Why Singapore is not immune to Asia's 'mini crisis'

Its extensive trade links can be dangerous.

According to Barclays, a mini crisis of confidence in the region triggered memories of the 1997-98 Asian crisis. 

Barclays noted that the Singapore economy  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.

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In recent weeks, a mini crisis of confidence has enveloped Asia. A sell-off in the financial markets of high current account deficit economies – India and Indonesia – has rippled through the region, and has particularly affected Malaysia (a shrinking current account surplus) and Thailand (in technical recession).

Despite its relatively stronger economic fundamentals – big current account surplus and improving economic growth – Singapore has not escaped unscathed. Compared to May, the STI is down nearly 10% while the SGD has weakened about 3.5% versus the USD.

The sell-off across Asia has triggered memories of the 1997-98 Asian financial crisis, although the region’s economies are in a stronger position now and there are more safeguards to manage capital outflows.

On external and structural vulnerability standpoints, Singapore looks very strong. First, the current account surplus is very large at 21% of GDP, as at Q2 13, although it has narrowed this year on weaker exports.

Second, the Monetary Authority of Singapore holds USD260bn of FX reserves, equivalent to nearly 100% of GDP, and it has accumulated more than USD85bn of net long positions in its forward book. (The traditional metric of reserves-to-short-term external debt has very little meaning for Singapore, as it is a global financial and business hub.)

Third, the government runs persistent budget surpluses. Its issuance of domestic debt is for the purpose of creating a benchmark yield curve, and it has no external debt.

Fourth, the sovereign has a triple-A rating from the three main credit rating agencies, making it only one of 11 countries with such ratings.

But regardless of fundamentals, Singapore will never be completely immune to a contagion event. One of the economy’s main strengths, its extreme openness, is also its Achilles heel.

Any shock originating from an Asean-4 economy would quickly affect Singapore through its extensive trade, investment and financial links with the region.

Singapore’s exports to Asean-4 make up 28% of its total exports (21% of domestic exports; 36% of re-exports) and 36% of GDP.

In terms of domestic industry exposure, Singapore mostly exports petroleum (28% of total oil exports), chemicals (27%), and machinery (25%) to the region.

Tourists from Asean-4 comprise 34% of visitor arrivals. Singapore’s stock of investment in Asean-4 exceeds USD75bn (21% of its total outward investment). Singapore’s three banks also have about 16% of their total assets in Asean-4 (mostly Malaysia and Indonesia), and 23% of their non-performing assets are in the region.