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SINGAPORE: The rise in risk appetite and sharp rebound in financial markets since the start of the year may have outpaced economic fundamentals, according to the Monetary Authority of Singapore (MAS) in its annual Financial Stability Review on Monday.
The MAS noted that although Asia has bounced back from the financial crisis faster than expected, the global economic outlook remains uncertain.
This is because the nascent recovery in the world's biggest economies – the United States, Japan and the European Union – has largely been dependent on government stimulus.
There is a risk that once these stimulus policies are withdrawn, their recovery will take a hit, thus affecting Asian economies, especially those that are export-dependent such as Singapore.
If economic recovery stalls, corporate earnings may come under renewed strain and corporate refinancing may become more difficult. MAS added that unemployment could also rise if the economy slows again.
Despite such uncertainties in the global outlook, Singapore's property market has taken on its own dynamics. Private home prices rose almost 16 per cent in the third quarter – the highest quarterly increase in almost three decades.
This has led MAS to warn that a speculative bubble could form. Speaking with Channel NewsAsia, some analysts said that such a warning is timely.
David Cohen, director of Asian economic forecasting at Action Economics, said: "It's probably healthy that people are talking about a potential bubble... It's when people don't talk about a bubble, (then) things get out of hand...
"The fact that policy makers, including the MAS, are taking notice and are preparing to take some steps to dampen the exuberance, that's also welcome."
MAS said although the government has already introduced several measures in September to temper the exuberance in the market and pre-empt a bubble, more measures might be needed.
But the nature and timing of such measures would have to be balanced against the still uncertain path of economic recovery. Professor Annie Koh, SMU's Associate Dean (Lee Kong Chian School of Business), agreed: "To come up with a tight policy right now, it might kill the goose that kills the golden egg...
"So killing the golden goose means you come in with very pre-emptive measures that may make cost of funds too high, and people start getting back into risk aversion. You might even stop local consumption picking up, you might stop investments picking up, and that will derail all the signs of correction that we are hoping to move back on."
On a brighter note, MAS said local banks and insurers have remained resilient through the crisis, maintaining high capital and liquidity ratios. It added that local banks' earnings have dipped but remained above market expectations.
This, together with successful capital-raising efforts during the crisis, should enable the local banks to absorb further credit losses in the coming quarters.
- CNA/so/ir
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