Minister's reply to Parliament Questions on the SMEs Business Cost and Assistance Measures

Question No 765 of Notice Paper No 221 of 2008

Name and Constituency of Member of Parliament
Mr Arthur Fong, Member for West Coast GRC

Question
To ask the Minister for Trade and Industry whether rising business costs faced by SMEs have dulled their competitiveness and what measures will be initiated to assist SMEs in these trying times, given the economic landscape over the next 6 to 12 months.

Answer
Amidst the challenging global economic environment, business costs have indeed gone up. Global commodity prices remain high compared to their level a year ago, and this has been reflected in higher fuel and materials costs for our SMEs. But this is not unique to Singapore. SMEs in other countries are similarly affected.

Feedback we have received from SMEs indicate that higher costs have squeezed their profit margins. But they remain financially sound. Loan default rates and rental arrears are stable. Industry feedback is that SMEs’ business expectations for the next six months are still moderately positive.

SME Assistance Measures

Our SMEs have highlighted that manpower, raw materials and rental are the key components contributing to the rising business cost. With the continued rise in global commodity costs, it is unlikely that the price pressure on raw materials will ease significantly. Nevertheless, we have also put in place several measures in areas within our control to address manpower and rental costs, so as to help SMEs meet the challenges as well as tap opportunities of the current economic environment.

Manpower Costs

We have sought to lower business costs by easing manpower constraints through various avenues. Working with MOM and WDA, we have reached out to economically inactive residents (housewives and mature workers) to encourage them to join the workforce. We have also provided greater flexibility in our foreign worker policy since January 2008. As a result, while we have been seeing some increase in labor costs in the recent months, this is still at a reasonable level compared to labor costs in previous years.

Rental Rates

We have also sought to ease rental rates. Part of the current rental escalation could be attributed to the spillover effects from the short-term office crunch. To mitigate this, the Government has released more transitional sites and vacant State properties for office use, which will come on-stream in about a year. 

The Government has also similarly increased space available for industrial and retail developments, which have also led to moderation in the industrial and retail rental growth rates. By next year, there would be more forward supply which will gradually be realized over the next few years to ease the demand. Nonetheless, we are already seeing a moderation in industrial rental growth rates. For the second quarter this year, industrial rental growth was at about 2.3%, down from about 7.8% in fourth quarter 2007.

Access to Credit

We will also ensure that SMEs continue to have access to credit through our Local Enterprise Finance Scheme (LEFS), Loan Insurance Scheme (LIS) and Microloan Programmes. With these available loans, our SMEs will be able to continue financing their current operations while investing in capabilities to fuel future growth. Based on our monitoring of these loans and feedback from the private financial institutions, there does not appear to be much credit tightening for the SMEs. For instance the amount of outstanding LEFS and LIS loans to SMEs for the first seven months of 2008 has grown by more than 50% over the same period last year. The percentage of SME defaults on bank loans has also remained stable. We are monitoring these trends carefully and will increase Government loans to SMEs if necessary.

Opportunities for SMEs in New Geographies and Clusters

These challenging economic times also provide new opportunities for SMEs to grow. IE Singapore has step up its efforts to support SMEs expanding into emerging markets such as Latin America, Middle East, Russia and Vietnam, which still present opportunities despite the current slowdown. For example, SMEs can now tap on IE’s new Exporters Development Programme, which develops our SMEs’ skills and knowledge in export activities.

Certain industry sectors also continue to see sustained growth despite uncertainty in markets and high business costs. The overall services sector, which comprise largely SMEs, grew by a healthy 7% in the second quarter of 2008. In particular, sectors such as medical technologies, oil & gas, environment and renewable energy, healthcare & wellness, education and lifestyle products and services are expected to demonstrate good growth, going forward. We will support the development of these industries as well as the development of capabilities of SMEs in these areas. Such investments will ensure that our companies continue to retain their competitive edge during this period of economic uncertainty.