Eurozone Crisis: The View From Singapore

 

With total trade amounting to three times its GDP, Singapore is one of the world�s more open economies. That makes it a canary in the proverbial coal mine during a global slump. So its warning of an imminent slowdown amid a protracted Eurozone crisis tells you that trouble may be afoot. Singapore�s government predicted last week that growth would slow to 1-3% in 2012, compared to an estimated 5% uptick this year and a dramatic 14.5% post-recession bounce in 2010. Talk about volatility. In its statement, the Ministry of Trade and Industry said its 2012 forecast excludes the downside risk of a �full-blown financial crisis in the developed economies�. So much for the decoupling of Asia from its Western trade partners. Yet it�s also misleading to extrapolate too much from tiny Singapore�s statistics, since it�s not exactly representative of developing Asia. Indonesia and Malaysia recently posted decent 3Q growth, and Thailand�s slowdown is a flood-related supply shock, not a fall in demand. Then there�s China, which rattled markets last week when a monthly manufacturing indicatorfell sharply.

Singapore isn�t only a trade-led bellwether. It�s also a global financial hub that�s brimming with Asia watchers who are plugged into the region�s economic prospects and its downside risks. Of course, by far the biggest risk is a Eurozone crisis that sinks banks in core economies and splinters the currency union. This would have a major impact on Asia�s output, says Rajiv Biswas, Asia-Pacific chief economist for IHS, as such a systemic shock to global markets could overwhelm domestic growth engines in countries like India and China. Singapore-based Biswas puts the chance of a Euro-wipeout at 35%. A more likely scenario, on which IHS has based its latest growth forecasts, is that Europe avoids a meltdown while going into a mild recession. He puts this possibility at 60%. Biswas argues that Europe can still pull through, provided that its rescue fund is properly capitalised and the European Central Bank backstops sovereign lenders. �You could stabilise the markets,� he says. On this basis, IHS predicts stronger growth next year for Asia, up from 4.6% in 2011 to 5.4% in 2012. Japan�s post-quake expansion would offset weaker growth in smaller economies, while a soft landing in China would see growth slowing to 8.1%, down from 9.7%.

As CEO for Southeast Asia at Standard Chartered Bank, Ray Ferguson is acutely aware of the credit risks in the region in the event of a Eurozone meltdown. Compared to the Lehman crash in 2008, Europe�s debt crisis is a �slow burning fire,� he says. Like Biswas, Ferguson think it more likely than not that Europe will pull out of its tailspin, though he declines to put a percentage on either scenario. As an emerging-markets lender, Standard Chartered has virtually no exposure to European sovereign debt (other UK banks are less lucky). But tighter credit in Europe is rippling outwards to trade-oriented markets in Asia, along with a corresponding slowdown in demand, which keeps Ferguson on alert. �It�s more about the outlook for 2012-13 than managing a crisis now in November,� he tells Forbes. �The wheels of commerce are still moving.� He remains bullish on Indonesia as a fast growing economy with underserved consumer credit markets. Standard Chartered has a 44.5% stake in Indonesia�s Bank Permata and advised the Indonesian government on its recent $1 billion Islamic bond issue.

Ironies abound in the reversal of fortune between emerging markets like Indonesia, which was virtually bankrupt just over a decade ago, and Europe�s sovereign borrowers. France�s 10-year bond currently yields 3.7% and is ripe for attack by short sellers. By contrast, Standard Chartered last week sold Indonesia�s 7-year bond with a yield equivalent to 4%, suggesting that the chance of being repaid is only slightly lower than in France, a G7 country. Another irony: Western banks stuffed with default-prone paper were only following the guidelines of their regulators. As Biswas points out, Basel II rules require banks to set aside more risk-weighted capital against wholesale lending to emerging markets like Indonesia. Lending to triple-A rated governments in Europe, however, was judged to be a safer investment and therefore required lower loss reserves. Not surprisingly, bankers responded by buying up sovereign paper issued by countries like Italy and Greece. �Sovereign bonds in the European Union turned out to be the biggest risk of all,� says Biswas.