Is Singapore Headed For a Recession?
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Is Singapore Headed For a Recession?

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There is uncertainty over whether Singapore’s economy is headed for a recession, and the online debate certainly reflects that. Overall, there seems to be a general consensus that growth prospects in 2016 will be challenging. As the island-state’s largest export destination, China’s slowing economy is set to be a drag on Singapore’s growth prospects. According to several observers, including Swiss billionaire investor Felix Zulauf, Singapore’s deep exposure to the Chinese economy poses untold risks.

Zulauf’s theory is that China is on a cusp of major downturn as monetary excesses from China’s post-2008 fiscal stimulus are corrected and continued capital outflows prompt a major devaluation, by 15 to 20 per cent. As though his prognosis is not ominous enough, he states that “China in today’s cycle is what U.S. housing was during the financial crisis in 2008.” The implication for Singapore is financial collateral damage: Singapore’s three largest banks–DBS, OCBC, and UOB–have significant lending exposure to the Greater China region, which includes Hong Kong. Known for its political stability, fiscal prudence, and stringent regulatory oversight, Singapore has apparently attracted a lot of foreign capital in recent years due to its image as a strong state.

Singapore’s banks in question have been quick to defend against such naysayers. The chief executive of Singapore’s largest bank, DBS, Piyush Gupta, argued that bad loans are contained, since counter-party exposure is restricted to top-tier Chinese banks. In fact, non-performing loans (NPLs) are far from crisis levels. DBS’s NPLs are not expected to go beyond 1.3 percent from its current level of 0.9 percent. Compare this to 2008 levels, when NPLs hit 2.9 per cent (for OCBC, the figures are 0.9 and 1.9 per cent respectively; for UOB, 1.4 and 2 per cent respectively). Greater China NPLs for DBS and OCBC are lower than their respective group NPL ratios. The banks have even stress-tested their oil and gas (O&G) loan portfolio with $20 per barrel price scenarios. DBS has the largest lending exposure to Greater China, excluding Hong Kong, at over 17 percent of gross loans.

This cautiously optimistic view is also shared by financial analysts. Jonathan Koh, an equity analyst at UOB Kay Hian, opines that Zulauf’s observations could not be reconciled with official industry statistic released by the Monetary Authority of Singapore (MAS). “Contrary to Zulauf’s views, our three local banks are well capitalized,” he says.

Meanwhile, Singapore’s Monetary Authority conceded signs of increasing credit risks, such as the uptick in non-performing loans but asserted that overall asset quality remains healthy and that banks have ample capital buffers. DBS chief Gupta ruled out the idea that banks are in a Lehman-like scenario and cited the country’s “strong reserves” and “robust financial system” as assurances.

Given the Republic’s dependence on foreign capital and its vulnerability to capital flight, concerns of a banking meltdown triggered by a possible crisis in China are not unwarranted. Zulauf’s analysis that the Singapore dollar would be under pressure as the yuan devaluates seems correct. Chinese authorities have repeatedly eased exchange rate policy since their one-off devaluation of the yuan in August 2015 to boost export growth took the world by surprise. In response, the Monetary Authority of Singapore had slowed appreciation of the Singapore dollar twice in 2015, amid low inflation and tepid growth.

If history is any guide, proactive counter-cyclical polices helped Singapore weather the 1997 Asian Financial Crisis better than most of its regional neighbors. That Singapore’s financial house was also kept in good regulatory order also played a part in limiting the contagion. The high premium that the government places on financial stability combined with its characteristically well-thought through responses to evolving external conditions will undoubtedly stand the country in good stead to deal with any crisis of foreign origin.

Case in point: the government is actively monitoring the uncertain economic situation and, as of now, official estimates predict between 1.0 to 3.0 percent growth in 2016. Prime Minister Lee Hsien Loong said that the government does not expect a downturn as severe as the 2008 global financial crisis.

The government is set to deliver its annual budget on March 24. The FY2016 budget is expected to contain supply-side strategies, such as skills upgrading to boost productivity, targeted support to SMEs to build their capabilities for internationalization and innovation, as well as measures to cushion the impact of the slowdown on specific sectors and boost consumption.

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