Singapore Warns of Europe Default Risk as Economy Grows 10%

Singapore’s government said the risk of a “disorderly” debt default in Europe can’t be ruled out, clouding the outlook for its economy even as growth rebounded last quarter.

Gross domestic product rose an annualized 10 percent in the three months through March 31 from the previous quarter, more than an initial estimate of 9.9 percent growth, the Trade Ministry said today. The median of 14 estimates in a Bloomberg News survey was for a 10.6 percent gain.

Greece’s inability to form a new government after an inconclusive election could reverse progress made in resolving Europe’s debt turmoil, compounding risks stemming from a China growth slowdown and an uneven U.S. recovery. While Singapore tightened policy in April through faster currency gains to curb persistent price pressures, most Asian policy makers are holding or cutting interest rates to bolster their economies.

“The developments in Europe pose a significant downside risk to Singapore’s economy,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “It’s hard for Asia to escape the repercussions if there’s a European recession and it’s accompanied by financial market instability and a banking crisis,” he said, adding Singapore’s growth outlook beyond the second quarter “is very poor.”

The Singapore dollar rose 0.3 percent to S$1.2651 against its U.S. counterpart at 9:39 a.m. local time today. It is the region’s best performer this year, gaining about 2.5 percent.

‘Downside Risks’

Japan’s economy expanded faster than economists predicted in the first quarter, propelled by reconstruction spending, a report showed today. GDP rose an annualized 4.1 percent.

Singapore maintained its forecast for GDP growth of 1 percent to 3 percent this year. The island’s exports rose 8.3 percent in April, beating the median estimate of economists, as manufacturers shipped more petrochemicals and sales to China rebounded, a separate report showed.

“Singapore’s growth momentum has picked up, anchored by a strong upturn in the manufacturing sector,” the Trade Ministry said. “Nevertheless, the recovery in the global economy remains fragile and vulnerable to downside risks.”

A “disorderly sovereign debt default in the Eurozone” that would hurt the global economy and Singapore’s export- dependent industries cannot be ruled out, the ministry said.

Ripple Effects

A Greek caretaker government will prepare new elections, probably on June 17, that may decide whether the country should remain a euro member. World Bank President Robert Zoellick said yesterday that a Greek exit from the euro could have ripple effects reminiscent of 2008, when Lehman Brothers Holdings Inc.’s collapse was followed by a global financial crisis.

The consequences of a Greek euro exit would be “unimaginable” and “catastrophic” for Europe, Malaysia’s central bank Governor Zeti Akhtar Aziz said in an interview with Bloomberg Television aired today. Several U.S. Federal Reserve policy makers said a loss of momentum in growth or increased risks to their economic outlook could warrant additional action to keep the recovery going, minutes of their April meeting released yesterday showed.

Singapore’s central bank, which uses the exchange rate to manage inflation, said last month it will increase “slightly” the slope of the currency trading band, and raised its forecast for consumer-price gains to 3.5 percent to 4.5 percent in 2012. Minister for Trade and Industry Lim Hng Kiang said this week inflation is estimated to remain at about 5 percent in the next few months.

The Monetary Authority of Singapore guides the local dollar against a basket of currencies within an undisclosed band. It adjusts the pace of appreciation or depreciation by changing the slope, width and center of the band.

Price Pressures

The central bank also restored a narrower policy band for the currency last month, a move that Deputy Managing Director Ong Chong Tee told reporters today was appropriate as inflation will peak or slow for the rest of the year.

Higher oil costs, rising housing rents, more expensive private transportation and unemployment near a three-year low have sustained price pressures in the city state. Economic expansion has also been supported by rising tourist arrivals and construction demand.

GDP increased 1.6 percent from a year earlier last quarter, after rising 3.6 percent the previous three months. The expansion matched an April government estimate and compared with the median forecast of a 1.8 percent gain in a Bloomberg survey. The economy contracted 2.5 percent in the fourth quarter from the previous period.

Vulnerable to Fluctuations

“While it all appears good and rosy, downside risks in the global environment have once again re-emerged,” Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore, said before the report. “A pullback in Singapore’s GDP growth in the second quarter should not be a surprise.”

Singapore, located at the southern end of the 600-mile (965-kilometer) Malacca Strait and home to one of the world’s busiest container ports, has remained vulnerable to fluctuations in overseas demand for manufactured goods even as the government boosts the financial services and tourism industries to reduce reliance on exports.

Weaker European demand is particularly troubling for countries including Singapore, Thailand and South Korea, where overseas sales make up the equivalent of half or more of gross domestic product. China’s exports rose less than estimated in April, while Philippine and Malaysian shipments unexpectedly fell in March, reports earlier this month showed.

Singapore’s manufacturing fell 1 percent from a year earlier last quarter, after climbing 9.2 percent in the three months ended Dec. 31, the Trade Ministry said today. The services industry grew 2.2 percent, while construction expanded 7.7 percent.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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