What is the biggest threat to the local economy in 2016?

SMEs are extremely vulnerable.

This is proving to be a tough year for the Singapore economy. Growth has been hindered by lacklustre global demand and internal restructuring woes, and the city-state has churned a series of distinctly uninspiring economic data.

Although global demand is expected to pick up slightly next year, analysts at UBS believe that the biggest threat in Singapore’s horizon remains the US Federal Reserve’s imminent interest rate hike.

“We expect that global trade will return to growth, but that the expansion in the volume and value of trade will remain lacklustre. The improvement in trade growth will provide a modest lift to Singapore's manufacturing and logistics sectors but the higher US rates will be a drag on the financial sector, both the externally focused and domestically focused elements,” said UBS.

UBS expects the US Fed to lift the Fed Funds rate to 1.25-1.50% and 2.25-2.5% by year end 2016 and 2017, respectively. Rising rates will have a knock-on effect on the property sector and, by extension, consumption.

“Consumption, we think, will remain soft as the adverse effects of lower employment growth and higher interest rates (on cash flows plus household net worth) become more of a drag. Both households and SMEs, we believe, are sufficiently leveraged to feel the pinch from higher interest rates,” said UBS.

To support growth, UBS believes that the government will increase policy support, particularly for SMEs. However, the government is not expected to deviate from its goal of boosting productivity and its policy of decreasing the country’s reliance on foreign workers.

“While we do expect the 2016 budget will provide countercyclical support to the economy, we doubt the government will want to prevent the adjustments in the labour market and property market from running their course. A better balanced and affordable property market and a more productive labour force are both key long term policy objectives for the government,” UBS said.