SINGAPORE - Rising risks to financial stability from ongoing trade and geopolitical tensions and expectations for sluggish global growth ahead mean businesses and households should be careful not to overextend themselves, said the Monetary Authority of Singapore (MAS) on Thursday (Nov 28).
Persistently low or negative interest rates in many major economies have fuelled rising debt among companies not in the financial sector, the MAS said in its latest annual Financial Stability Review.
It added that financial institutions and investors around the world are also taking on higher risks by putting more money into emerging markets where they are more susceptible to global shocks.
Stress tests that the MAS has conducted showed that companies, banks and households here are resilient enough to withstand shocks, though they need to guard against weaknesses.
The regulator noted that vulnerabilities in the corporate sector remained stable in the first six months this year, compared with a year ago, although debt had also stayed high.
"The prolonged period of depressed external demand conditions has caused some weakening in the financial positions of firms in the trade-related sector," the MAS said, adding that companies focused on the local economy remained relatively healthy, depending on their sectors.
"For households, balance sheets have strengthened alongside an increase in net wealth, with liquid assets such as cash and deposits exceeding total liabilities," it said.
Moves taken to tighten unsecured credit rules since 2014 have paid off, the MAS added.
Still, wage growth is expected to ease these two years, compared with 2018, because of the poor economy, and this may in turn lower household income growth and undermine consumer confidence, it said.
"Ongoing uncertainties in the economic outlook, softening labour market conditions, and slower income growth could weigh on households' financial positions," it said.
Households that are already overextended should be cautious in taking up new debt, the MAS said.
"While the July 2018 property cooling measures have helped to bring the property market closer to economic fundamentals, prospective home buyers should be mindful of their ability to service their mortgage loans amid uncertainty in the economic outlook," it said.
The regulator also noted that Singapore's banking system is healthy with strong capital and liquidity positions. Total credit growth has moderated to a more sustainable pace, it said.
But the MAS pointed out that prolonged uncertainties in the global operating environment could present challenges for lenders, as interest rates are likely to stay lower for longer.
Banks could face some pressures on net interest margins given the persistent low interest rate environment amid a slower pace of credit expansion, it said.
It also warned banks to be vigilant to pressures on their foreign currency liquidity positions.
"An unexpected tightening of global liquidity or stresses in the (forex) swap market could accentuate short-term foreign currency liquidity conditions in the banking system."
Accordingly, banks should continue to maintain sound credit risk management standards and practices, and ensure adequate provisioning buffers to guard against external vulnerabilities.