Global bank failures fan contagion fears, could impact broader economy though S'pore banks are insulated: MAS

SINGAPORE — The outlook over Singapore's financial sector “remains uncertain” as the collapse of Silicon Valley Bank and Credit Suisse last month have fanned fears of a broader contagion in the banking system, the Monetary Authority of Singapore (MAS) said.

“Should latent vulnerabilities in the global financial system emerge in the coming months, consumer and investor confidence could take a further hit, with adverse implications for the broader economy." 

Releasing its bi-annual macroeconomic review on Wednesday (April 26), the authority said that Singapore’s banking system continues to be “well-insulated” from banking stresses.

Last month, it said that the banking system had "insignificant exposures" to failed banks in the United States after Silicon Valley Bank — a popular bank for tech startups in the US — and Signature Bank went insolvent following a bank run.

In its report on Wednesday, MAS maintained its expectations for gross domestic product (GDP) growth in 2023 to be between 0.5 and 2.5 per cent, lower than 2022’s 3.6 per cent GDP growth.

It also maintained its forecast for core inflation — which excludes accommodation and private transport costs — to fall around 2.5 per cent by the end of 2023, and for it to average between 3.5 to 4.5 per cent for the year as a whole. 

Excluding the effects of the one percentage point increase in the Goods and Services Tax that kicked in this year, MAS kept its forecast of core inflation at 2.5 to 3.5 per cent and headline inflation at 4.5 to 5.5 per cent. 

As for the finance industry, it noted that pressures placed on banks in the United States and Europe are likely signalling that the sharp tightening of monetary policy in these countries is affecting certain segments of the economy and financial system, especially the businesses with "balance sheet mismatches".

Unlike previous episodes of interest rate shocks that prompted households and businesses to curb their consumption and investment, the current shock could permeate through the banking sector’s balance sheet, MAS said.

The finance and insurance sector made up 13.5 per cent of Singapore’s GDP in 2022, data from the Department of Statistics showed.

With an uncertain outlook amid a fear of the contagion effect of failures among under-capitalised banks globally in the coming quarter, MAS said that negative confidence may affect the financial sector.

Not only would this reduce demand for fund management, underwriting and security dealing activities in the near term, it will also delay companies’ longer-term capital expenditures.

SLOWDOWN IN GLOBAL ELECTRONICS INDUSTRY

In its report, MAS added that the reasons for Singapore’s dampened growth prospects include a slowdown in the global electronics industry, and higher consumer prices and interest rates restraining spending. This has slowed the expansion of domestic-oriented sectors.

Given the deep and extensive trade linkages and electronics supply chains in the region, the electronics production and trade has a "direct and significant impact on the Singapore economy”, it added.

A drop in global chip demand, for one, has resulted in Singapore’s semiconductor exports falling by around 24 per cent year-on-year in March — making it the sixth consecutive month of decline. 

This is dragged down by exports to China, Hong Kong and Taiwan, as global leaders in the sector see a sharp spike in inventory relative to sales.

On the consumer front, rising interest rates could deal a further blow to the manufacturing sector as demand for consumer and enterprise IT products drop.

However, MAS said that tourism and consumer-facing sectors will continue to grow, bolstered by the return of tourists from China. The authority predicts that tourism will return to pre-pandemic levels by end-2024.

It also said that the construction sector will be supported by a “strong pipeline” of projects, with contracts awarded in the civil engineering and residential segments returning to pre-Covid levels.

MAS added that supply constraints have eased, cost of some construction materials such as steel reinforcement bars have declined, and the shortfall in skilled construction labour has progressively eased, adding to a more positive outlook for the sector. 

HOW THE FINTECH INDUSTRY MAY BE AFFECTED

Indirect exposure to the affected US bank collapses — such as Silicon Valley Bank and Signature Bank — could also have an impact on venture capital funds, MAS said.

This may mean that Singapore's financial technology (fintech) industry, which comprises mainly micro-enterprises, could face headwinds as venture capitalist firms restrain funding. 

“There could be negative spillovers to the information and communications sector, given that a substantial proportion of firms in the fintech industry provides IT services as their principal activity, with most of them specialising in software development (such as blockchain).” 

However, MAS said that any adverse impact is “expected to be limited” because such fintech activities account for a small fraction of the information and communications sector.

Reiterating its previous statements on the collapse of US banks, it said that Singapore’s banking system is well-insulated, since the banks here have diversified, large corporate-heavy and Asia-centric loan books with minimal exposure to the tech startup ecosystem.

“While Singapore’s banks could also face losses on their bond holdings amid the sharp rise in interest rates, which led to the repricing of assets, less than 20 per cent of their total assets are in bonds, compared to around 55 per cent of Silicon Valley Bank's total assets.”

Domestic banks have also been able to pass on the higher funding costs to their customers because a bulk of their assets are in floating-rate loans. Beyond that, banks here have “insignificant direct exposures” to Credit Suisse.

“In addition, both UBS and Credit Suisse do not serve retail customers and their primary activities here are confined to private and investment banking,” it added.