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More uncertainty ahead but system is resilient: MAS

SINGAPORE — Global economic conditions are entering a phase of greater uncertainty that will give rise to pockets of risks to the Republic’s financial system, but banks, companies and households here remain resilient to potential shocks, the Monetary Authority of Singapore (MAS) said in its annual Financial Stability Review released today (Nov 27).

The finance industry must guard against rising risks, says MAS. Photo: Daryl Kang/TODAY

The finance industry must guard against rising risks, says MAS. Photo: Daryl Kang/TODAY

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SINGAPORE — Global economic conditions are entering a phase of greater uncertainty that will give rise to pockets of risks to the Republic’s financial system, but banks, companies and households here remain resilient to potential shocks, the Monetary Authority of Singapore (MAS) said in its annual Financial Stability Review released today (Nov 27).

“The overall assessment in this year’s review indicates that Singapore’s banks, corporates, and households are resilient to potential vulnerabilities and shocks. It is important for our financial sector to continue to be vigilant to new or growing risks as highlighted in the report as external headwinds and contagion risks have intensified,” MAS deputy managing director Ong Chong Tee said.

These include divergent monetary policies worldwide, depressed global commodity prices and spillovers from China’s slowdown, which have caused the credit cycle to turn. 

“Uncertainty over United States monetary policy could trigger higher market volatility, while accommodative policies in the eurozone and Japan could fuel search for yield and financial excesses,” the MAS said in its review.

The MAS review found some signs of asset-quality deterioration in Singapore’s banks, with the overall non-performing loan (NPL) ratio rising to 1.5 per cent in the third quarter this year from 1.1 per cent a year ago. In particular, the ratio for the manufacturing sector rose to 4 per cent from 2.5 per cent over the same period.

Economists TODAY spoke to said this is in line with weakness in the manufacturing sector, where output fell for the ninth consecutive month in October. The amount of bad loans from this segment could exacerbate in the face of sluggish global demand.

“It is not a surprise that the size of bad loans has grown. With slower growth, there will be more businesses reflected in bad loans, especially those related to manufacturing and commodities. It is not just in Singapore that we are seeing exports and manufacturing contraction,” said CIMB Private Banking economist Song Seng Wun.

Barclays economist Leong Wai Ho noted that the jump in NPL is “slightly more than expected” but a ratio but 1.5 per cent is still small. In comparison, NPL ratios across Europe’s major banks averaged 5.6 per cent at the end of June, while those of US lenders were a little less than 3 per cent.

Besides the moderation in loan growth, other risks the MAS flagged in the review include the volatility in regional currencies and the weakened debt-servicing ability of firms. 

It noted that corporate earnings have already slowed over the past year amid an uncertain operating environment and the percentage of highly leveraged firms has continued to rise. 

“Such firms would be most susceptible to debt repayment difficulties if interest rates were to increase or if earnings projections were not met,” MAS said, adding that corporates should take steps such as hedging their risks amid the challenging operating environment.

Its stress test showed that the percentage of firms at risk would increase from 23 per cent to 32 per cent of all corporates should interest costs increase 25 per cent and EBITDA (earnings before interest, taxes, depreciation and amortisation) decline 25 per cent. 

However, after taking into account their cash reserves, the proportion would drop to 9 per cent, indicating that the vast majority of companies would be resilient to interest rate and earnings shocks.

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