Why Singapore's extreme openness is its Achilles' heel

Will it be hit anytime soon?

According to Barclays, Singapore is unlikely to be immune to any contagion event in Asia, notwithstanding its stronger economic fundamentals relative to its peers – a large current account surplus, huge stock of FX reserves and strong fiscal balance sheet.

However, its extreme openness is also an Achilles’ heel for Singapore, given its extensive trade, investment and financial links with the region, particularly the Asean economies.

Here's more from Barclays:

We see another source of potential vulnerability: the rapid increase in household mortgage debt amid a ‘bubbly’ property market, to which local banks have significant loan exposures. Households and banks’ balance sheets could come under pressure should property prices correct significantly.

The risk of a property market correction in the next two years is rising, as expected higher interest rates look set to coincide with a large increase in housing supply over 2014-15. A macroeconomic shock or a policy miss-step could also trigger a market correction.

All previous property market crashes have coincided with economic recessions. Household consumption and construction-related investment typically contract. A pullback in bank lending also affects broader economic activity.

But there are silver linings. Singapore households are cash-rich, not just asset-rich, and mortgage loan-to-value ratios are reasonable. This savings buffer should allow households to smooth any disruption to consumption. A limited rise in NPLs would also alleviate any negative feedback loop from the financial channel. The government could also unwind some of the nine rounds of property market cooling measures it has rolled out to cushion any disorderly price correction.

Neither an Asia contagion event nor a property market crash in Singapore is our base case. In our central scenario, we expect Singapore’s growth to improve in H2 and into 2014, on the back of a gradually recovering global economy.