Financial system is robust, says MAS in response to Forbes article
By Yasmine Yahya, The Straits Times, 15 Jan 2014
SINGAPORE'S central bank has said the country is not in danger of being caught in a credit bubble that puts it or the banking system at any risk of crisis.
In a statement underlining the strength of the financial system, the Monetary Authority of Singapore (MAS) said "serious observers and investors" have no doubt over the nation's financial health.
It said three facts stand out: The property market is stabilising; household balance sheets are strong; and the financial system is robust. The statement was in response to media queries that the MAS received on an online Forbes article published on Monday.
In it, Forbes columnist Jesse Colombo said Singapore is headed for an Iceland-style meltdown, as low interest rates have encouraged households and firms to take on more debt and fuelled an unsustainable surge in property prices.
This has led to bubbles in the construction and financial services sectors, he said. Mr Colombo, who has the nickname "bubbleologist" for his preoccupation with credit bubbles, recently warned that Malaysia, Thailand, the Philippines and Indonesia are caught up in a massive one.
In its response, the MAS said it has already taken steps to cool the property market and prevent households from taking on too much debt. The property market is now stabilising, it added, and new housing loans are declining.
Household balance sheets are, on the whole, strong. "Property asset values are significantly higher than debts incurred. The average loan-to-value ratio of outstanding housing loans stands at a healthy 47 per cent as of the third quarter of 2013, implying a large buffer in asset values," it said.
The recent Financial Sector Assessment Programme by the International Monetary Fund has also found that Singapore's financial system would remain sound even under severe stress scenarios.
"Singapore's triple-A rating from all the major rating agencies is not an aberration. It attests to the country's economic and financial strength, including its sizeable foreign reserves," MAS said.
Barclays economist Leong Wai Ho noted the article's flawed assumptions about Singapore's ability to deal with major shocks to the economy. It said the Government is limited in its ability to bail out banks here due to a high public debt, but Mr Leong said that this is not true as Singapore has significant surpluses.
S'pore headed for meltdown? Forbes article flawed: Experts
No bubble as economy is healthy, debt levels still low, say economists
By Yasmine Yahya And Fiona Chan, The Straits Times, 16 Jan 2014
ECONOMISTS here have said an online Forbes article that argues Singapore is headed for a meltdown is alarmist and flawed.
They said property prices and debt levels have accelerated in recent years, but this does not mean the country is in a bubble or headed for a crisis.
Singapore's economy is diversified and still growing, unemployment is near zero amid a tight labour market, and loan levels remain low relative to asset values and savings, they added.
The article, published on Monday, predicted an Iceland-style meltdown for Singapore, drawing parallels between the two countries' large financial sectors and reputations as safe havens.
Columnist Jesse Colombo, who started warning in 2004 about the looming housing debt crisis in the United States, wrote that Singapore is in the midst of a bubble that will eventually pop and put its banks and sovereign wealth funds at risk. Mr Colombo, a self-styled "anti-economic bubble activist", has never visited Singapore but has been writing a series of articles foretelling economic bubbles across South-east Asia.
Economists whom The Straits Times spoke to described his claims as sensationalist. They said while Singapore must be mindful of the risks of interest rates rising, the Government has taken steps to curb over-borrowing.
"The rate of credit growth has been at a pace which would normally set alarm bells ringing, but it's not an inevitable collapse," said Capital Economics economist Daniel Martin.
"Big does not mean it must burst," added Standard Chartered economist Edward Lee, referring to Singapore's debt levels. Mr Lee, who was one of the first to flag Singapore's rising household debt last year, pointed out that recent stress tests have demonstrated the resilience of banks here.
Mr Colombo also warned that the property and banking sectors here would collapse when interest rates rise and households are unable to service their mortgages.
But OCBC economist Selena Ling said even if interest rates rise or property prices drop significantly, the Government has said the proportion of borrowers at risk would likely rise to just 15 per cent. "There is probably little systemic risk to the banking industry even if any significant property correction will be painful."
