Face Masks, Anyone? Singapore Struggles With Haze

Chris McGrath | Getty Images

Tourists gather to take photographs of the haze covered Marina Bay Sands hotel on June 18, 2013 in Singapore.

Smog so dense you can hardly see and people walking around with face masks on: scenes often associated with polluted Beijing actually describe Singapore, where the air quality has reached "hazardous" levels this week following burning to clear land in neighboring Indonesia.

Singapore's Pollutants Standards Index hit 321 late on Wednesday, the highest since Southeast Asia's prolonged haze crisis in 1997-1998 and well above the unhealthy threshold of 100.

Economists say the pollution levels are a bad omen for the economy which has been grappling with slow growth and high inflation.

(Read More: Singapore's Air Turns "Hazardous")

A number of firms across the city-state have told workers to take precautions. Fast-food chain McDonald's has stopped its delivery service, while significantly for food-loving Singapore, usually bustling cafes and restaurants have thinned out as consumers take the government's advice and stay indoors.

"I looked forward to spending time in the green spaces in Singapore, but I haven't been able to do that, I've been stuck inside," said 39-year old British tourist Wendy McDonald, who is visiting Singapore with her family.

"There have been times when we would have normally planned to eat out but we've decided to stay in," she said. "I am really worried about it, I don't want to expose my kids to it, and I've developed a cough."

Worse This Time

The Singapore haze, an annual weather phenomenon caused by Indonesian crop burning, normally arrives around August to September, but this year the haze has come early and is much worse than normal.

The health impacts of the haze, which has a lingering smell of burnt wood, are a huge concern for local residents.

The Ministry of Health this week advised Singaporeans to limit prolonged or heavy outdoor activities as a result of the haze.

"There could be a significant impact on the economy this time round compared to previous years. If the haze gets worse the economic impact could be pervasive," said Vishnu Varathan, market economist at Mizuho Corporate Bank.

(Read More: Singapore Faces Choppy Recovery: Central Bank )

According to Varathan, the impact on tourism will be particularly damaging for the Singapore economy which is increasingly dependent on domestic activity rather than exports, with the retail sector first in line for a hit.

Singapore's economy grew at an annualized rate of 1.8 percent in the first quarter of this year compared with 3.3 percent in the previous quarter.

"On a domestic level the haze will have a clear impact on actual business activity as fewer residents will be out and about. It will also impact the level of visitors, as increasing numbers cancel trips. It will certainly impact retail, which will get the biggest impact from a slowdown in visitor arrivals," Varathan added.

Taking a Hit

Staff at Lau Pa Sat, a famous "hawker centre" or food court in the city told CNBC that deteriorating air quality has hit customer numbers hard.

And according to Lau Chuen Wei, executive director at the Singapore Retail Association, retailers are experiencing a marked decline in traffic. Singapore is in the midst of the "Great Singapore Sale" that marks one of the busiest shopping periods of the year.

"Retail sales have declined by anything between 8 and 12 percent [because of the haze]," Lau said. "If this continues, the industry which is already faced with very high cost of operations, would certainly be badly hit and retailers, who are already struggling to hold on to their very slim margins, will see this being eroded further."

Roslan Rahman | AFP | Getty Images

A view from Mount Faber hill shows residential and commercial buildings shrouded in haze in Singapore on June 17, 2013.

On Thursday reports emerged that the Ministry of Manpower is considering issuing a stop-work order if the haze situation worsens severely and is mulling the closure of childcare centers and schools.

(Read More: This Tiny Nation Could Be a Gold Trading Hub)

CNBC understands a number of corporations, including technology firm Blackberry, are sending daily emails to employees updating them on the situation and giving them the option to work at home.

"I used to live here and it was never this bad. I don't think it would stop me coming back completely but I would definitely time my visit to avoid this time of year in future, while in the past I wouldn't have even thought about it," said McDonald, adding she would think carefully before planning her next trip to Singapore.

Mizuho Corporate Bank's Varathan said office closures were unlikely as air conditioning systems mean office workers are relatively safe. However, industries where the majority of work is conducted outside could suffer a more severe impact, he said.

"We will see a slowdown in manufacturing, in port activity, rig-building, ship building, marine and offshore engineering activity," he said.

(Read More: Pollution 'Worst on Record' in Beijing)

On a broader scale, a severe worsening of the haze situation could go so far as to damage trade relations between Singapore and Indonesia, said Varathan, following reports on Thursday that the Singapore government had sent a delegation to Jakarta to discuss the deteriorating smog situation.

On the flipside, certain pockets of the economy are receiving a boost from the haze.

Anecdotal evidence suggests taxi firms are experiencing a spike in advance bookings as customers take steps to avoid stepping outside to hail a cab.

Sales of face masks and air purifiers are seeing brisk sales with a number of retailers such as drug store Watsons selling out of face masks due to strong demand.

Singaporean resident Vipin Ghelani said he was forced to go to six different stores in search of face masks on Wednesday.

"I went to five or six different places, including Guardian and Watsons (drug stores) and they were sold out everywhere," he said.

—By CNBC's Katie Holliday: Follow her on Twitter @hollidaykatie

—Additional reporting by CNBC's Sri Jegarajah

Correction: An earlier version of this story had Singapore's economy grew 1.8 percent in the fourth quarter. The time period is incorrect and should be the first quarter.