters. Perhaps no drastic action is necessary.

ALTHOUGH the latest economic indicators show that the Singapore economy is maintaining progressive growth, the risk of inflation has mounted in recent months - mainly driven by higher global oil prices and costs of food, transport and housing. However, controlling or subsidising the prices of food and basic goods to cope with rising prices may be ineffective and costly measures in the long term in Singapore's open economy. We should evaluate new approaches to mitigate inflation risk. For example, more support can be extended to domestic importers to establish external trade links and expand their network to source for more cost-competitive products. More importantly, we have to keep our economy competitive and constantly strive to outperform in order to tackle inflation.

Besides attracting new investments, Singapore should promote a long-term approach to worker education and training. Organisations should support these initiatives and encourage employees to go for training and development programmes to upgrade their skills and competencies. We will not be able to totally insulate ourselves from inflation but there is no reason why we should not continue to innovate and develop our capabilities to sustain strong economic growth.

INFLATION is not flattering in a growing economy, and Singapore has been swinging against inflation by revaluation of the Sing dollar against major currencies especially the US dollar and the euro. It is taking a double-barrelled monetary tightening with an appreciation bias for the basket of currencies that the Sing sollar is pegged to.

Singapore'S economy grew by a whopping 14.7 per cent for the whole of 2010 and markets celebrated our city-state's leading role in Asia but such growth brought concerns such as long-term asset price inflation and depreciating worth of the Sing dollar. Arguably, a much stronger currency will save the worth of Sing dollar. The con, of course, will be the impact on competitiveness if the Sing dollar goes overboard to become too strong.

Though the government must allow for a very gradual and sustainable appreciation of the currency to help fight inflation, it must be mindful that working-class Singaporeans will be the worst hit in any inflationary impact. Their earning capacity will not grow proportionately to the inflationary growth, and their dollar will buy fewer goods and sundries. They have less flexibility and elasticity in fiscal prudence or imprudence and if the Budget 2011 does not provide for them specifically, the working class may be steps behind in Singapore's growth story.

Increasing tax reliefs to account for rising inflation and increased cost of living, exemption of essential items from GST, direct cash subsidies for conservancy charges or rental rebates, transport rebate for senior citizens and school-going children are probable remedies in Budget 2011 that could alleviate the temporal pains caused inadvertently by inflation. From the perspective of fiscal prudence, such measures will go a longer way towards helping the working class in Singapore.??The blunt and brute force of any inflationary pressure can at least be lessened with a considerate Budget.

EDUCATION and life-long learning are great levellers of society, especially in Singapore, where our only resource is human capital. I would like to see the government setting aside more dollars for this on two fronts, to alleviate the financial burden on the low-income groups and to uplift their future earning power.

First, our government should do more to ensure that every needy child from low-income groups who deserves to be helped will have all his/her education expenses met or subsidised. The Straits Times School Pocket Money Fund and other charitable organisations can complement this, but the government should plug any gap that exists.

Second, while the government is already doing a great job in continuous education by way of skills upgrade and reskilling for employees, more can be done to reach out to more employees from the low-income groups, for them to benefit from the various programmes, be it CET, Workfare, etc. The government should ensure that all touch points are being exploited, be it through NTUC, SNEF, ASME or employers, to reach out to more of such employees. The scope should also be expanded to cover more industries, if not all, and a wider spectrum of jobs or occupations.

Perhaps, the government can consider investing in a multi-year media blitz to attract the attention of workers from the low-income groups to upgrade and reskill. Minimum skill, rather than minimum wage, is the way to go in contemporary Singapore, if we are to fight inflation. The adage of teaching a person how to fish rather than giving him or her a fish is still relevant today, more so in the current Singapore context, where we face the ever looming danger of a wider divide between the rich and the poor, arising out of our success and the concomittant inflation, that sometimes go with it, as with the present economic situation.

