Singapore business closures, openings in line with pre-Covid trend: Analysts

The recent growth in business closures in Singapore reflects both ongoing cost pressures and an earlier spike in new businesses during the pandemic, and is not expected to weigh significantly on the economy, analysts told The Business Times.

 

Business cessations rose 2.8 per cent year on year to 24,503 in the first half of 2022, while business formations fell by 5.8 per cent to 31,431. But these figures actually represent a return to the pre-pandemic norm, rather than being cause for alarm.

Sanjay Mathur, chief economist for South-east Asia and India at ANZ, called the year-on-year changes "a very brief spurt", noting: "The absolute numbers for business formation or cessation are not particularly high or low."

Indeed, the year-to-date change in business closures is smaller than the 3.9 per cent increase recorded in the first half of 2019, before the Covid-19 pandemic, while the slowdown in business formation is similar to the 5.9 per cent decrease over the same period.

Meanwhile, the overall number of enterprises – which includes businesses, non-profits, government bodies, and schools – rose from 273,400 in 2019 to 291,600 in 2021, mainly on an increase in small and medium-sized enterprises, according to Department of Statistics figures.

"Technically speaking, Singapore has already recovered from Covid, and we have actually grown beyond pre-Covid levels," said DBS senior economist Irvin Seah. "The net increase (in enterprises) is reflective of that economic recovery."

The recent fall in business formation actually comes after a pandemic-era spike. Figures from the Accounting and Corporate Regulatory Authority (Acra) show a surge in business openings in 2020, mainly in the second half of the year. On a full-year basis, formations jumped by 3.1 per cent to 63,480, up from 61,573 in 2019 and 61,804 in 2018.

Seah suggested the rise in business openings partly reflected "people who lost their jobs thinking of starting their own businesses" .

The trend of pandemic-era openings was not isolated to Singapore. In the United States, applications for new businesses "fell substantially in the early stages of the pandemic but then surged in the second half of 2020", according to a working paper from the National Bureau of Economic Research (NBER). The pace of growth, which continued into mid-2021, was described as "the highest on record".

Meanwhile, industry sectors recording significant growth in new businesses here – especially in late 2020 – included wholesale and retail trade, manufacturing, and food and beverage services.

Business formations in wholesale and retail trade have since slowed down, while firms in industries such as information and communications and finance and insurance services are still on the rise.

Clive Choo, senior lecturer in business at the Nanyang Business School, observed: "The Covid pandemic opened new opportunities in online businesses in 2020, such as sectors that could transact online – retail trade, F&B, logistics management and local last-mile delivery."

That is in line with the US data, which also showed that new businesses were concentrated in industries such as "non-store retail", professional services, trucking, and F&B services.

The patterns "are consistent with the shifts towards remote activity interactions" during the pandemic, such as telework, online retail, and restaurant delivery transactions, University of Maryland economist John Haltiwanger wrote in the NBER report in June 2021. "These patterns suggest that the surge in new applications reflect ongoing restructuring in the economy."

But companies across the board are now likely coming under pressure from rising global costs.

The number of business closures sank to 42,463 in 2020 – down from 47,321 in 2019 and 44,816 in 2018 – but has been on an uptrend since then. Acra earlier reported that cessation data for Aug to Oct 2020 was affected by an extension of the response time for striking-off application notices during Singapore's circuit breaker.

Mathur noted that inflation will constrain new business formation and cause some closures, given a manpower crunch in some industries, as well as pricier rents, labour, and raw materials.

Citing challenges such as supply disruptions and energy and borrowing expenses, Choo said: "Overall, the costs of running a business are increasing faster than increase in revenue, if any. Depleting cash explains the increase in cessations in the first half of 2022."

That's even as watchers were mixed on the types of companies driving the increase in closures.

The online and hybrid businesses that were set up from 2020 onwards "contributed significantly to cessations of pure bricks-and-mortar businesses" that were less competitive, Choo believes.

Taking a different tack, Mathur suggested that the businesses capitalising on Covid-related developments – such as food and grocery delivery – saw demand ease as the economy reopened, and "it would appear that wage growth has shifted business viabilities".

Similarly, Seah told BT: "This is more a normalisation process – people getting back to work and deciding some of the new ventures that they started over the past few years don't make sense."

Whatever the cause, the closures are not expected to weigh down the Singapore economy, which is still tipped to continue its post-pandemic recovery in 2022, despite slowing growth.

Said Seah: "I presume most of these companies are smaller companies, which frankly will not have a significant impact on the overall underlying fundamentals of the economy."

Mathur added that the business openings and closures "on their own do not have significant implications for growth as demand dynamics are favourable" in the broader economy.

Though Choo believes the F&B industry will contribute to closures in the medium term – on factors such as waning government support, more competition, and reliance on offline business – he also sees growth areas for new firms to be set up.

Besides business opportunities relating to digitalisation, "sectors relating to electric vehicles, renewable energy and green buildings will gain traction" as well, he told BT.

 

Source: The Business Times