IMF: This is the most important risk for Singapore

Jiewphoto | Moment | Getty Images

A "protracted period of slower growth" in the global economy is the most important short-term risk to Singapore's trade-oriented economy, the International Monetary Fund (IMF) warned on Wednesday.

"As a city state with a very open economy, Singapore is exposed to external volatility and risks," Alex Mourmouras, division chief at the IMF, wrote in a statement after a visit to the wealthy city-state.

"Side effects from global financial conditions, such as a surge in financial volatility and persistent U.S. dollar strength, and a growth slowdown and financial risks in China…have an important impact," he noted.

Becoming a smart city: What makes Singapore different
Becoming a smart city: What makes Singapore different   

These external risks could be exacerbated by elevated indebtedness of the household and corporate sectors since the global financial crisis, Mourmouras added. Singapore's household debt was equivalent to 76.3 percent of gross domestic product (GDP) in the third quarter of 2014, compared with 71.9 percent two years earlier.

IMF expects Singapore's economy to grow 2.5-3.0 percent in 2015, in line with government's own forecast range. The economy's growth pace has been moderating in recent years, expanding 2.9 percent in 2014 after growing 4.4 percent in 2013.

On the domestic front, Singapore also faces hurdles as the country transitions towards a growth model that relies less on low-wage foreign workers, IMF said. This has resulted in a tight employment environment that has put pressure on labor-intensive businesses.

The prospect of higher interest rates could also put further pressure on Singapore's slowing property market. The city's once-exuberant real estate market has been softening over the past year-and-a-half as government measures to stabilize prices took a toll on transaction volumes and prices. With 90 percent of Singaporeans owning at least one property, the health of the property market has far reaching implications for the economy.

Read MoreSingapore tops growth forecast, MAS stands pat

To be sure, while the outlook for the economy is "uncertain", IMF says Singapore undoubtedly has a few things going for it.

Lower energy prices, a less restrictive monetary policy stance and the expansionary budget are expected to fuel a recovery in domestic demand, which could offset the drag a cooling real estate market and rising interest rates, Mourmouras said.

In February, the government unveiled a budget featuring higher retirement benefits, larger infrastructure spending and corporate tax rebates.

Furthermore, strong macroeconomic fundamentals—a very strong external position, adequate level of foreign reserves, large fiscal buffers and strong bank balance sheets—will likely help absorb financial shocks, he said.

Singapore boasts one of the world's largest current account surpluses relative to GDP despite slower growth. It expected to register a current account surplus of 19 percent of GDP in 2015-2016 thanks to a lower oil import bill, according to Scotiabank.