Friday, November 7, 2008

A dent in Singapore's financial hub dream

A dent in Singapore's financial hub dream PDF Print E-mail
Thursday, 06 November 2008

Megawati Wijaya
Asia Times

When the United States and Europe showed early signs of financial distress last year, Singapore came to the rescue of a handful of big investment banks hit by subprime mortgage problems. But as the financial contagion spreads, the island nation's open economy is emerging at least in the short term as one of the region's biggest losers from the crisis.

Despite the island state's emergence as a regional financial hub and its limited exposure to the toxic securitized financial products which have blown big holes in Western banks' balance sheets, Singapore's economy is in a bad way. That's because its economic growth is still highly reliant on commercial trade, with merchandise exports representing over 220% of gross domestic product (GDP), according to a Credit Suisse research report.

Typically, around 20% of those shipments are destined for US markets, making Singapore's economic growth highly correlated to America's performance, according to the same research. As such, Singapore is already technically in recession, where a slump in exports pushed quarterly growth into negative territory for the second quarter in a row.

Third-quarter gross domestic product (GDP) contracted 6.3% from the previous quarter, a steeper decline than the 5.7% contraction in the previous three months. The Ministry of Trade and Industry revised down its full-year economic growth forecast for the second time this year, recently trimming its projection to "around 3%" from 4% to 5% previously.

Swiss investment bank UBS sees the economy growing at 3.5% this year, but recently revised down sharply its 2009 forecast from 4.8% to 1.5%. Meanwhile, inflation earlier this year reached a 26-year high and consumer prices are on pace to rise between 6% and 7% this year, according to the Monetary Authority of Singapore (MAS). The Straits Times Index also fell to its five-year low of below 1,600 in the last week of October from the comfortable 3,500 in the beginning of the year.

"The direct financial exposure of Singapore financial institutions to the US sub-prime mortgages is relatively small," said Anand Srinivasan, associate professor of finance at the National University of Singapore (NUS) Business School. "However, the indirect impact of a worldwide recession is bound to be large."

Singapore's National Trade Union Congress has (NTUC) warned that retrenchment will rise next year as business continues to deteriorate.

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