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Singapore buffs the surface of an unsound structure 

By Sumathi Bala, Financial Times 

August 19, 2003

The Singapore government's decision to cut contribution rates to its Central Provident Fund (CPF), the state-run pension savings scheme, may aid a short-term economic recovery. But the changes are not deep enough to overcome long-term structural problems facing the city-state, analysts argue.

In his annual national day speech last Sunday, Goh Chock Tong, Singapore's prime minister, said the rate would be cut and could drop to as low as 30 per cent from the present 36 per cent, as Singapore revamped the savings fund to reduce costs and stay competitive with other regional cities.

"With economic conditions so unpredictable, it would be better to have a range of rates, rather than a fixed rate, so that CPF contributions can be cut in bad years and increased in good years," he said.

Mr Goh did not spell out the details of the rate cut but said he would announce the proposed changes in parliament in the next few weeks. In the long run, the changes would "more than make up for the present pain" by ensuring more jobs in a more competitive economy, he claimed.

They send an important signal to investors that Singapore is taking steps to cut business costs, Mr Goh said, and would help draw in more investments, leading to more job creation.

The market reaction was broadly positive yesterday, with the Straits Times index closing 1.8 per cent higher at 1,622.24, above the psychologically important 1,600 mark.

"The reaction is purely on a basis of price-to-earnings ratios. If employer CPF contributions are lowered, earnings will rise. This is how the market is seeing it at the moment," said Nizam Idris, deputy head of research at IDEA global in Singapore.

Under the proposed changes, based on recommendations by the economic review committee, if the CPF rate is cut to 30 per cent, employers' contribution would fall to 10 per cent from the current 16 per cent, while employees' contributions stayed at 20 per cent.

"If the long-term target is to get employer contribution down to 30 per cent, then it is quite significant in keeping business costs down," says Mr Nizam. "However, keeping wages low is not the right way of trying to stay competitive because there is no way Singapore can compete with countries such as Malaysia, China or India in terms of cost."

In his argument for the CPF changes, Mr Goh pointed out that Singapore's business costs are reaching developed country levels at a time of stronger competition from lower-wage countries. "For every manufacturing worker hired in Singapore, a company can hire three in Malaysia, eight in Thailand, 13 in China or 18 in India."

Dominique Dwor-Frecaut, regional economist at Barclays Capital said a 6 per cent CPF cut "is not going to get companies knocking on their doors to set up new manufacturing bases [in Singapore].

"Low- and middle-end factories would still prefer to go to China. The only difference it can make is in the services sector, where it may induce banks to come to Singapore."

Analysts added that introducing a flexible wage component could work to kick-start the economy and save jobs but would not help cure longer-term structural problems. "It is a sensible and pragmatic measure to alleviate things at the margins, meaning it can stop a cycle in the short term," said Hugh Young, managing director of Arberdeen Asset Management in Singapore. "Ultimately, if you ask me whether it can bring about a circular swing which is more fundamental in the long term, I will say no."

Analysts say a "systemic change" is necessary for Singapore to pull itself out of the current economic rut. They argue it needs to take bolder measures such as further liberalisation of the domestic services sector, more encouragement of private enterprise and even possibly going as far as implementing a looser monetary policy.

"Of course, these would be more painful in the long-term", said Ms Dwor- Frecaut. "But at least it would address the deeper problems."  

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