OVER the last 11 years that I have been working in Singapore for Robert Walters, prices have certainly been increasing and it's critical that the government continue to widen the band on the local dollar to curb rising inflation as this will potentially be harmful to the economy.

Should inflation continue to rise, companies could face a challenge in budgeting and planning for the long term and this might consequently discourage overall investment and savings in Singapore. As a result, this could potentially cause a damaging effect on the local economy which relies heavily on foreign companies' investment. We have witnessed an increasing number of companies gradually turning to neighbouring countries as more cost-effective options, with many of them hubbing activities in Malaysia, the Philippines and Eastern Europe due to the rising cost of employment in Singapore.

Additionally, enticing foreign talent into Singapore to bridge the gap on niche skill sets will also be a challenge with rising costs on accommodation, transport, education and food commodities. While overseas talent will be attracted to the favourable tax regime here in Singapore, the additional high cost of living could possibly discourage them overall.

A larger concern will be for the lower-income groups, retirees and the elderly, as they would most likely have limited income and thus experience more difficulty and restraint in the event of rising inflation. As such, the government would need to put measures in place for these particular groups to ensure that they are accounted for.

ON a macro-economical level, inflation has unfortunately been the effect of the economic downturn; as such, it is an inevitable result of the economic disparity despite a robust economy.

Singapore has managed and prepared its people well for the ongoing economic changes. However, it is crucial that we do not allow inflation to escalate as it tends to directly affect costs of consumer goods. This increases the costs of living. Inadvertently, inflation tends to affect the low-income groups the hardest. The situation arises when costs due to inflation do not match the salary scales of the low-income groups - salary increases will help to diffuse economic constraints such as inflation. The upcoming Budget must, I believe, ensure that these issues are contained.

INFLATIOn shows itself in rising prices and shortages of the necessities and comforts of life where there is an increase in currency without a corresponding increase in food, commodities, supplies and services.

One could expect a fairly strict macroeconomic disciplines on low budget deficits and tight money and credit.

Inflation compensation in the form of wage subsidies or inflation allowances, rebates and discounts should be considered - particularly for the low-income group.

A centralised body or institution keeping track of all wholesale and retail prices of trade, medical, transport, business and living costs would help in price control and policymaking.

THE current inflation trend is cost-push inflation which is more driven by the rise in the cost of essentials goods and services such as food prices, housing and transportation. It even leads to a rise in wages that negates productivity gains and erodes competitiveness. Hence, the focus will need to be on the key areas - total labour costs; cost-saving measures such as using environmentally friendly alternative energy sources; continual training of skills and retention of key talents so that labour costs as a whole can be mitigated.

The Budget could help in the following areas:

* Improving productivity: Initiate ways to enhance productivity per employee through continual skills upgrading and technology to have better retention programmes to engage the high performers.

* Helping the lower-income group: Revise existing schemes such as Workfare to give more focus for low income in different sectors of the economy.

In such an economic scenario, it becomes very critical that the right information reaches employees at the right time. Even if it's a decision which is likely to negatively impact the compensation or benefits of the employee, it is very critical that the rationale for change and how it will help the organisation and its workforce to meet the challenges are well articulated by its leaders.

THE key to mitigating the negative effects of rising inflation is to keep the prices of basic necessities down. People can cut back spending on luxurious items but if they cannot afford the basic necessities in life, then there is going to be social chaos and unstability. Our government needs to keep the cost of food, transportation, utilities and health care down during this inflationary period.

There should also be a distribution of part of the budget surpluses to the people - with more to be dished out to the poor. However, more importantly, the Budget needs to keep unemployment down as people will still need to have a basic income to tide through rising inflation. For the poor and unemployed, our government might want to consider the use of micro-financing to help them start businesses so that they can generate some income for themselves.

THE main area that needs to be addressed is housing, which is one of the more important elements in the consideration of inflation. A good majority of the Singapore population live in HDB flats so I feel that public housing should be regulated such that it is protected from becoming a speculation vehicle in the property market.

