Household debt: Singapore’s ‘Achilles heel’?

Household debt: Singapore’s ‘Achilles heel’?

SINGAPORE, TOURISM, EMERGING ASIA, CURRENCIES, INDIA, BUSINESS NEWS

CNBC.com | Thursday, 12 Sep 2013 | 2:25 AM ET

Singapore stepped up efforts to contain a rapid increase in household debt by tightening rules around unsecured credit late Wednesday – a move viewed by economists as a preemptive strike ahead of a rise in borrowing costs in the country. “The central bank is being pre-emptive. Taken together with the previous measures announced, including the Total Debt Servicing Ratio (TDSR) framework for property loans, they will likely be effective,” Michael Wan, economist at Credit Suisse told CNBC on Thursday, referring to a measure which caps monthly mortgage payments to 60 percent of a borrower’s monthly income.Among the new rules on unsecured credit, the Monetary Authority of Singapore, the country’s central bank, requires banks to review a borrower’s total debt and credit limit before granting a new credit card.

In addition, financial institutions will not be allowed to grant further unsecured credit to individuals who have outstanding debt of more than 60 days with the institution.

While expectations are for short-term interest rates to begin rising in 2015, a hawkish Federal Reserve chairman could mean that an increase in borrowing costs comes sooner, said economists. When interest rates rise, households will have to pay a higher monthly mortgage payment as a portion of their income.

The benchmark Singapore interbank overnight rate (SIBOR), used to price housing loans, tracks rates in the U.S.

High household debt levels are being referred to by some as the “Achilles heel” of Singapore’s otherwise seemingly healthy economy, with a large current account surplus, huge stock of foreign exchange reserves and strong fiscal balance sheet.

“Rapid acceleration in household debt and bank lending are vulnerabilities for Singapore’s economy, which could be destabilizing in the event of potential capital outflows and higher interest rates,” Joey Chew, economist at Barclays wrote in a report titled “Openness and household debt – the Achilles’ heel” on Wednesday.

The country has among the highest level of household borrowing relative to gross domestic product (GDP) in Asia at 75 percent, rising from around 63 percent in 2010, according to the bank, as record low interest rates in the recent years encouraged borrowing.

“While household debt has risen 41 percent over this period, household income has increased by only 25 percent and wages by even less, just 15 percent,” she said.

Chew added that the nation’s extensive trade, investment and financial links with the region, also pose a threat to the stability of its economy.

“Regardless of fundamentals, Singapore will never be completely immune to a contagion event. One of the economy’s main strengths, its extreme openness, is also its Achilles heel,” she said.

“Any shock originating from an ASEAN-4 economy (Indonesia, Malaysia, Philippines, and Thailand) would quickly affect Singapore,” she added.

Singapore’s exports to the four countries, for example, make up almost 30 percent of total exports.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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