Singapore vulnerable to multidimensional risks posed by Europe Crisis

Find out the many ways on how troubles in the West could affect Singapore and other countries in Asia Pacific as Standard and Poor’s reports.

According to Standard & Poor's, it currently sees limited immediate impact on Asia-Pacific banks from their exposure to the eurozone, but a further slowdown in the global economy and the potential negative impact on local economies could be a key risk factor.

Among Asia-Pacific banks, banks in Australia, New Zealand, Korea, Singapore, and Hong Kong are more exposed to global market volatility. Banks in China, Japan, and Taiwan will be hurt by a slowdown in export, it says.

The euro debt crisis could affect the Asia-Pacific banking industry in the following ways, says Standard %& Poor’s:

• Losses arising from exposure to European sovereigns and private sectors could negatively affect Asia-Pacific banks' profitability and capitalization.
• A slowdown in exports to Europe could result in lower economic growth in Asia-Pacific, and potentially lead to weaker asset quality and higher credit costs.
• Lower economic growth would be likely to impede credit growth and fee-based activities for Asia-Pacific banks, which in turn would lead to weaker profitability.
• European banks' consolidation of assets could increase pressure on financing conditions for banks, corporations, and sovereigns in the Asia-Pacific region.
• A disruption in the global financial market and risk aversion among investors could negatively affect Asia-Pacific banks that rely heavily on wholesale funding markets.
• Dislocation of the global financial market will indirectly affect banks' performance due to increased volatility in real estate and other types of assets.

Standard & Poor’s however notes that even if the debt crisis forces European banks to cut their foreign exposures, any reduction would be manageable, in its view. This is because European banks hold limited market positions and there has been a slowdown in loan demand in the Asia-Pacific region.

Here’s more from Standard & Poor’s

Given the sound financial profiles of Asia-Pacific banks, Standard & Poor’s Ratings Services currently considers most of the rated banks in the region capable of withstanding pressures from the euro debt crisis at their current rating levels. However, in the case of a more pronounced global economic slowdown, there could be increasing pressure on the banking sectors of some Asia-Pacific countries.

Under our base-case scenario, we assume the global economy will avoid a severe recession; the Economic and Monetary Union will grow at an anemic 0.4% in 2012 and enter a mild recession; the U.S. economy will escape a recession; and China will manage to secure a soft landing with about 7.7%-8.0% growth in 2012 (see “Growing Global Risks Eclipse Asia-Pacific Economic Growth In 2012,” published Dec. 16, 2011). However, if the eurozone’s debt woes lead to a more severe global financial, it could prompt us to lower our assessments of the banks, including those for their risk positions and capital and earnings.

“Considering the export-oriented structure of the Asia-Pacific region, a more pronounced global economic slowdown could have a larger impact on the region’s overall economy and the credit profile of the Asia-Pacific banking industry,” said Standard & Poor’s credit analyst Naoko Nemoto. “Under this scenario, which differs from our base-case scenario, we would consider negative rating actions on the banking sectors of relevant Asia-Pacific countries.”

Standard & Poor’s may also consider negative rating actions if stresses in the eurozone cause a market dislocation and result in funding difficulties for Asia-Pacific banks, for instance, by a pronounced withdrawal of European banks from the region, Ms. Nemoto said. If confidence in global financial market weakens and European banks reduce their assets in the region, that could increase pressure on Asia-Pacific banks’ asset quality and funding.