Singapore could fall into a recession if Greece were to exit the euro zone, being the most vulnerable Asian economy, together with Hong Kong, given its close trade and financial links with Europe.
According to Credit Suisse and Standard Chartered, a disorderly Greece exit would lead to contagion across the currency bloc, triggering a recession in the city-state. Standard Chartered forecasts the economy will contract 0.3 percent in 2012 under this scenario.
“(If) the region enters a full-blown crisis, then there is no doubt that Singapore would be amongst the worst impacted of all Asian economies,” Robert Prior-Wandesforde, Director of Asian Economics at Credit Suisse said in a note.
With Singapore’s exports to Europe making up 12.2 percent of the country’s gross domestic product (GDP), Prior-Wandesforde says a “major trade shock” for Singapore would be inevitable. The country’s main shipments to the European bloc, its biggest export market, include electronics and petrochemicals.
By contrast, for neighbors Malaysia and Taiwan, exports to Europe make up just 7.6 and 5.1 percent, respectively, of their GDP.
Economists at Standard Chartered note that not only would exports to Europe be hurt, but a widespread crisis across the single currency bloc would also impact the Singapore’s trade with countries outside Europe.
"Potential contagion via trade is likely to remain high, similar to 2008-09. The indirect impact of weakness in Europe via its effects on the U.S. and China should also be noted,” Tai Hui, Head of Regional Research for Asia at Standard Chartered, said in a report.
In addition to trade shocks, Prior-Wandesforde warns that the economy is also vulnerable to a withdrawal of bank funding by European lenders. Euro zone banks make up over 23 percent of domestic lending in Singapore, the highest among peers in Asia.
Singapore also has among the biggest private sector holdings of European debt and equities in Asia, according to Credit Suisse. These debt holdings however account for just 1.6 percent of GDP, while equity holdings make up almost 1 percent, adds Prior-Wandesforde.
On the bright side, economists say that Singapore has a huge amount of fiscal flexibility to tackle a major growth shock.
“(Singapore) has sizeable fiscal savings, as well as assets parked in its two sovereign wealth funds. Asian governments are already preparing for the worst and could quickly implement fresh stimulus measures,” Hui said.