By John O'Callaghan
SINGAPORE, Jan 27 (Reuters) - It was just one seat in parliament but the loss of a by-election this weekend will force Singapore's long-ruling People's Action Party (PAP) to take a hard look at how it balances investor and voter needs in one of the world's biggest financial centres.
With anger rising in the wealthy Asian city-state over soaring living costs, reliance on foreign workers and a widening income gap, the opposition Workers' Party took the PAP-held seat in the Punggol East ward by a convincing margin of nearly 11 percent in Saturday's poll.
The PAP, which has dominated politics since 1959, will keep its grip in parliament with 80 of 87 elected seats and is not likely to be supplanted at the helm of the island of 5.3 million people in the near future.
But the rise of the Workers' Party from a fragmented opposition and its seven seats in parliament point to eroding support for the PAP before the 2016 general election and the need to halt a decline in popularity that began in earnest two years ago.
"Investors will see that Singapore is no longer just free or independent of politics," said Chua Hak Bin, an economist at Bank of America Merrill Lynch. "There is more probability in the future that the PAP will not be the one single dominant party and there will be more political constraints on policy-making."
The government will have to stay the course it has embarked on, he said, because taking even more aggressive steps to cool the property market and further restrict foreign workers would risk suffocating growth and raising business costs.
Saturday was a "tipping point," wrote Chua Mui Hoong, opinion editor of the state-linked Straits Times newspaper, as a PAP barrage of nationwide social spending announced just before the by-election seemed to have little impact on voters in the relatively young and middle-class ward.
"Future elections will be full of people who think and vote like those at Punggol East."
The seat, won by the PAP in 2011 with 54 percent of the vote, became vacant when the speaker of parliament quit in December over an extramarital affair.
Prime Minister Lee Hsien Loong, the elder son of Singapore's founding leader Lee Kuan Yew, said he respected the choice of voters but sought to play down the impact.
"In a by-election, the governing party candidate always has a tougher fight. Voters see it as choosing an MP, not choosing a government," he said in a statement. "Our plans and programmes are already in progress. But they are geared towards the longer term, and will take time to show results."
Lee Kuan Yew led the transformation of the British outpost into a major financial hub and one of Asia's richest countries in just over a generation with a pro-business fervour, a pervasive role in the lives of citizens and an intolerance of dissent.
In a "social compact" with Singaporeans, the PAP built up the nation by focusing on economic growth, self-reliance, housing for all, good education and healthcare, clean government and strict laws to ensure public safety.
That social compact is now under serious strain as economic and social pressures challenge the PAP's technocratic approach and its impatience with critics.
The extent of public antipathy became apparent in the 2011 national election, when the PAP suffered its worst result since independence in 1965 by winning just 60 percent of the vote.
Things have not improved since as the PAP's man for the largely ceremonial role of president just squeaked through in a four-way race in 2011 and the ruling party failed to capitalise in a by-election last year, when the Workers' Party held its seat in the Hougang ward despite a sex scandal of its own.
Clearly concerned, the government has broken from the past in talking openly about the issues and taken steps to cool property prices, restrict the number of lower-skilled foreign workers and enhance social protections.
After months of public dialogue, new population and immigration policies are due soon that will have profound implications as the workforce ages and the government envisions Singapore as a global city with at least 20 percent more people.
"They'll hope that by the time of the next elections, the concerns that are in the minds of voters such as congestion, housing and stagnant wages will abate," said Chua, the economist.
But some bloggers said Saturday's election illustrated why the government needs to do some radical alterations.
"It is an unmitigated disaster that will tell the PAP that it has to change, not tweak itself," wrote Calvin Cheng, a former nominated member of parliament. "Everything that used to work is now not working."
For Belmont Lay, editor of the New Nation online magazine, it was the human touch that helped the Workers' Party candidate, a woman who works as a sales trainer and lives in public housing, defeat the PAP's contender - "a colorectal surgeon with so many credentials and too much ministerial calibre".
"What the PAP should recognise by now is the electorate no longer wants superhumans who can save them from themselves," Lay wrote. "They want someone they can relate to. Someone who is motherly, caring and soft." (Additional reporting by Kevin Lim and Saeed Azhar; Editing by Raju Gopalakrishnan)