COMPANIES and financial institutions in Singapore have enough buffers to manage shocks to their incomes and financing costs as their strong balance sheets can help them cope with higher borrowing costs and market volatility, said the Monetary Authority of Singapore (MAS) on Wednesday (Nov 27).
As most corporates have low debt levels, overall bank credit quality is strong.
Meanwhile, while household debt has crept up, the impact is likely to be cushioned by continued growth in wages and financial assets.
Nevertheless, a sharp deterioration in the global outlook could pressure banks’ profitability and capital positions. A small proportion of highly-indebted corporates and households could also face pressure to service their debts, said the financial regulator in its report.
The 86-page Financial Stability Review by the MAS identifies potential vulnerabilities in Singapore’s financial system and reviews its resilience to potential shocks and risks.
Globally, the probability for adverse shocks has increased due to heightened policy uncertainty, trade tensions and geopolitical conflicts.
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Against this backdrop, trade-dependent small economies such as Singapore’s could have to confront negative scenarios that involve a sudden and significant change in the ratio of a country’s export prices to its import prices, also known as a terms-of-trade shock.
Such a scenario could be compounded by a global growth slowdown, higher-for-longer interest rates and renewed strength in the US dollar.
Other factors, such as stretched asset valuations and highly leveraged positions, may also worsen market volatility.
“This could lead to the disorderly unwinding of leveraged positions, sharp asset repricing or a sudden retrenchment in cross-border credit and investment flows,” the central bank said.
Emerging markets could be vulnerable to currency and capital flow volatility, although such markets in Asia – which includes Singapore – could rely on the buffers they have built up over the past decade as a source of resilience.
Emerging markets in Asia could also be susceptible to the potential supply shocks such as heightened geopolitical and trade tensions and could see a resurgence in currency volatility.
MAS noted that in its most recent risk survey conducted in April and October this year, Singapore’s financial institutions highlighted macroeconomic uncertainty and geopolitical risk as their top risks.
Respondents noted that increases in macroeconomic, geopolitical and monetary policy uncertainties could induce a growth slowdown and an inflation resurgence. A slower than expected growth outlook for China could have implications for corporates, funds, and loan portfolios with significant exposures to the economy.
