Singapore’s buoyant property market has seemingly triggered slightly higher debt levels amongst households, as compared to pre-pandemic levels.
The republic’s private property has been very hot, with new private home sales in the first 10 months of the year surpassing full-year sales in 2018, 2019 and 2020, data from the Urban Redevelopment Authority reveals.
This follows a “confluence of factors” including a strong upturn in external demand, low interest rates due to accommodative global monetary conditions and a broader recovery from the pandemic.
The cumulative gain in the price of private homes jumped by 8.7% since the start of the pandemic, outpacing the 5.3% growth in Singapore’s gross domestic product (GDP), before adjusting for inflation.
As such, household debt as a percentage of GDP rose to 70% in 3Q2021, from 67.1% a year ago. In absolute terms, household debt rose by 6.8% in the past year.
“Accordingly, household leverage risk has effectively risen compared to pre-Covid levels,” the Monetary Authority of Singapore (MAS) notes in its annual financial stability review released on Dec 6.
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The review - which is conducted annually - assesses the potential risks to Singapore's financial system and its capacity to withstand potential shocks. It measures the risks by using a Financial Vulnerability Index (FVI) for the Republic's banking, corporate and household sectors.
The FVI highlights that households are seen to be more vulnerable to financial risks today than before the pandemic. Over the past year though, their level of vulnerability has remained broadly unchanged since Singaporeans have been taking on less short-term debt such as credit card debt and personal loans.
However, the central bank noted that the pandemic will continue cause considerable uncertainty in the coming year, despite expectations of a growth in Singapore’s economy.
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Estimates from the Ministry of Trade and Industry (MTI) put Singapore’s economic growth at about 7% this year and between 3% and 5% next year. This follows a 5.4% contraction in 2020, or what is considered the republic’s worst recession on record.
However, the resurgence of Covid-19 outbreaks and an increase in cases of the Omicron variant could lead to more safety measures being reimposed. This could potentially disrupt economic activity and the flow of credit, MAS stressed.
Adding to this is another concern: consumer prices in several major economies rising at its fastest pace in decades. Its external-oriented focus makes Singapore vulnerable to such trends.
For instance, the republic’s borrowing rates will edge up if the US Federal Reserve raises its benchmark interest rates to address inflationary concerns.
To this end, the central bank’s advice is for households to “exercise caution in taking on large new commitments [by] paying due regard to their ability to service long-term mortgage obligations” as interest rates are expected to rise gradually.
Highly leveraged households – or households with more debt than equity – should refrain from taking on more debt and try to build up financial buffers where possible to cushion against stresses emanating from a weakening in macroeconomic conditions, MAS added.
Easing company debt
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Unlike households, companies in Singapore saw an in easing in the vulnerability levels from 2020 thanks to an improvement in their earnings.
“Leverage risk has remained broadly stable, as credit extended to the corporate sector as a share of GDP moderated in the second quarter of 2021 alongside improved profitability,” the central bank observes.
“Liquidity and maturity risks have also generally eased over this period, as firms built up cash buffers on the back of the earnings recovery, resulting in improving maturity profiles and debt servicing ability,” it adds.
In this time, companies here were also seen avoiding excessive reliance on foreign currency borrowings.
Even so, companies will now have to contend with uneven growth across the economy.
Sectors less affected by the pandemic - especially manufacturing – will gain further traction, while those that have been more sensitive to the pandemic – such as hospitality and tourism, are expected to be subject to sporadic mobility restrictions, depending on the evolution of the coronavirus.
As such, MAS writes that targeted support for viable firms affected by the resurgence in infections may still be needed, even as broad-based assistance measures are withdrawn to guard against debt sustainable risk in the medium to longer term.
Recovery in bank lending
On an industry level, Singapore’s financial sector was able to withstand the economic drag brought on by the Covid-19 pandemic.
For one, the overall lending by banks saw firm growth on the back of improving demand for credit in Singapore and in the region.
"The banking sector has maintained healthy asset quality alongside strong capital and liquidity buffers, while continuing to support the economy's demand for credit," MAS highlights.
The central bank notes that the non-bank sector has also weathered the stresses from the pandemic. For instance, insurers remain well capitalised while investment funds have been able to meet redemptions.
Data from the MAS shows that the overall resident credit-to-GDP ratio declined from its peak of 192% in 1Q2021 to 183% in 3Q2021, following mainly an expansion in GDP.
In line with this, the 2021 Industry-Wide Stress Test showed that banks would remain resilient if a resurgence in infections due to more virulent mutated virus strains causes the global recovery to stall.
However the regulator points out that credit quality could potentially deteriorate if renewed disruptions to economic activity trigger a rise in business insolvencies and unemployment.
“Banks should maintain sound underwriting standards and actively monitor loans extended to vulnerable firms, especially those in sectors that are still constrained by COVID-19 restrictions, as well as prudent provisioning to mitigate potential credit losses,” MAS suggests.
Emerging vulnerabilities
Aside from concerns to households and companies, MAS noted that climate change and the increased prominence of crypto assets are “emerging vulnerabilities” for financial stability.
“While these risks may be less pronounced at this juncture, they warrant close monitoring and an active assessment of options due to their potential to rapidly develop and materialise into significant financial stability risks,” it says.
Climate change has been gaining much traction globally as more countries look towards a low-carbon economy.
This has brought on discussions on how climate risks could potentially affect financial stability. For example, increasing awareness could trigger “an abrupt re-assessment of physical and transition risks, leading to a sharp increase in risk premia across a wide range of assets that are perceived to be incompatible with a low-carbon economy”, the MAS said.
As for crypto assets, the regulator noted that they are still a small proportion of “overall financial system assets”.
“[They] have not been widely used in critical financial services”, the MAS said, referencing the peak daily trading volume of crypto-assets against the Singapore dollar year-to-date has been less than 1% of the average daily turnover on the Singapore Exchange.
This may soon change amid continued growth in activity and deepening of interconnections between financial institutions set to continue.
“The wealth effect could also be more pronounced if crypto-assets account for a larger share of investor portfolios. In particular, consumption could be subject to considerable shocks arising from the inherent heightened volatility of such assets,” said MAS.
To this end, it acknowledged that close monitoring of the crypto asset market would be increasingly important, going forward.
Cover image: file photo
