SINGAPORE: Risks to global financial stability have risen but Singapore’s financial system remains resilient amid the challenging environment, the Monetary Authority of Singapore (MAS) said on Thursday (Nov 28).
Corporate leverage remained stable, while household balance sheets have strengthened. The overall banking system is also healthy with strong capital and liquidity positions, the central bank said in its annual Financial Stability Review.
It cautioned, however, that global risks have grown against a challenging macroeconomic backdrop.
This includes a global economy that continues to see a synchronised slowdown and an uncertain outlook given ongoing trade and geopolitical tensions.
Corporate indebtedness and lending to riskier borrowers have also risen on the back of accommodative policy stances by major central banks, alongside higher portfolio capital flows into emerging market economies.
With increased uncertainties and expectations for prolonged sluggishness in global growth, MAS urged local companies, banks and households to remain vigilant.
For example, it warned that further uncertainty and weakness in the external environment could add pressure on firms in trade-related sectors and cause negative spillovers to the rest of the economy.
"External headwinds" have weakened the financial positions of these firms, said MAS, adding that the non-performing loan (NPL) ratios for the trade-related sectors have seen an uptick in the third quarter.
In manufacturing, for instance, the NPL ratio rose to 4.6 per cent from 3.6 per cent in the previous quarter.
“While the projected improvement in the manufacturing sector in 2020 should cap a further deterioration in NPLs, the trade-related sectors as a whole still bears closer monitoring,” it wrote.
MAS also said its stress tests suggest that most companies would be able to withstand interest rate and earnings shocks.
But highly leveraged firms should still exercise financial prudence as the risks of a persistent growth slowdown and trade tensions could continue to weigh on profitability and debt servicing ability, it added.
Similarly, the central bank’s stress test showed lenders here having the capacity to withstand severe shocks.
Total credit growth has moderated to a more sustainable pace. While asset quality deteriorated slightly in the third quarter, banks continue to maintain ample capital buffers to cushion credit losses, it said.
However, the extended uncertain global operating environment could present banks with challenges.
“Banks could face some pressures on net interest margins given the persistent low interest rate environment,” MAS wrote in its 65-page report.
“The impact on bank profitability could be further exacerbated by ongoing weakness in the global operating environment.”
MAS urged banks to continue maintaining sound credit risk management standards and practices, while ensuring adequate provisioning buffers to guard against external vulnerabilities.
Turning to households, the central bank noted that household balance sheets have strengthened alongside an increase in net wealth, with liquid assets such as cash and deposits exceeding total liabilities.
Leverage risk also moderated as the growth in household debt slowed. The latter, according to MAS, is partly due to the roll-out of property cooling measures in July 2018 which led to a slower pace of housing loan growth.
But it reminded households that are already over-extended to be cautious in taking up new debt.
“While the July 2018 property cooling measures have helped to bring the property market closer to economic fundamentals, prospective buyers should be mindful of their ability to service their mortgage obligations amid uncertainty in the economic outlook.”
In its latest half-yearly macroeconomic review released last month, MAS said it expects wage growth to ease in 2019 and into next year, with employers already turning cautious when it comes to hiring.
“Amid the possibility of an extended period of sluggish GDP growth, wage increases are expected to ease, which could weaken households’ debt servicing ability,” it wrote.
“Should labour market conditions continue to soften further, for instance in response to an unexpected shock, this could undermine household income growth and consumer confidence,” it added.
MAS also sounded other “potential downside risks” to the property market, such as the large supply of unsold units in the medium term.