Economic risk is the likelihood that economic activities, including economic mismanagement would cause drastic changes in a country's business environment that would have a negative impact on revenue and other short term and long term goals of companies. Economic risk could mean both internal and external. Internal factors include monetary stability, the currency exchange system (fixed vs. floating), government expenditure policies and the country's resource base. External economic risks include uncontrollable risks like supply shocks, currency fluctuations, trade deficits, natural disasters and the health of the overall global economy. A Countries adjustment to the impact of external economic shocks would vary from nation to nation.
Monetary stability can be evaluated by a variety of economic statistics. The relative size of government deficits, rate of money supply increase and the outflow of capital are key indicators of economic risk. Huge government deficits and a rapidly growing money supply can lead to runaway inflation and currency devaluation.
Exchange rate volatility can be controlled by hedging anticipated offshore revenues in the foreign exchange market. Capital outflow is the export of savings by a country's citizens due to fears caused by the expectation of currency devaluation. Capital outflow is due to inappropriate economic policies or high political risk and is measured using the country's balance of payments account.
As a small open economy with strong linkages to International Finance markets and the global economy, Singapore has been affected by the global financial turmoil through various channels. The crash in the global financial markets and strains in US dollar funding affected the local stock market and the Asian Dollar market. The slowdown in the real economy would in turn affect Singapore's financial system through a negative feedback loop. Singapore continues to be exposed to the fluctuations in the global financial markets.
Singapore's equity and money markets were affected by the global financial turmoil. The domestic equity market has experienced sharp decline alongside sell-offs in equity markets globally. The STI (Straits Times Index, the index of Singapore stock exchange) has fallen by around 50% since the middle of the year in 2008.
On 30 October 2008, MAS established a swap line with the US Federal Reserve. By doing so MAS joined 13 other major central banks to have such a facility with the US central bank. The swap line was established as a precautionary measure.
The Singapore dollar money market has remained relatively insulated from the global crisis. In a strategic decision before the onset of the credit turmoil, MAS expanded the Standing Facility to include all participating banks of the MAS Electronic Payment System (MEPS+) in July 2008. As a result banks were assured that they would be able to access central bank liquidity if the need arises.
The global financial turmoil has affected the economy. Singapore's GDP growth moderated from 7.7% y-o y in 2007 to 4.5% in 2008.The manufacturing sector was the main reason for negative GDP growth in Q3 2008, due to negative growth in the biomedical and electronics cluster.
