Budget focusing on both businesses and individuals
Singapore's economic growth is likely to be between 1-3% this year. Several measures were announced in the Singapore Budget 2013. For businesses, it was mainly focused on reducing foreign workers and helping to defray some operating costs. For the individual, more progressive tax systems were announced, and are shifting higher tax rates to the higher income group.
Reduction in work permit holders ratio and increase in worker levy
To reduce Singapore’s reliance on foreign workers, the Dependency Ratio Ceilings (DRCs) in the marine sector has been reduced from five Work Permit holders for every full-time local employee, to 3.5:1. In addition, the government will also raise foreign worker levies, but more details will only be released later on by the Ministry of Manpower. We do not expect the local yards to be hurt by this wellanticipated announcement, as measures have been in place to reduce this over the medium to longer term.
Some measures to take the load off companies
This includes the Wage Credit Scheme and special corporate tax rate rebate for YA2013-2015 of up 30% rebate or up to S$30,000 a year. There is also flexibility in the extension of Certificate of Entitlement (COE) for commercial vehicles from the current 5 yrs to 5+5 years as well as other support to increase productivity.
Taxing the rich…
In this area, the most significant measure is the investment property tax for
high-end properties. This will impact the top one-third of all non-owner occupied properties. New marginal property tax rates of 12-20%, but 99% of owner-occupied residential properties will enjoy lower tax rates.
While the masses and lower-income will enjoy subsidies
This includes personal income tax rebate for YA 2013, CPF Medisave Account top-up of $200 for all Singaporeans aged 45 and above, subsidies of up to 80% for lower-income elderly to defray the cost of consumables, restoration of employer contribution fully from 1 Jan 2014 for low wage workers, review of healthcare financing system and investment in more preventive care, etc. Income tax rebate pegged at 30% subject to a cap of S$1500 for residents below 60 years old.
A budget for the SMEs and lower-income residents
There are some goodies for the SMEs and also for the lower-income residents, largely to help defray rising costs. The corporate and personal income tax rebates will be welcomed by both businesses and residents. Overall, we see limited impact on the Offshore & Marine sector, slightly positive for the Healthcare sector and somewhat negative for the Singapore Residential Property sector.
Key Highlights
(1) Offshore & Marine Sector: Push for lower reliance on foreign workers continues
Huge reduction in DRCs
In a bid to urge companies to further reduce their reliance on foreign workers, the government will reduce overall Dependency Ratio Ceilings (DRCs) in the marine sector. An employer in the marine industry is currently allowed to hire five Work Permit holders for every full-time local employee, but this ratio will decrease from 1:5 to 1:3.5. To this end, the EDB and Spring are currently working with key players in the industry to upgrade operations and improve productivity.
The return of foreign worker levy increases; details out later
In addition to tighter DRCs, the government will raise foreign worker levies. Recall that companies enjoyed a reprieve for a year when no levy increases were announced in 2012 Budget, after increases were announced in the 2011 and 2010 Budgets. This is not surprising - we had mentioned in our report last year that levy increases may come back into the picture in the next 12 months.
Details related to the marine sector were not disclosed in the Budget Speech, but we believe that this sector will not be spared, since it was explicitly mentioned that there will be further levy increases "for all sectors". More details will be released by the Ministry of Manpower.
Unlikely to have negative impact on stocks
These developments will provide clear incentives for businesses to restructure and upgrade their operations. Shipyards, which generally utilize a sizeable portion of foreign workers, (e.g. we estimate about 40- 45% for Keppel Corp and Sembcorp Marine) will be motivated to increase investments in solutions to increase productivity.
Though there may be increased costs in the short run, it is unlikely to have a negative impact on stocks as:
1) the reduction in DRCs will take place in two stages – by Jan 2016 and Jan 2018, giving companies time to prepare for the changes,
2) this is a well-flagged issue and yards such as Keppel Corporation and Sembcorp Marine have already embarked on productivity initiatives; regional yards are also being upgraded so that more work can be outsourced to them, and
3) the bulk of the construction costs of a rig or high-end vessel (which local yards produce) comprise equipment and material costs rather than labour costs. As for ASL Marine, most of the labour intensive work is done in its Batam shipyard. Meanwhile, we note that the increase in levies would be only for unskilled workers – firms that employed skilled workers would not be affected.
(2) Healthcare Sector: A key focus once again
Similar to Budget 2012, the Singapore government pledged its commitment to make healthcare more affordable for Singaporeans for its Budget 2013. While the main focus would remain on the lower income group and elderly, the government also stated that it would ensure that the needs of the middle-income group are met.
One of the more significant impacts to the private healthcare sector is the government’s target to lower the out-of-pocket medical expenses of Singaporeans. We believe that this could incentivise patients to take-up more private healthcare services, given the long waiting times at public healthcare institutions. Raffles Medical Group [HOLD; FV: S$3.01] would be a key beneficiary, in our view.
The ongoing structural change in demographics towards an aging population, rising affluence and increasing burden on the public healthcare sector would likely underpin the growth momentum of the private healthcare sector. We are maintaining our OVERWEIGHT rating on the healthcare sector.
