SINGAPORE: While Singapore’s households, businesses and financial sector remain resilient to shocks in the financial system, they should stay vigilant in the face of more challenging conditions, the Monetary Authority of Singapore (MAS) said on Friday (Nov 25).
Companies’ financials strengthened during the recovery from the COVID-19 pandemic, while households were supported by continued robust employment gains and strong wage growth, MAS said in its annual financial stability review.
But Singapore’s central bank pointed to a “trifecta of risks” of weaker growth, higher inflation and tighter financing conditions.
The Government has projected the Singapore economy to grow between 0.5 per cent and 2.5 per cent next year, slower than the 3.5 per cent growth expected this year.
At the same time, inflation is expected to stay elevated given a strong labour market and high imported inflation, while the ongoing tightening in financing conditions has further increased borrowers’ debt servicing burden, said MAS.
In October, MAS tightened monetary policy for the fifth time in a year to help dampen inflation. Latest data showed core inflation eased slightly to 5.1 per cent in October, but is projected to stay elevated in the next few quarters.
Domestic indicators of vulnerability for the corporate, household and financial sectors have edged higher, mostly due to the "unwinding of pandemic-induced precautionary buffers", said MAS.
Calling for heightened vigilance from both companies and households, MAS said households should be prudent, especially when committing to large financial obligations such as mortgage loans.
This is so they can have some cushion against the further tightening of financial conditions that is expected in the coming quarters.
MAS said firms should continue to ensure adequate buffers, including having sufficient liquid assets and efficiently managing the maturity of their debt.
The annual financial stability review presents MAS’ assessment of the resilience of Singapore’s financial system, informed by its analysis of global and domestic risks and vulnerabilities.
As the world exits the COVID-19 pandemic and markets and the economy adjust, MAS said risks to the global financial stability outlook have intensified.
It identified a “worsening growth-inflation nexus”, with growth expected to slow sharply over the next year while inflation is likely to remain significantly above many central banks’ targets.
The ongoing Russia-Ukraine war continues to generate uncertainty in the outlook for commodity prices and supply chains.
“The most immediate risk is a potential dysfunction in core international funding markets and cascading liquidity strains on non-bank financial institutions that could quickly spill over to banks and corporates,” said MAS.
“Tighter financial conditions and highly volatile markets could give rise to liquidity imbalances that central banks and fiscal authorities need to adequately address to avoid precipitating a disorderly liquidation of assets.”
Debt sustainability of vulnerable households and businesses could come under stress, leading to a deterioration in banks’ asset quality, said MAS. It also highlighted that increasing global risk aversion could cause a further pullback of financing for emerging markets.
But banks are in a better position to manage the credit risks and absorb losses than they were during the global financial crisis of 2007 to 2008, it added.
Household vulnerabilities rose moderately over the past year, with more property loans and short-term debt – proxied by credit card borrowing – as discretionary spending picked up with the reopening of Singapore’s economy.
MAS assessed that households have “sufficient positive equity and liquidity” to mitigate downside risks in the event of falling asset values and rising debt servicing costs.
Most households should remain financially resilient even with significant income losses and a "full pass-through of sharp interest rate hikes", while non-performing mortgage loans are expected to remain low.
But there are vulnerable segments among more leveraged households – such as new borrowers with larger outstanding mortgage loans – and lower-income households with higher expenditures relative to income, said MAS.
Tightened credit measures, including the lower total debt servicing ratio (TDSR) and higher credit assessment interest rates, would ensure new borrowers are financially prudent, said the central bank.
It noted that household debt continued to grow, underpinned by a sustained rise in housing loans, but the year-on-year rate slowed as property market cooling measures from last December came into effect.
In the corporate sector, businesses are contending with a more rapid tightening of financing conditions, a sustained rise in input costs, and a sharp slowing in growth, said MAS.
Companies’ vulnerability has increased slightly, partly due to the normalisation of precautionary liquidity balances built up during the pandemic.
