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Concern over indebtedness in Singapore, Asia

But analysts highlight buffers that make a credit crisis in the region unlikely

Singapore

THE surge in household debt in Singapore over the past six years - measured as a ratio to gross domestic product (GDP) - has outpaced that of the United States during the run-up to the global financial crisis, a fresh HSBC report has shown. This reflects overarching wariness that any tightening through regulations or a rise in interest rates would have more impact in this part of the world now than before, though analysts have indicated that the current addiction to debt in Asia is unlikely to spark a credit crisis in the region.

Singapore joins Thailand in registering a jump in household debt to GDP ratios between 2007 and 2013 that is bigger than that of the US for the period between 2001 and 2007, HSBC's note said. Economists measure household debt against GDP as one way to show the extent that economic growth can cover the amount of debt racked up.

"Household debt may not be as big a systemic financial risk as it was in the West, but it highlights a potential growth problem in Asia: without it, how resilient would consumption spending really be?" said HSBC economist Frederic Neumann in the report.

Other analysts have earlier flagged concerns over Asian debt. In February last year, S&P's analyst, Tan Kim Eng, noted in a report that loose monetary conditions may be "magnifying financial and economic risks".

"The conditions that supported robust economic growth in the region could turn less supportive in the future. In the current circumstances, a lack of regulatory vigilance could create possible financial instability," Mr Tan said.

But he also argued that debt-to-GDP ratios can overstate financial risk in some economies, particularly for financial centres such as Singapore and Hong Kong.

For example, companies may take loans from domestic banks to invest abroad, and these projects may not count towards the home economy's GDP.

OCBC, which has the second-largest construction loan book in Singapore, said earlier this year that more property developers are taking loans from the bank for projects in London and Australia.

In a comparison of Singapore and Hong Kong, Barclays analyst Sharnie Wong said in a March report that Singapore banks have shown greater discipline in pricing loans.

In Singapore, personal loans - excluding those for housing - are typically secured against collateral, and the size of unsecured lending is restricted based on the individual's income.

A person who earns more than $30,000 a year can be offered an unsecured loan of about four times his monthly salary. The bank may raise this ratio for a person who earns at least $120,000 a year.

And, Singapore is now reviewing rules for money-lending - usually for unsecured loans - and will look at, among other things, the cap on the total of such loans taken by each borrower.

By contrast, personal loans in Hong Kong are mostly unsecured, since lending rates can be as low as 2 per cent, and loan size can be up to 18 times of monthly income, Ms Wong said.

In Singapore, household debt-to-GDP ratio stood at about 75 per cent last year. This is higher than Hong Kong's 62 per cent, though for Hong Kong, that is its historic high.

Over here, the debt ratio had breached the 90 per cent mark in 2002 and 2003, and household debt has since eased after the government introduced a borrowing cap for property loans, known as the total debt servicing ratio, Ms Wong said.

Housing loans in Singapore make up about three-quarters of all consumer loans, which stood at $228 billion in April.

S&P's Mr Tan noted high domestic saving rates for some parts of Asia offer a buffer against rising debt. He also highlighted that Asia's total leverage - which includes debt from the public and private sectors - remains "well lower" than in much of Europe, given the relatively lower government borrowings.

There are now brewing concerns over China's government debt, though this is mainly focused on local government debt, Mark Austen, CEO of Asia Securities Industry and Financial Markets Association, a finance-trade body, told BT in an interview.

China's overall local-government debt stood at 17.9 trillion yuan (S$3.6 trillion) - or about a third of its GDP - for the first six months through to June last year, said media reports that cited China's National Audit Office figures.

In January, a Forbes article highlighted Singapore's "significant public debt".

But government borrowings here are not used to fund spending in a country that rarely runs a budget deficit. The sovereign bonds are issued mainly to create a government yield curve, used then to price other securities, such as private debt.