The recent regulatory and property tax changes are good initiatives to help insulate it from such speculation. However, I would like to see more of these initiatives targeted at escalating housing prices. I believe that property prices are currently artificially high so I would also like to see the authorities looking into the statistics of actual occupancy rates of these housing units. Knowing whether the market is driven by a genuine need or otherwise is important as it points to the fundamentals underlying the escalating property price phenomenon.

We must be wary of a situation like the one in Dubai where huge numbers of houses were bought up by speculative investors, and the trend was not supported by a genuine need of the population. When the bubble bursts, there would be far-reaching consequences for the economy.

As for measures to address the problems facing low-income groups, it goes back to the issue of gainful employment. Being in the talent acquisition industry, I often receive feedback from employers that Singaporeans are generally choosy about jobs. While this may be so, there are the lower-income groups consisting of the less educated, physically impaired or senior citizens who genuinely experience discrimination by employers.

As an employer and employment service provider, I feel for both groups indeed. One suggestion I would like to make is to have greater tax incentives for companies that hire such groups of workers who are willing to work and contribute to society. Similar to the Jobs Credits Scheme that helped employers through the last economic crisis, we could even consider matching a percentage of rebates from the Skills Development Fund if employers are willing to take on the challenge of engaging this group of individuals and deploying them to areas to which they can contribute.

PART of the inflation is imported, eg oil and food prices. Some may argue that a stronger Sing dollar helps, but it is a double-edged sword as this will affect our exports. Subsidies are out of the question as they distort the market mechanism. For the low-income group which is particularly hardest hit, there may be need for more immediate community relief, through grassroots organisations including voluntary welfare organisations (VWOs). The government could empower VWOs with increased support to reach out to the low-income groups.

Certainly, businesses should not go into a price escalation war to tackle increased cost. Government departments may have to take the lead in not increasing levies and charges. What the government can do is to help businesses with enhanced research, innovation and productivity assistance initiatives, perhaps making easier for more companies to get onto the bandwagon. Innovation and greater productivity will certainly put businesses in a better position to hold prices.

ONE of the key areas that should be looked into is the overall rise in business costs such as rental of commercial space and material costs. Because of the heated property market, rental costs have gone up which will push up inflation. Rising costs of materials, will also in turn affect the costs of goods. Commodity prices and now fuel prices seem to be on an upward spiral and that can only mean higher costs of production which is ultimately passed onto the consumer. The Budget could address ways in which to help businesses tackle such rising costs using tax policies and grants to help offset some of these costs.

There is a lot more that can be done to help the the lower-income group. In the immediate term, to cope with inflation, such measures could include tax reliefs, monetary assistance and more subsidies particularly for essential goods and services such as electricity and water. In the longer term, measures such as skills upgrading and training will enable them to seek better-paying employment.

SINGAPORE has experienced phenomenal economic prosperity and steady robust growth that can never be understated. However, these broad indicators should not take our focus away from the threat of inflation and its effect on the most vulnerable sectors of our society.

The widening of the income gap is a phenomenon that has been witnessed in many developed countries. There are a number of factors that may have led to this, foremost of which is the declining demand for low-skilled workers as displaced by technology, and the fierce competition for jobs and wages brought about by the onset of globalisation.

While it is difficult to keep the balance within a confluence of factors in an increasingly global economic set-up, I believe that the key is to achieve the goals of equitable progress through the redistributive mechanisms of gainful employment on the one hand, and the encouragement of entrepreneurship on the other hand - which not only provide people with viable livelihood opportunities but allows for the creation of new wealth the dynamics of which will energise the economy overall.

When inflation strikes, expanding programmes of preferential option directed to low-income groups by way of increased subsidies for basic needs such as health care and housing are always helpful.

Individual and communal acts of benevolence can also alleviate the situation but at the end of the day, we count on our nation's efficient policymaking and enlightened governance to ensure a long-run strategy for a kind of economic progress that is both sustainable and broad-based.

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