Tuesday, March 25, 2008

Moderate impact on Singapore economy

THE steep losses in the Singapore share market may mirror the plunges on Wall Street, but economists believe the impact on the financial sector and the wider economy here will be considerably more moderate. (by Bryan Lee, ST 23 March 2008)

They believe the local financial sector is cashed up while the mega building projects that started last year will keep the economy going for the next few years.

'Singapore is entering this crisis in as good a position as it can hope for,' said Deutsche Bank economist Sanjeev Sanyal.

'There is very strong demand created from big investment projects, such as the integrated resorts, the Marina Bay business district and the Formula One circuit.'

All of these projects, he said, are unlikely to be derailed in any circumstance and will be key growth drivers for the local economy in the next few years.

Mr Sanyal added that the financial sector here is also well-regulated and well-capitalised: 'If something nasty happens, Singapore banks are liquid and under-leveraged.'

He noted that local banks were among the few survivors from the 1997 Asian crisis.

'Now that this is a far more distant hit, Singapore banks are not in any particular danger,' he added.

The relatively conservative investment policies of the three local banks have meant limited exposure to toxic sub-prime instruments.

This prudence has also left the local lenders with strong balance sheets - they are cash rich, with robust capital reserves and a moderate dependence on leverage for their operations.

The Monetary Authority of Singapore said last Monday, after the fall of US investment bank Bear Stearns, that most players here have not experienced problems arising from the ongoing turmoil.

Still, as a key financial centre, the local industry is closely linked to its American and European counterparts.

Citigroup economist Chua Hak Bin said that in a worst-case scenario where big global banks fail, they will pull back their operations here. Many of them have a significant presence here and are key players in the local industry.

More vulnerable is the manufacturing sector, which is driven largely by external demand.

'If the US enters into a deeper and longer slowdown, the second half of 2008 will be more dicey for exporters,' said CIMB-GK economist Song Seng Wun.

Consumers here may also pull back on spending as sentiment will degenerate in the face of a protracted US recession, he said.

'It's all an issue of confidence. Consumer confidence here is still robust but we are starting to see some softening in the property market. This could become more significant if the crisis drags on.'

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