The Singapore economy is expected to slow to a pace that’s “below-trend” in 2023, warns the Monetary Authority of Singapore (MAS) in its Financial Stability Review (FSR) released on Nov 25.
In the next year, the central bank is also anticipating inflation to remain elevated underpinned by a strong labour market and continued pass-through from high imported inflation.
Borrowers may also face a higher debt servicing burden on the back of the tightening in financing conditions, MAS continues.
“This trifecta of risks could be amplified upon interaction with prevailing vulnerabilities, posing liquidity and credit risks to the financial system,” reads the statement.
In its overview, the MAS noted that risks to the global financial stability outlook have intensified, with economies contending with tighter financial conditions, higher inflation and slowing growth.
Further downsides to its outlook include heightened geopolitical tensions and the following impact on supply chain disruptions, as well as economic and financial fragmentation.
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“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,” MAS warns.
“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,” it adds.
As domestic indicators of vulnerability for the corporate, household and financial sectors edged higher this year due to the unwinding of pandemic-induced precautionary buffers, the trifecta of risks could pose liquidity and credit risks to the financial system.
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Corporate vulnerability to shocks were found to have increased in 2022, reflecting the normalisation of precautionary liquidity balances as well as the higher maturity risk of debt.
Household vulnerabilities have also risen slightly as households took on more property loans, leading to a slight risk in leverage risk. Maturity risk also increased during the year in review as households accumulated more short-term debt.
In the past year, overall banking vulnerability also increased due mainly to rising leverage vulnerabilities as the banks’ balance sheets expanded along the recovery in economic activity.
A key source of risk for banks, however, is the vulnerability of corporates and households to adverse shocks as financial strains on households and businesses present credit risks for banks through rising non-performing loans (NPLs). The good news is, Singapore's household sector is assessed to have sufficient positive equity and liquidity to mitigate downside risks should asset values drop and debt servicing costs increase. In MAS's FSR, the central bank says its stress test suggests that most households should remain financially resilient. Non-performing mortgage loans are also expected to remain low.
Within the financial sector itself, the challenging global environment and heightened economic uncertainties could impact credit quality in the quarters ahead.
This is in spite of the financial sector emerging from the Covid-19 crisis in a “strong position”, says MAS. The Singapore banking sector, in particular, benefitted from the recovery in the domestic economy, continuing to maintain strong capital and liquidity buffers during the period.
That said, the tightening financial conditions and market volatility could result in liquidity strains, the central bank warns. As such, banks should continue to manage their credit risk in a prudent manner, MAS adds. They should also strengthen their liquidity profiles to guard against the risk of liquidity imbalances in key financial markets. Financial institutions, too, need to be prepared for further bouts of market volatility even if things seem healthy at present.
In the 3Q2022, the economy’s overall resident credit-to-GDP ratio declined to 169%, down from 179% in the 3Q2021. This was driven primarily by an increase in nominal GDP levels. Accordingly, the resident credit-to-GDP gap remained negative in 3Q2022. MAS says it will maintain the countercyclical capital buffer (CCyB) at 0% for 2023.
