Financial stability risks elevated despite resilient global economy, strong investment sentiments: MAS
Singapore corporates, households, financial sector stay buoyant amid robust financial positions
[SINGAPORE] Financial stability risks remain elevated even as the global economy has been more resilient than expected and despite strong investment sentiments, said the Monetary Authority of Singapore (MAS).
Public equity markets show growing concentration risks, while concerns over public debt sustainability continue to rise, said MAS in its Financial Stability Review published on Wednesday (Nov 5).
MAS noted that the global economy this year has shown more resilience than expected, supported by the front-loading of demand, strong technology-related investments and accommodative financial conditions.
But geopolitical risks and trade policy uncertainty were elevated relative to a year earlier.
The potential for further volatility in trade restrictions could also prolong firms’ caution in making new investments outside the technology sector.
Within public equity markets globally, valuations are relatively stretched and concentrated in the technology and artificial intelligence (AI) sectors. This could result in sharp corrections if investors lose optimism in AI’s ability to generate sufficient future returns.
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There are mounting concerns in sovereign bond markets over fiscal sustainability amid widening fiscal deficits and already-high public debt levels as well.
Meanwhile, regional economies remain exposed to currency and capital flow volatility, MAS said.
The weaker US dollar and tariffs may hit regional exporters – particularly Asean exporters in the consumer discretionary and materials sectors.
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The US dollar has depreciated by 7 per cent on a trade-weighted basket of currencies since the beginning of the year.
This has limited the effectiveness of local exchange rates as a shock absorber in the event of a global growth slowdown, while exporters face lower revenues in local currency terms.
Tariffs by the US have also resulted in broad-based price weakness in the region as producers and exporters cut prices, even as real production and export volumes rose due to the front-loading of demand.
Regional equity markets may face a correction as weaker corporate earnings are priced in.
Singapore’s resilience
Nevertheless, Singapore’s corporates, households and financial sector have stayed resilient amid strong financial positions, MAS said.
Financial conditions in the Republic have been supported by strong tailwinds from buoyant global financial markets and more accommodative monetary policy by major central banks.
Singapore’s financial stress index also fell below its long-term average despite a spike in April after the announcement of US tariffs.
But MAS said that renewed trade conflict or an escalation in global fiscal sustainability concerns could trigger revisions in investor risk sentiment and corrections in international financial markets.
The country’s financial institutions also cited macroeconomic uncertainty and geopolitical risk as the two most significant risk factors to the domestic financial system in the most recent MAS Systemic Risk Survey.
Other risks flagged by these institutions include the dependence on a limited number of third-party IT vendors, and potential risks related to AI, such as heightened risks of cyberattacks and scams that leverage the use of AI.
Nevertheless, the overall financial vulnerabilities index of the Singapore banking sector improved from a year earlier, largely due to lower vulnerability to non-resident leverage risks and liquidity risks.
Singapore banks maintain strong capital and liquidity buffers.
Stress tests of Singapore investment funds and insurers also show that they are well-positioned to weather global shocks, with limited risk spillovers to the rest of the domestic financial system.
For the corporate sector, the overall financial vulnerabilities index fell from a year earlier as well, due to lower vulnerability to liquidity, maturity and foreign currency risks.
Corporates gained from the resilient domestic growth momentum and the recent easing in financing conditions, which have enabled them to strengthen their financial position over the past year.
MAS expects corporate debt-servicing capabilities to remain more than sufficient amid a more accommodative global interest rate environment and benign domestic financial conditions ahead.
Within Singapore households, vulnerabilities also remain low.
Despite a modest rise due to an increase in outstanding mortgage loans, household leverage risk is contained as household financial assets have grown faster than household debt, MAS said.
Debt-servicing capacity stayed healthy amid stable income growth and lower mortgage rates from lower interest rates.
MAS’ stress tests also show that a significant majority of households have the capacity to manage an income shock amid higher debt-servicing costs.
However, 1 per cent of households could face negative cash flows with savings buffers that cover fewer than six months of this shortfall.
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