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Singapore’s financial system resilient but must stay prudent amid 'considerable uncertainty' from COVID-19: MAS

Singapore’s financial system resilient but must stay prudent amid 'considerable uncertainty' from COVID-19: MAS

View of Elgin Bridge and the Singapore skyline. (Photo: Jeremy Long)

SINGAPORE: Singapore companies, households and the financial sector should stay vigilant and prudent amid “considerable uncertainty” from the COVID-19 pandemic, the Monetary Authority of Singapore (MAS) said on Monday (Dec 6).

So far, the local financial system has been resilient as existing buffers and “exceptional” government measures provided “critical support”. The subsequent economic recovery and accommodative domestic financial conditions also helped to shore up overall resilience, the central bank said in its annual financial stability review.

The pandemic “will continue to be a source of considerable uncertainty”. While authorities are expecting the Singapore economy to grow between 3 per cent and 5 per cent next year, renewed COVID-19 outbreaks around the world and re-imposition of mobility restrictions could disrupt economic activity again, the MAS said.

This may result in renewed job losses and concerns about the viability of corporates.

The consequent increase in global risk aversion could also cause a tightening in domestic financial conditions, reducing the flow of credit to the economy. These stresses could be exacerbated if global financial conditions were to also tighten significantly in response to persistently higher inflation.

“Continued vigilance and prudence therefore remain warranted,” said MAS.


On households, the MAS expects a supportive macroeconomic environment moving forward, amid improvements in the labour market. However, the financial positions of households, particularly those in the most vulnerable segments, could come under pressure in the event that shocks materialise.

The central bank noted that prevailing buffers and macroprudential measures to discourage over-leveraging have built up resilience against these shocks, but urged households to still exercise caution when taking on large new commitments.

Households should be “paying due regard to their ability to service long-term mortgage obligations, especially as interest rates are expected to gradually rise”, it wrote in its report.

In addition, highly-leveraged households should refrain from taking on more debt and try to build up financial buffers where possible so as to cushion against stresses from a weakening in macroeconomic conditions.

So far, MAS’ financial vulnerability indices showed household vulnerability being unchanged from a year ago, although at levels slightly higher than the pre-pandemic period. This is largely due to elevated leverage risk as new housing loans continued to grow on the back of a resilient property market.

The central bank wrote that a "confluence of factors" have supported the private residential property market so far, such as a strong upturn in external demand, low interest rates on the back of accommodative global monetary conditions and a broader recovery from the pandemic.

At the same time, domestic macroeconomic and financial sector policies, like government transfers and the financial industry’s provision of liquidity support, have mitigated the downside risks in the property market.

“The confluence of these factors has supported sentiments in the property market, underpinning the recent gains in prices and transaction activity that appear to be characterised by a firm underlying momentum,” the MAS said.

But the uncertain trajectory of the pandemic remains a key risk as new virus strains emerge.

“Against this backdrop, the Government closely monitors developments with the continuing objective of promoting a stable and sustainable property market,” it added.


Among local corporates, the MAS said its financial vulnerability indices showed a drop in vulnerability to shocks compared to a year ago, as corporate earnings improved. 

Companies will likely have to contend with uneven growth across the economy moving ahead.

Sectors less affected by the pandemic, especially manufacturing, will gain further traction, the central bank said. Meanwhile, those that are more sensitive to the pandemic could be subject to sporadic mobility restrictions, depending on the evolution of the coronavirus.

With that, targeted support for viable firms temporarily affected by the resurgence in infections may still be needed, even as broad-based assistance measures are withdrawn to guard against debt sustainability risk in the medium to longer term.

This, according to the MAS, underscores the importance of timely surveillance on non-financial corporates in order to assess their vulnerability, understand their contribution to financial stability risks as well as inform the design of appropriate policy support. 

It said it is looking to enhance its existing corporate surveillance framework with “probability of default indicators”.


On Singapore’s financial sector, the MAS noted that banks have maintained healthy asset quality, alongside strong capital and liquidity buffers.

The non-bank sector has also weathered the stresses from COVID-19 well, with insurers remaining well-capitalised and investment funds being able to meet redemptions.

But credit quality could deteriorate if renewed disruptions to economic activity trigger a rise in business insolvencies and unemployment, the MAS said.

An industry-wide stress test conducted this year showed that banks would remain resilient if a resurgence in COVID-19 infections, due to more virulent mutated virus strains, causes the global recovery to stall.

"Banks would be able to meet the credit needs of businesses and households in the adverse scenario, even as they continue to adhere to prudent provisioning practices,” said the central bank.


The annual financial stability review presents the MAS’ analysis of both global and domestic risks, which in turn forms the basis of its assessment of the resilience of Singapore’s financial system.

Globally, the financial system has remained resilient this year but medium-term vulnerabilities are building up, “reflecting the build-up of non-financial corporate and sovereign debt, as well as elevated property prices and stretched equity valuations”, the central bank said.

These vulnerabilities could interact with potential shocks from the evolving macro-financial environment and pose a risk to financial stability, especially for more vulnerable emerging market economies, it added.

The MAS also highlighted climate change and the increased prominence of crypto-assets as “emerging vulnerabilities” for financial stability.

“While these risks may be less pronounced at this juncture, they warrant close monitoring and an active assessment of options due to their potential to rapidly develop and materialise into significant financial stability risks,” it wrote in its report.

On climate change, the central bank noted that global efforts to transition to a low-carbon economy have gained much traction and “accordingly, the manifestation of physical and transition risks is likely to become more pronounced over time”. 

At the same time, there has also been growing recognition of the effects that these climate risks could pose to financial stability.

For example, increasing awareness could trigger “an abrupt re-assessment of physical and transition risks, leading to a sharp increase in risk premia across a wide range of assets that are perceived to be incompatible with a low-carbon economy”, the MAS said.

“It is thus imperative for financial institutions and authorities to build up capabilities to better assess, manage and mitigate the impact of these climate risks on their assets,” it added.

Meanwhile, crypto-assets have gained “increasing prominence” in recent years.

At the moment, they remain “a small proportion of overall financial system assets and have not been widely used in critical financial services”, the MAS said, noting how the peak daily trading volume of crypto-assets against the Singapore dollar year-to-date has been less than 1 per cent of the average daily turnover on the Singapore Exchange.

However, the continued growth in activity and deepening of interconnections between financial institutions in such assets are likely to continue, with crypto-assets and their markets “becoming systemically significant for financial stability considerations in the future”.

“The wealth effect could also be more pronounced if crypto-assets account for a larger share of investor portfolios,” the MAS said.

"In particular, consumption could be subject to considerable shocks arising from the inherent heightened volatility of such assets."

Among others, it noted that the growth of decentralised finance “has the potential to create a shadow financial system without the regulatory safeguards designed to mitigate financial stability risks across the entire range of financial services”.

“As such, close monitoring of the crypto-asset market will be increasingly important going forward,” it said.

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Source: CNA/sk(mi)


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