MAS said that projected growth outcomes across sectors are likely to remain uneven amid a slowdown.
With the exception of hotels and restaurants and the construction sectors, there was a broad-based recovery in corporate earnings over the past year, but profit margins could decline in the period ahead.
“Nevertheless, the strengthening of firms’ financials over the past year would provide some cushion should risks materialise,” said MAS.
Businesses generally have adequate buffers to mitigate shocks, it added, but highly leveraged firms and smaller firms with weaker cash reserves would be at risk if cost pressures continue while revenue growth slows.
MAS’ report showed that banks’ vulnerability increased over the past year, largely driven by rising leverage vulnerabilities as banks’ balance sheets expanded alongside economic recovery.
Banks in Singapore emerged from the pandemic with strong capital positions and remain resilient to adverse shocks, said MAS.
But credit quality could be affected by the challenging global environment and heightened economic uncertainties, with tightening financial conditions and market volatility potentially leading to liquidity strains.
MAS called on banks to manage their credit risk and strengthen their liquidity profiles to guard against the risk of liquidity imbalances in key financial markets.
The non-bank sector continued to function normally, but financial institutions need to be prepared for further bouts of market volatility, MAS added.
This year’s review included analyses of the impacts that climate change, the crypto-asset ecosystem and digital banks have on financial stability.
On climate change, the central bank said there was still “significant uncertainty” on the timing, frequency and severity of climate-related events and their associated risk.
A climate scenario analysis MAS conducted for key banks and insurers found that over the longer term, physical and transition risks from climate change could have a significant impact on their balance sheets.
On crypto, MAS noted that while recent events highlighted how the failure of a key crypto entity can lead to contagion within the global ecosystem, these have not significantly affected the broader global financial system due to limited links.
“Given the global crypto-asset ecosystem’s potential for rapid growth, its associated vulnerabilities and their implications for global financial stability warrant continued close monitoring and commensurate regulation,” it said.
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Companies’ financials strengthened during the recovery from the COVID-19 pandemic, while households were supported by continued robust employment gains and strong wage growth, MAS said in its annual financial stability review.
But Singapore’s central bank pointed to a “trifecta of risks” of weaker growth, higher inflation and tighter financing conditions.
The Government has projected the Singapore economy to grow between 0.5 per cent and 2.5 per cent next year, slower than the 3.5 per cent growth expected this year.
At the same time, inflation is expected to stay elevated given a strong labour market and high imported inflation, while the ongoing tightening in financing conditions has further increased borrowers’ debt servicing burden, said MAS.
In October, MAS tightened monetary policy for the fifth time in a year to help dampen inflation. Latest data showed core inflation eased slightly to 5.1 per cent in October, but is projected to stay elevated in the next few quarters.
Related:
Domestic indicators of vulnerability for the corporate, household and financial sectors have edged higher, mostly due to the "unwinding of pandemic-induced precautionary buffers", said MAS.
Calling for heightened vigilance from both companies and households, MAS said households should be prudent, especially when committing to large financial obligations such as mortgage loans.
This is so they can have some cushion against the further tightening of financial conditions that is expected in the coming quarters.
MAS said firms should continue to ensure adequate buffers, including having sufficient liquid assets and efficiently managing the maturity of their debt.
GLOBAL RISKS INTENSIFIED
The annual financial stability review presents MAS’ assessment of the resilience of Singapore’s financial system, informed by its analysis of global and domestic risks and vulnerabilities.
As the world exits the COVID-19 pandemic and markets and the economy adjust, MAS said risks to the global financial stability outlook have intensified.
It identified a “worsening growth-inflation nexus”, with growth expected to slow sharply over the next year while inflation is likely to remain significantly above many central banks’ targets.
The ongoing Russia-Ukraine war continues to generate uncertainty in the outlook for commodity prices and supply chains.