(3) Singapore Residential Property: More onerous property taxes for high-end
Finance Minister Tharman announced, in the 2013 Singapore Budget yesterday, that a more progressive property tax would be implemented from 1 Jan 2014 onwards. The new progressive tax rate will be as high as 15% for the component of annual value (AV) in excess of S$130k for owner-occupied residential properties, and 19% for AV over S$90k for non-owner-occupied properties. We see these new rules having the heaviest impact on high-end property; to illustrate, property taxes for a owner-occupied property with an annual value of S$150k will increase 69% to S$12.6k, and taxes for an identical non-owner-occupied property will increase 60% to S$24.0k. In light of the new tax regime, we believe the high-end segment, already impacted by previous rounds of property cooling measures, would now appear even less attractive (although new property tax increase as a percentage of property value is still relatively insignificant). In addition, we also see the new tax rates affecting the holding costs of investment companies with high-end residential assets portfolios, which could consequently put pressure on capital values. Maintain NEUTRAL on the Singapore residential sector. Our top picks are CapitaLand [BUY, FV: S$4.29] and CapitaMalls Asia [BUY, FV: S$2.55].
(4) Transport Sector: Likely fare adjustments ahead
For public transportation measures, nothing unexpected was cited during the Budget Speech. As with previous reiterations by the Transport Minister, DPM Tharman acknowledged that much improvement was needed in the public transportation space, and highlighted ongoing plans to help mitigate the commuter crunch i.e. the Bus Service Enhancement Programme and addition of new rail lines (e.g. Thomson line and Eastern Regional Line).
In addition, he added that beyond this one-off assistance for the Public Transport Operators by the government, sustainability of bus operations would have to “rest on improvements in efficiency and a sustainable system of fare revenues”. This is in line with our view that fare increases will be announced shortly, and that an agreed upon and enforceable fare formula will be put in place for the future.
Staying the course on economic restructuring. Like Budget 2012, the issue of foreign workers and productivity kicked off the Budget Speech. Key measures and announcements aimed to induce businesses to raise productivity and upgrade skills, thus generate better quality jobs and raise income, and include:
+ Reducing further dependence on foreign labour e.g. across-theboard hike in foreign workers levies in July 2014 and July 2015, with biggest increase for sectors with weak productivity and significant rise in foreign workers; restrict employment of foreign labour in sectors like services (e..g retail, restaurants) and marine via lower dependency ratio ceilings; raise the qualifying salary for S Pass holders from SGD2,000 to SGD2,200 per month; tighten eligibility requirements for the Employment Pass workforce.
+ Incentives to boost productivity such as a SGD51m programme to link up SMEs with public sector research institutions and private sector technology providers to identify productivity solutions; as well as a SGD60m Land Productivity Grants for companies that move some operations offshore while keeping core functions in Singapore, thereby saving land for other uses.
Targeted redistribution measures. Essentially, the tax measures, government spending and benefits here are tilted in favour towards the low-income groups, as well as making the tax structure more progressive.
+ Increases in healthcare spending, especially to meet the need of the elderly e.g. more money for health promotion and preventive care; raising monthly cash assistance for lower-income households; Medifund to be topped up by SGD1b to SGD4b; ElderCare Fund to increase by SGD250m to SGD3b; expand the existing Senior's Mobility Fund into a Senior's Mobility and Enabling Fund which will cover a much wider range of assistive devices, such as hearing aids, shower chairs and motorised wheelchairs, plus topping up the fund from the current SGD10m to SGD50m.
+ Expand the coverage of – and enhance – the Workfare Income Supplement (WIS) programme to lower-wage workers earning up to SGD1,900 a month versus SGD1,700 previously. Workfare payouts will also be increased across the board, with the maximum amount to be increased from SGD2,800 to SGD3,500. In addition, 40% of the payouts will be in cash instead of 29% currently, with the balance into the workers’ Central Provident Fund accounts.
+ Help for government pensioners who draw lower pensions. The Government will increase the Singapore Allowance and monthly pension ceiling by SGD20 a month to SGD280 and SGD1,210 respectively.
+ Raises the registration fees of mid-range and luxury cars, and retains and restructure property tax as means to tax the wealthy. On the property tax, the tax rates are set to rise to between 12% and 20% from 10% currently for high-end residential real estate – with the largest increase on investment properties that are not owner-occupied by, while it will fall for the majority of owneroccupied residential properties. The new property tax structure will be phased in from January 2014 and take full effect from January 2015.
Assist people and businesses to deal with rising living cost and business cost. Key measures include:
- Personal income tax rebates to all taxpayers on 2012 income, capped at SGD1,500 i.e. 30% for those below 60 years and 50% for those at 60 years and above as at 31 Dec 2012.
- Additional Goods and Services Tax (GST) voucher for lowincome and middle-income families, in addition to the permanent GST voucher scheme which was introduced last year. This will double the amount that eligible households receive to SGD740 for regular households and SGD1,240 for retiree households.
- Rebates on service and conservancy charges for all HDB households. Households living in one- to two-room flats will get a three-month rebate, while those in three- to four-room flats will get two months. Those living in five-room flats will get a 1.5 month rebate while those in executive flats will get a month's rebate.
- Concession on domestic worker levy for families with young children, elderly dependent and person with disabilities. The levy will be reduced from SGD170 to SGD120 a month for those who are eligible.
- 3-year transition support package to help companies adjust to the labour force restructuring and higher business costs. The package, include wage credit scheme where the government will fund 40% of total wage increases for Singaporeans for three years; corporate tax rebate of 30% of tax payable up to SGD$30,000 per year for three years from year Assessment (YA) 2013 to YA 2015; and productivity incentives.
- 1-year 30% road tax rebates for goods vehicles, buses and taxis effective July 2013.
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