Singapore Firms Hit by Foreign Labor Laws

Bloomberg | Getty Images

From designing the decor to drawing up the dessert menu, Venezuelan national Carlina Maldonado and her husband spent months preparing for the launch of their new restaurant venture in the Asian financial hub of Singapore. But as the opening day approached, there was just one thing missing: staff to serve their South American fare.

Hiring challenges, stemming from the government's tighter controls on foreign labor, postponed the launch of their restaurant, Sur, by a month – an expensive delay that left them with a high rental bill and zero income.

"We had an overwhelming response to the job ads we posted online, but 99 percent of the applications were from non-Singaporeans, mostly Filipinos. They were extremely qualified but we couldn't employ them because of the hiring restrictions," 33-year-old Maldonado, a former bartender, told CNBC.

The Singapore government, which is facing growing public opposition to the country's liberal immigration policies, has announced a slew of measures to limit the influx of foreign workers in the past year, including lowering the foreign manpower dependency ratio for the manufacturing and services sectors by 5 percent each, in addition to steep increases in the monthly levy paid for hiring overseas employees which have taken place every six months since 2011.

For Maldonado, the new policies mean she needs to hire five Singaporeans before she can employ one foreign worker with the appropriate qualifications. Before the measures were implemented in July, the quota was four Singaporeans to one foreign worker.

(Read More: Threat of New Curbs Looms Over Singapore Property Market)

"The lack of manpower has made the market extremely competitive. Restaurants are entering bidding wars for employees," she said, adding that higher-than-anticipated labor costs have drastically altered their return on investment.

Singapore, which has topped the World Bank's global ranking on the ease of doing business for seven straight years, has long been lauded for its business-friendly regulatory environment. But measures to boost domestic productivity, through limiting the inflow of foreign workers, are denting the attractiveness of the Southeast Asian nation as an investment destination, and could weigh on the economy's growth, according to economists.

Foreigners – which make up almost 40 percent of Singapore's 5.3 million population – are an important source of cheap employment, particularly for the country's manufacturing, construction and services sectors.

"Businesses that have not made the necessary adjustments to survive in the country's high cost environment will find it increasingly difficult to compete. We expect the less productive companies to start to get weeded out as restructuring bites, which should have an impact on GDP," said Michael Wan, research analyst at Credit Suisse.

Barclays economist Wai Ho Leong expects Singapore's annual growth to decelerate to 2-3 percent in 2020-2030, from the current 3-5 percent, as a result of the slowdown in overall employment. The annual intake of foreign workers, for example, is forecast to decline from the peak 70,000-80,000 seen in the past five years to around 20,000-30,000 by 2020.

"More labor curbs will be put in place, there is no u-turning – it's a reality that labor resources will grow at a much slower pace in the future, and costs will go up," said Leong of Barclays.

Experts say Singapore's release of a white paper last month, detailing a population target of 6.5-6.9 million by 2030, will put further pressure on authorities to limit access to foreign workers. According to Credit Suisse, this means the expansion of Singapore's overseas population would have to slow to 2.6 percent per annum from 7 percent in 2012.

(Read More: Singapore Targets Population Jump as Discontent Rises)

Satish Bakhda, head of operations at Rikvin, a firm that provides company registration and employment pass services, noted that it is harder to obtain employment passes for service sector jobs compared to just a couple years ago.

"Bringing in a manger for a restaurant, for example, is tough. They [Singapore government] want to ensure that foreigners aren't taking jobs away from Singaporeans – they must complement, not compete," he said.

"Even banks and multinational companies are being questioned – do you really need this guy? The real problem is the lower end salaries, less than S$4000," Bakhda added.

Worst Hit

The government's clampdown on foreign manpower will hit small-to-medium-sized enterprises the hardest, said Ho Meng Kit, chief executive officer at Singapore Business Federation, which represents more than 18,000 companies operating in the city state.

"The impact will be felt through the business community and more painful with SMEs because they are the ones that rely on low skilled foreign workers, face greater competition, and profitability isn't as high," Ho said.

"These are sectors (that) Singaporean (workers) don't want to join," he added, noting that businesses will need to innovate to compensate for the lack of manpower, or think about whether it makes sense to operate in the city. The concept of self-service, for example, which isn't widely adopted in the country, will likely become more common.

Manpower constraints are expected to contribute to a pullback in investment in the country this year, according to the country's Economic Development Board, which is targeting S$13 billion in fixed-asset investments in 2013, lower than the $16 billion hit last year.

(Read More: Singapore's High Cost of Living May Come at a Cost)

"This is the first time they are targeting a lower figure than the previous year," Wan of Credit Suisse noted.

While labor intensive businesses could be deterred, Vishnu Varathan, market economist at Mizuho believes Singapore will remain an attractive investment destination for knowledge intensive operations including research and development and legal and financial services.

Ho of the Singapore Business Federation agreed, "If you look at overall factors – it's still compelling for new businesses in terms of infrastructure and rule of law."