Eurozone Crisis Is Main Risk for Singapore

The Eurozone crisis is the main risk facing Singapore's economy and financial system, the central bank said Wednesday, warning the city-state to brace for "a more adverse turn of events".

Ravi Menon, managing director of the Monetary Authority of Singapore, said any sharp deterioration in the Eurozone, the city-state's biggest export market, could hurt economic growth and lead to a drying up of bank credit.

"The key risk facing the Singapore economy and financial system is the ongoing crisis in the eurozone," Menon said at a news conference.

"While Eurozone governments have taken important steps to deal with the crisis, we must be prepared for a more adverse turn of events."

Turmoil in the Eurozone continued to cast a shadow across global financial markets Wednesday after Spanish borrowing prices hit a new historic high amid fears that Madrid will soon need a full-blown bailout.

Singapore could see a drying up of bank credit similar to the aftermath of the collapse of U.S. bank Lehman Brothers in 2008 that hammered global markets, Menon said.

"Already, we have seen some retraction in Eurozone banks' trade finance activities in Asia, but local and global banks have stepped in to fill the void," he said.

Singapore, an international financial center, should brace for "excessive inflows as well as outflows" of capital, which could impact on the Singapore dollar, he added.

Financial institutions operating in Singapore have "limited direct exposure to peripheral Europe", Menon said but warned that "if the crisis spreads to core Europe, contagion could be larger".

"Our financial system is sound and we should be able to weather the storm," he added.

Singapore's economy is on track to expand between 1.0 and 3.0 percent this year, down from 4.9 percent growth last year, he said.

However, economic growth could dip below 1.0 percent if the situation in the Eurozone escalates, China's economy slows down drastically and the United States falls into a recession, he added.

Singapore's trade-driven economy, regarded as a bellwether for Asia, contracted by 1.1 percent in the second quarter from the previous three-months due to a slowdown in global demand, the government said earlier this month.

Menon said average growth in the second half is likely to be slower than the first half.