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Financial system stable but global risks increasing: MAS

Rising interest rates, pressure on currencies may weaken the ability of sovereigns, corporates and households to service debt

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The MAS noted early signs of the recent property curbs having moderated the pace of price increases and transaction activity. This should contribute to stronger household balance sheets in the medium term.

Singapore

WHILE Singapore's financial stability remains sound - whether in terms of corporate debt, the overall banking system or household borrowing - risks to global financial stability have increased amid tighter financial conditions and trade tensions, the Monetary Authority of Singapore (MAS) warned in its annual Financial Stability Review on Friday.

Rising interest rates and pressure on currencies could weaken the ability of sovereigns, corporates and households to service debt, particularly for those which have borrowed in foreign currencies, said the MAS.

This global situation poses risks for various aspects of Singapore's otherwise stable financial picture. Corporate profitability and debt profiles remain sound, for example, but the MAS advised firms to stay cautious of potential external headwinds.

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Corporate balance sheets stayed firm with the median return on assets of Singapore-listed firms rising slightly to 3 per cent in the second quarter, from 2.7 per cent a year ago.

Corporate debt-to-GDP was 154 per cent in the second quarter, up marginally from 151 per cent a year ago. Notwithstanding the rise in overall corporate leverage, corporate debt profiles remain sound at the firm level. The median debt-to-equity ratio of listed firms decreased to 37.6 per cent in the second quarter, from 44.6 per cent a year ago.

The corporate non-performing loan (NPL) ratio decreased to 2.4 per cent in the third quarter, an improvement from 2.7 per cent a year ago. This was led by an improvement in asset quality for trade-related sectors alongside a global pick-up, with the manufacturing sector's NPL ratio decreasing to 4.6 per cent from 5.1 per cent previously.

The MAS said that although its annual stress test showed that most listed firms would be able to withstand interest rate and earnings shocks, firms should remain cautious as an expected tightening of financial conditions and escalation in trade tensions could weigh on profitability and debt servicing ability.

Similarly, while the domestic banking system remains resilient with strong capital and liquidity buffers well above regulatory requirements, banks should be watchful of foreign currency liquidity risks, said the MAS.

Credit quality in the overall banking system has improved, with the non-performing loan ratio having decreased to 1.9 per cent in the third quarter, from 2.1 per cent in the year-ago period. Total provisioning coverage remained healthy at 102 per cent in the third quarter. Specific provisions rose to 59 per cent from 45 per cent a year ago. However, the MAS noted that the foreign currency loan-to-deposit (LTD) ratio has been increasing - reaching 129 per cent in September - and "bears close monitoring". The Singapore dollar LTD ratio has stayed low at 87.1 per cent.

Finally, household debt indicators are stable but could deteriorate if property price momentum and buying activity continue unabated.

While household debt growth had been in line with income growth over the past year, housing loans have risen in tandem with the pick-up in property demand. As at July 2018, the value of new housing loans was up 30 per cent year on year.

However, the MAS noted early signs that recent property cooling measures have moderated the pace of price increases and transaction activity, which should contribute to stronger household balance sheets in the medium term.

Households should keep an eye on their abilities to service debt, given headwinds of interest rate hikes, said the MAS.

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