(MENAFN- Arab Times) Singapore's economy is one of the most open and competitive markets in the world. According to the 2011 World Bank Ease of Doing Business Index, Singapore is ranked first in the world for doing business.
Its economy is based on an export-led growth model; thus, a slowdown in exports can have serious repercussions on the country's domestic economy. Exports in Singapore have been on a downward trend for the past two years, mainly due to the slowdown in economic activity of its biggest trading partners: the US and Europe.
Singapore exports shrank more than expected in August, highlighting fears that a slowing Chinese economy and lackluster European demand will remain a drag on Asian economies. Singapore's oil and non-oil exports have both been falling; in fact, non-oil domestic exports fell by 11 per cent in August compared with the same month last year, reversing the 5.7 per cent increase in July.
The dominant drag on non-oil exports still remains to be the electronics sector. Electronic goods make up 60% of total non-oil exports because they are strongly sensitive to changes in demand, it comes as no surprise that it is one of the first sectors to get hit when global demand slows down and is an indicator of upcoming weakness in the world's economy. This is followed by sluggish trade data from China, South Korea and Taiwan.
What does the indicator tell us?
The trade balance is the difference in value between a country's total exports and imports, sparking fears that even the more robust regions of the global economy are not immune from the slump in Western countries. When a country is in a trade surplus, then it is a net exporter: its exports are outweighing its imports in value.
For over a decade Singapore has been a net exporter of goods, thanks to its strategic geographical location. Its economy is highly dependent on the 'Asian model' of export-led growth, a model that was born in Japan.
Asian economies, particularly Asia's four 'tiger economies' (Singapore, Hong Kong, Taiwan and South Korea) were inspired by Japan's economic lead after the second world war, and after implementing the model back in the 1960s, saw their economies boom, per capita income grow and poverty levels fall.
Over the past decade, tiger economies' exports as a share of GDP grew from 68% to 98%. But becoming such a highly export dependent economy does not come without its consequences: the on-going global economic slowdown is having serious impacts on Singapore's economy. The fall in export demand is dragging the country's GDP growth to dangerously low levels, a -0.7% negative growth rate in August compared to the same month last year.
What are the economic and financial implications?
Singapore's trade balance can act as a barometer for global economic activity and more specifically, other Asian economies which have largely been seen as a buffer for the world economy given the slump in the West. With even Asian economies floundering, it has increased uncertainty and lowered business and consumer confidence, the repercussions of which are affecting the world economy.
This places further pressure on the Monetary Authority of Singapore to easy policy next month. Traditionally, it has used its exchange rate rather than interest rates as its policy tool for the trade-reliant economy.
Singapore's inflation rates fell in August and are at 3.6 percent which would be the lowest since October 2010, when year-on-year inflation was 3.5 percent. This could further push Singapore to relax its bias toward steady appreciation of the Singapore dollar at its meeting next month, thereby making its exports attractive and could possibly fuel global demand.
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