Update: Moody's sees Singapore's 2016 GDP growth at the lower end of official estimates

SINGAPORE'S gross domestic product (GDP) growth for 2016 should average 1.6 per cent, after expanding by 2.0 per cent in 2015, Moody's Investors Service said on Wednesday.

The credit rating agency said that its forecast is at the lower end of the Singapore government's estimated growth range of 1.0-3.0 per cent.

"Growth is expected to be significantly slower than it was between 2000 and 2010, when it averaged 6.2 per cent annually. A slowdown in external demand will remain the key drag. Industries with high exposure to global conditions, such as engineering - including marine and offshore engineering - and oil and gas, will be most affected," Moody's said.

It said that trade-dependent Singapore is especially vulnerable to the current lacklustre global trade conditions.

"In particular, Singapore's close trade and financial linkages with China (Aa3 negative), imply that the slowdown in China presents significant challenges for Singapore, particularly given the island state's role as an international financial centre in the Asia-Pacific region."

It noted that China's transition towards a services and consumption-focused economy with a more market-driven and internationally-open financial sector is already underway.

"Our baseline assessment is that the change will be gradual. However, reducing overcapacity in traditional industrial sectors and opening the capital account both involve economic and financial risks that will have spillover effects for the region," Moody's said.

The most direct impact for Singapore will be through trade flows. In 2014, China was Singapore's largest trading partner, with bilateral trade in goods at S$121.5 billion, while Singapore is China's third-largest trading partner in Asean. At the end of 2015, China's share in Singapore's total non-oil domestic exports was 14.8 per cent. In 2015, non-oil domestic exports from Singapore to China fell by 6.4 per cent. This fall extended into a 14.6 per cent decline in the first quarter of 2016.

Moody's said that a rebalancing Chinese economy has meant shifts in trade flows and in regional supply chains. In addition to direct bilateral trade, there may be second-round effects as lower import demand from China has a knock-on effect on other countries in the region.

"Lower value-added or labour intensive production is being off-shored, while China is increasingly producing intermediate items that many Asean economies previously specialised in. This will have implications for the composition of trade flows and sectoral composition within the Singapore economy itself, particularly as far as the nature of manufacturing and service-sector production is concerned."

Apart from the implication for trade, increased financial stress in China's corporate sector - in particular SOEs (state-owned enterprises) - could result in a deterioration in the asset quality for banks in Hong Kong and Singapore due to exposure to mainland China through their lending portfolios. It noted non-bank lending to China has fallen over the past year, alongside a decline in trade finance.

"Given the small share of Chinese foreign direct investment (FDI) in Singapore's total FDI (a little over one per cent), we do not expect a significant direct impact through this channel," Moody's said.

"However, portfolio flows may be affected, as heightened volatility in China's financial markets could spill over globally, and in particular to Hong Kong and Singapore as major international financial hubs. Such contagion occurred last summer and in early 2016 when China's asset prices declined markedly," it added.

Moody's also said that the Singapore government's goal to achieve productivity growth of 2.0 per cent to 3.0 per cent per year until 2019, looked increasing challenging.

"Apart from the pro-cyclicality to global cycles, the chief drag stems from domestic productivity growth, that has typically been outpaced by growth in externally-oriented sectors. Moreover, an increasing number of workers have been entering the domestically-oriented sectors, such as construction and food and beverage services, which are less productive than other sectors."