By Marius Zaharia and Anshuman Daga

SINGAPORE (Reuters) – Singapore’s labor shortage is probably the biggest challenge for growth, and the restructuring of the economy towards coping with such pressures will take a considerable amount of time, the central bank’s managing director said on Tuesday.

Speaking at the Foreign Correspondents Association in Singapore, Ravi Menon said the economic growth forecast of 1-2% remained in place, having only recently been cut from 1-3% on concerns over Brexit and weakening global demand.

Ravi Menon, Managing Director of the Monetary Authority of Singapore, attends a conference during the 2016 IIF G20 Conference at the financial district of Pudong in Shanghai, China, February 25, 2016. REUTERS/Aly Song – RTX28I1H

But the trade-reliant economy faced domestic challenges as well, most importantly a labour shortage exacerbated by restrictions on foreign workers introduced in 2011 amid disquiet over immigration.

This means wage growth has raced ahead of productivity. At roughly 43% of gross domestic product, wage costs in Singapore are now at levels which historically had preceded recessions in 1985, 1997 and 2001.

“Probably the biggest challenge facing us is continuing to grow in the face of labor shortages,” Menon said.

Firms were adapting to that with mixed results, he said. Some were investing in technology and in making their business processes more efficient, while others were struggling to cope with high labor costs and low profit margins.

Those businesses “either have to merge or redeploy their resources,” Menon said.

“This is a restructuring process that is still ongoing. The outcome is not certain. It will take a considerable period of time for these adjustments to take place.”

Menon reiterated that the banking system was solid. Its total exposure to the oil and gas sector – including loans, debt and contingent liabilities – is less than 10 percent.

The most recent stress tests, which assumed recession in Singapore, the United States, the European Union and Japan and below 3% growth in China as well as 50% falls in commodity and property prices, showed banks could withstand such conditions and still meet their capital requirements, he said.

While some analysts warn of rising recession risks in Singapore, Menon said it was not clear to him if that was the case. He did not give details on any potential policy moves.

The Monetary Authority of Singapore manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate.

In April, it unexpectedly eased policy by setting the rate of appreciation of the Singapore dollar’s policy band at zero percent.

(Editing by Jacqueline Wong)

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