Fundamentals strong but Singapore banks, companies and households need to guard against headwinds: MAS

SINGAPORE (Nov 22): Risks to global financial stability have heightened amid tighter financial conditions and rising global trade tensions, warns the Monetary Authority of Singapore, the republic's de facto central bank.

This is because rising interest rates and pressure on currencies could weaken debt servicing abilities of countries, companies and households, in particular those who have borrowed in foreign currencies, says MAS in its Financial Stability Review for November which was released on Friday.

And while the profitability and debt profiles of Singapore companies remain sound so far, MAS says firms should remain cautious of potential external headwinds.

Over the past year, firms in the trade-related sectors benefitted from the uplift in the global economy but those in domestic-oriented sectors saw a more uneven performance.

The recent round of property measures has also moderated aggressive land bids. This should offer long-term stability for the property sector and encourage prudence among property firms, says MAS.

In addition, stress tests conducted by MAS showed that most companies are able to withstand the interest rate and earnings shocks.

Still, firms should remain cautious of the headwinds, as an expected tightening of financial conditions and escalation in trade tensions could weigh on corporate profitability and debt servicing ability, warns MAS.

Meanwhile, Singapore’s domestic banking system remains resilient with strong capital and liquidity buffers.

Over the past year, loan growth remained healthy despite higher macro uncertainty. Overall asset quality has improved and weaker segments, particularly the Transport, Storage and Communications sector (TSC), have also seen declines in Non-Performing Loan (NPL) ratios.

Local banking groups also have strong capital and liquidity positions, well above MAS’s regulatory requirements.

But while banks continue to hold surplus liquid assets, an abrupt tightening of global financial conditions could accentuate foreign currency liquidity risks, says MAS.

In particular, they should actively monitor their foreign currency liquidity risks as they continue to expand their cross-border lending activities.

As for Singapore households, leverage indicators remains stable although this could deteriorate quickly if housing loans rise unsustainably, says MAS.

While household debt growth remains in line with income growth over the past year, housing loans have increased in tandem with the pick-up in property demand.

“The recent property market cooling measures have moderated the pace of price increases and transaction activity, which will contribute to stronger household balance sheets over the medium term,” says MAS.

But with rental yields expected to remain weak, MAS says households should exercise prudence when considering taking up loans to fund property purchases.

“Overall, households should continue to be cognisant over their ability to service their debt, given headwinds of rising interest rates.”