Firmer global recovery on the cards in H2, but virus mutations, Fed moves could be drags: MAS

A FIRMER global recovery is on the cards in the second half of 2021 with the world's two largest economies the US and China witnessing strong rebounds, but downside risks remain significant, said a top executive from the Monetary Authority of Singapore (MAS).

Potential drags include the emergence of more infectious or lethal virus mutations, as well as a sharp pickup in inflation in the US, said MAS's managing director Ravi Menon at the launch of the annual report on Wednesday.

On inflation, in particular, the Fed could withdraw policy accommodation sooner than expected, which could lead to markets reacting by driving up long-term interest rates.

"The premature tightening of financial conditions could then trigger increased volatility in financial markets, especially in economies that have yet to emerge from the pandemic and those with higher fiscal or external funding needs," he noted.

As for Singapore, it should see a recovery in the second half of this year, alongside strengthening global demand and further progress in its vaccination programme, said Mr Menon.

The recent tightening of domestic restrictions and border controls will cause a near-term setback to segments that make up about 8 per cent of the economy, but the impact will be significantly less severe than during the circuit breaker last year.

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He added that Singapore's GDP growth could exceed the 4-6 per cent forecast range, but this is barring any setback to the global economy. The 4-6 per cent official forecast range was maintained last month and will be next reviewed in August.

Official foreign reserves down from previous FY

The investment return from the official foreign reserves (OFR) was S$8.2 billion in FY2020/21, down from S$16.3 billion in the previous financial year. The S$8.2 billion comprised of investment gains of S$22.8 billion, and negative currency translation effects of S$14.6 billion.

The investment gains come as global markets recovered strongly during the financial year, derived mainly from interest income and realised capital gains.

Negative currency translation effects were primarily due to the strengthening of the Singapore dollar against the US dollar and Japanese yen.

MAS made a net profit of S$5.2 billion, and will return half of the profits, or S$2.6 billion, to the government and the remainder will be added to MAS's reserves

As at March 31, 2021, MAS held S$510.2 billion of OFR.

Investment grade bonds in the advanced economies form the largest allocation in the portfolio, with about three quarters of the OFR denominated in US dollar, euro, Japanese yen and pound sterling, with US dollar forming the bulk.

Growth of financial services

The financial services sector is estimated to have grown by about 6 per cent in the first half of this year, outpacing last year's growth of 5.1 per cent as the overall economy contracted in 2020.

Growth was broad-based, with the banks supported by strong fee income growth and the insurance industry expanding on the back of robust demand for single-premium life insurance products.

Even in the midst of a pandemic, assets under management in Singapore grew by 17 per cent year on year to S$4.7 trillion as at end-2020, driven by strong inflows into traditional and alternative investments, as well as valuation gains across major asset markets.

Investments in fintech firms based in Singapore reached a record S$1.4 billion in 2020, an increase of more than 30 per cent from 2019. In the first quarter of this year, fintech companies in Singapore raised more than S$650 million.

Financial institutions are expected to create 6,500 new hiring opportunities this year, with strong demand in areas such as technology, wealth management, corporate banking, and insurance. The financial services and fintech sectors added 2,500 net jobs last year.

Crypto boom

Mr Menon on Wednesday warned retail investors against investing in cryptocurrencies and crypto assets, but said that Singapore does not want to curtail innovation.

This comes as countries around the world such as the UK and China have been clamping down in this space.

For Singapore, it is better to "stand guard at the gates" of the formal financial sector to make sure that the risks are well-contained, rather than try to control the crypto asset players directly, said Mr Menon.

He noted that there are many small players in the crypto space which are experimenting with the technology to create use cases that have "great social and economic benefit" - a development that MAS does not want to put a stop to.

However, he flagged that people could be investing in crypto without fully understanding them.

"Our advice (to retail investors) is to stay away from this - the risks are huge, price movements are very volatile, and if you put a substantial part of your savings or investments into these things, you could lose a lot of money," he said.

Property watch

Mr Menon said that MAS remains "highly vigilant" to the risk of a sustained increase in housing prices relative to income trends, with a prolonged divergence seen as unsustainable.

He noted that the property market has been "remarkably resilient" in the face of the pandemic. The residential property price index rose by 1.6 per cent in 2020, even as nominal gross domestic product (GDP) contracted 8.2 per cent.

As at the first quarter of 2021, the property price index was 5.6 per cent above its pre-pandemic levels, while nominal GDP was about 4 per cent below, he noted.

When asked by the media, Mr Menon said that the property market is not considered overheated at this juncture.

"We will never tell in advance whether we would implement (property cooling) measures because that defeats the purpose of implementing the measures," he said.

"We hope the market will continue to remain stable and that we don't have to make any moves.

"But we have said many times that we are just as determined to make sure that the market remains stable, and prevent overheating from happening."

Dividend caps and problem loans

MAS is conducting additional stress tests to assess whether it is necessary to extend the current dividend restrictions on local banks.

The financial regulator is in close discussions with banks on their capital management plans and will be advising them on its position "very shortly", said Ho Hern Shin, MAS's deputy managing director for financial supervision at the launch of the annual report.

Since July last year, the MAS has called on local banks to cap their total dividends per share for FY2020 at 60 per cent of the previous year's dividends per share, and offer shareholders the option of receiving the dividends in scrip in lieu of cash. This was done as a pre-emptive move to ensure that banks could prioritise lending and support businesses and individuals during the pandemic.

Mr Menon pointed out that the central bank's earlier concerns that defaults among weaker corporates could strain banks' profitability and capital positions have not materialised.

That being said, he cautioned that problem loans can take time to surface. "Borrowers on full or partial loan moratoriums may not show signs of financial stress, especially if they are also obtaining financial support from the government," he said.

But as the support measures taper off, banks will have greater clarity about the repayment ability of their borrowers.

This comes as MAS recently announced the "final extension" of the current set of credit relief measures by another three months, till end September 2021.