Here’s why Singapore seems defenseless against China’s contagion

Close economic ties with China are to blame.

As goes the big red dragon, so goes the island nation, as Singapore’s vulnerability to China’s downturn have been exposed due to the city-state’s small open economy, its financial hub status and its close linkages with China.

According to analysts from OCBC, several pain points are emerging, including the SGD hinging on the extreme weak side of the band. OCBC says this is sparking talks of another out-of-cycle policy easing.

Meanwhile, OCBC adds that another pain point is the pressure on the short-term interest rates.

“3M SIBOR has risen to its highest since Nov08, playing catch-up to the 3M SOR,” OCBC said.

OCBC recalls that during the Global Financial Crisis, when China’s GDP growth dropped to 6.2% yoy in 1Q09, Singapore’s growth also fell 8.8% yoy, but the rebound in the subsequent quarters was equally sharp.

“One important caveat is if there will be monetary/fiscal policy measures to mitigate the growth slowdown. As the flash 4Q15 GDP growth data suggests, public construction and services growth helped to offset the manufacturing weakness,” OCBC said.