“The most immediate risk is a potential dysfunction in core international funding markets and cascading liquidity strains on non-bank financial institutions that could quickly spill over to banks and corporates,” said MAS.
“Tighter financial conditions and highly volatile markets could give rise to liquidity imbalances that central banks and fiscal authorities need to adequately address to avoid precipitating a disorderly liquidation of assets.”
Debt sustainability of vulnerable households and businesses could come under stress, leading to a deterioration in banks’ asset quality, said MAS. It also highlighted that increasing global risk aversion could cause a further pullback of financing for emerging markets.
But banks are in a better position to manage the credit risks and absorb losses than they were during the global financial crisis of 2007 to 2008, it added.
HOUSEHOLDS AND COMPANIES RESILIENT
Household vulnerabilities rose moderately over the past year, with more property loans and short-term debt – proxied by credit card borrowing – as discretionary spending picked up with the reopening of Singapore’s economy.
MAS assessed that households have “sufficient positive equity and liquidity” to mitigate downside risks in the event of falling asset values and rising debt servicing costs.
Most households should remain financially resilient even with significant income losses and a "full pass-through of sharp interest rate hikes", while non-performing mortgage loans are expected to remain low.
Related:
But there are vulnerable segments among more leveraged households – such as new borrowers with larger outstanding mortgage loans – and lower-income households with higher expenditures relative to income, said MAS.
Tightened credit measures, including the lower total debt servicing ratio (TDSR) and higher credit assessment interest rates, would ensure new borrowers are financially prudent, said the central bank.
It noted that household debt continued to grow, underpinned by a sustained rise in housing loans, but the year-on-year rate slowed as property market cooling measures from last December came into effect.
In the corporate sector, businesses are contending with a more rapid tightening of financing conditions, a sustained rise in input costs, and a sharp slowing in growth, said MAS.
Companies’ vulnerability has increased slightly, partly due to the normalisation of precautionary liquidity balances built up during the pandemic.
MAS said that projected growth outcomes across sectors are likely to remain uneven amid a slowdown.
With the exception of hotels and restaurants and the construction sectors, there was a broad-based recovery in corporate earnings over the past year, but profit margins could decline in the period ahead.
“Nevertheless, the strengthening of firms’ financials over the past year would provide some cushion should risks materialise,” said MAS.
Businesses generally have adequate buffers to mitigate shocks, it added, but highly leveraged firms and smaller firms with weaker cash reserves would be at risk if cost pressures continue while revenue growth slows.
Related:
BANKS IN STRONG POSITION
MAS’ report showed that banks’ vulnerability increased over the past year, largely driven by rising leverage vulnerabilities as banks’ balance sheets expanded alongside economic recovery.
Banks in Singapore emerged from the pandemic with strong capital positions and remain resilient to adverse shocks, said MAS.
But credit quality could be affected by the challenging global environment and heightened economic uncertainties, with tightening financial conditions and market volatility potentially leading to liquidity strains.
MAS called on banks to manage their credit risk and strengthen their liquidity profiles to guard against the risk of liquidity imbalances in key financial markets.
The non-bank sector continued to function normally, but financial institutions need to be prepared for further bouts of market volatility, MAS added.
This year’s review included analyses of the impacts that climate change, the crypto-asset ecosystem and digital banks have on financial stability.
Related:
On climate change, the central bank said there was still “significant uncertainty” on the timing, frequency and severity of climate-related events and their associated risk.
A climate scenario analysis MAS conducted for key banks and insurers found that over the longer term, physical and transition risks from climate change could have a significant impact on their balance sheets.
On crypto, MAS noted that while recent events highlighted how the failure of a key crypto entity can lead to contagion within the global ecosystem, these have not significantly affected the broader global financial system due to limited links.
“Given the global crypto-asset ecosystem’s potential for rapid growth, its associated vulnerabilities and their implications for global financial stability warrant continued close monitoring and commensurate regulation,” it said.
Continue reading...