Singapore SMEs brace for another year of rising costs

EVEN as Singapore’s inflation cools this year, small and medium-sized enterprises (SMEs) are expected to face continued – or even intensifying – cost pressures.

Industry leaders noted four areas of concern: rents; labour costs; utilities and fuel charges; and pass-through costs from suppliers.

Rents: Still heading up

Rental charges of commercial and industrial spaces will generally tick up in 2024, said Ang Yuit, president of the Association of Small and Medium Enterprises (Asme).

“We have not seen rentals come down; in fact, rentals have been notching upwards still,” he told The Business Times.

While Asme has observed office rentals to have held steady, retail leases have generally gone up by between 3 to 10 per cent, Ang said.

In an informal poll by tenant advocacy group Singapore Tenants United for Fairness (SGTuff), 79 of 100 small business owners said their rents rose by up to 20 per cent in 2023.

Another 18 respondents saw even larger increases of 21 to 40 per cent, said SGTuff chairperson Terence Yow.

One way to mitigate this is through adopting hybrid work arrangements, if that is feasible for business operations, Ang said. This frees up some office space that can then be sublet.

Another idea is for tenants in the same commercial building to share common areas such as meeting rooms. This way, some tenants can reduce the amount of the space they rent, and the savings can be split accordingly, he said.

Labour: Policy-prompted rises

On the manpower front, post-pandemic labour market tightness should keep easing, and nominal wage increases may be lower this year.

Yet wage costs are still expected to rise – especially for SMEs that hire skilled foreigners, due to government policy changes.

Minimum monthly qualifying salaries for new S-Pass applications rose by S$150 to S$3,150 from Sep 1, 2023. From Sep 1 this year, they will rise for S-Pass renewals too. S-Pass holders in the financial services sector will need at least a monthly salary of S$3,650 for renewal, up from S$3,500 now.

As S-Pass qualifying salaries increase with age between 23 and 45, they will be even higher for older S-Pass holders.

Similarly, qualifying salaries rose for new Employment Pass applications in 2023, and will apply to renewals from Sep 1 this year.

Local employee wage costs have also increased, due to higher Central Provident Fund (CPF) contributions.

On Jan 1, the monthly salary ceiling for CPF contributions rose by S$500 to S$6,800. Employers will have to pay additional CPF up to this higher wage threshold.

While increased manpower costs cannot be avoided, SMEs can look into offshoring arrangements in lower-cost countries, said Singapore Computer Society president Sam Liew.

“It’s been shown that many tasks can be performed remotely,” said Liew. “SMEs can consider offshoring their systems and platforms – especially the ones that are non-critical and not sensitive – as this can help to increase the labour pool, and you get your cost arbitrage.”

Beyond reducing costs, offshoring arrangements can help to plug short-term labour shortages, and reduce the need to bring in skilled foreign workers, Liew added.

Utilities and fuel: Higher rates

While oil prices may be cooling, utilities costs are still expected to rise this year, partly due to government moves.

Singapore Manufacturing Federation (SMF) president Lennon Tan expects utility costs to stay elevated in 2024. SMF members have generally observed a threefold increase in electrical costs compared with pre-pandemic, he noted.

Higher carbon taxes and the goods and services tax (GST) hike are two reasons that electrical costs are unlikely to fall significantly in 2024, industry players said.

As for water, government tariffs are going up this year. The cost of potable water will rise by S$0.20 to S$2.94 per cubic metre (cu m) in April, which will affect industries such as hospitality or food and beverage services.

Industrial water prices will increase by S$0.08 to S$1.66 per cu m, which will hit manufacturers. NEWater prices will go up to S$2.41 per cu m, up from S$2.33 now.

However, national water agency PUB has estimated that the total rise in monthly water bills will be less than S$25 for about three-quarters of businesses.

On the road, diesel fuel costs have increased by 10 to 20 per cent over the past two years, and are likely to remain high, said Singapore Logistics Association chief executive officer Oh Bee Lock.

To mitigate higher energy costs, businesses may have to spend more money first. Said Tan: “Businesses should really take active steps into investing: to reduce energy costs, in automation, (and) in sustainability to reduce their carbon footprint and wastage – this is the time that they should step up, and invest.”

Yet he acknowledged that the cost of financing such investments has also risen, due to higher interest rates.

To reap economies of scale, SMEs can consider collaborating and sharing common resources when planning such investments, said Oh.

Suppliers: Passing it on

Another enduring cost pressure in 2024 is pass-through costs from suppliers – which may themselves be SMEs.

Highlighting this trend, Tan said: “It’s the increase in GST, along with all the inflationary costs, that are all stacking up.”

He has observed some “opportunistic” price increases, with suppliers raising rates by more than the one percentage point rise in GST, which took effect from Jan 1.

Irvin Seah, head of Asian Insights Office at DBS, argued that some SMEs need to go beyond controlling costs: “For some, there’s really not much they can do there, but they should instead focus more on raising their own bottom line.”

Those who have yet to improve productivity through digitalisation can tap government grants for this, Seah said.

But SGTuff’s Yow cautioned that most solutions are “much easier said than done”.

For instance, SMEs are often encouraged to reduce manpower costs by adopting digital tools. Yet this itself can be a costly process, said Yow, citing the pandemic-powered trend of using QR codes for e-menus in restaurants.

“It helps somewhat, but it took a long time and a lot of pain and money,” he said.