The Monetary Authority of Singapore, responding to media queries on Tuesday, said Singapore is not facing a credit bubble that puts it or its banking system at any risk of crisis. It said the property market is stabilising, household balance sheets are strong and the financial system is robust.
Economists also noted flaws in Mr Colombo's arguments, such as his claim that the Government's high public debt limits its ability to bail out banks in a crisis.
Bank of America Merrill Lynch economist Chua Hak Bin noted: "The high public debt is not because of fiscal deficits. About two-thirds are CPF funds, which are guaranteed by the Government but are deployed for investments abroad."
Assets held by sovereign wealth fund GIC and Singapore's foreign reserves amount to several times the public debt, he added.
Mr Martin said he was surprised the article pointed to the Government's investments in public infrastructure as a reason for a supposed construction bubble.
"When you have a country like Singapore where the population has been growing rapidly, it's understandable that you'd invest in its transport network," he said.
"And it's not just that these investments are sensible - the Government can very much afford them."
Chilly reception to S'pore's 'Iceland' tag
By Victoria Barker, MyPaper, 16 Jan 2014
AFORBES article on the state of Singapore's economy which has gone viral has raised a storm, with economists here offering differing views on its credibility.
American economic analyst Jesse Colombo claimed that the Republic is facing a dangerous credit bubble fuelled by low interest rates and heading towards an "Iceland-style meltdown".
On Tuesday, the Monetary Authority of Singapore categorically refuted this. "Singapore is not facing a credit bubble that puts the country or its banking system at any risk of crisis," a spokesman said, adding that "serious observers and investors are not in doubt about the country's financial health".
Among Mr Colombo's claims:
- Singapore has a credit bubble, which started soon after interest rates fell below 1 per cent. Outstanding private-sector loans have risen 133 per cent since 2010.
- It also has a property bubble, with prices up 60 per cent since 2009. Mortgage loans have grown at 18 per cent each year for the past three years.
- Seventy per cent of Singapore's mortgages have floating interest rates.
- Cheap credit is also fuelling a construction bubble.
- The financial-services industry grew 163 per cent between 2008 and 2012, which is not sustainable.
- Singapore's bubble will pop if the bubbles in emerging markets and China, where Singapore has invested heavily, pop, and interest rates rise.
CIMB economist Song Seng Wun disagrees. "To say the authorities are blind to the risk (of overleveraging) is a bit excessive," he told MyPaper. "This region has gone through the (1997) Asian financial crisis... measures taken by regulators suggest they are much more mindful of the risk of excesses brought about by cheap lending."
Mr Yeoh Lam Keong, a senior adjunct fellow at the Institute of Policy Studies, called the article "insightful in many ways" and said it "correctly" points out the dangers of real-estate-based asset bubbles in Asia.
These, together with overinvestment in construction due to depressed global interest rates and debt-fuelled expansions, are "very likely to lead to crashes in these sectors when prices of real estate and construction activity take a deep fall", he said.
Though the risk of the real-estate bubble popping is high, he said "a recession here is very unlikely and, thus, a banking crisis is also unlikely".
The article raised doubts about the Government's ability to handle cyclical shocks to the economy, noted Barclays Capital economist Leong Wai Ho. "We are not invulnerable to such shocks," he said. "(But) the key is to stabilise the labour market quickly, which heralds the quick return of confidence...Singapore has (previously) managed to do this."
In a Facebook post, Lee Kuan Yew School of Public Policy senior fellow Donald Low called the article "far too sweeping".
Property prices may fall 10 per cent this year, said Mr Low. But even if they fall 20 per cent, the health of the banks and households will not be affected.
"There will be households that have negative equity, but as long as they have the cash flow to service their mortgages, it will not precipitate a financial crash," he said.
Still, he mostly agrees with Mr Colombo's point that booms led by real-estate development and the financial sector are "mostly illusory". "They create the impression of economic dynamism without creating any real productive capacity in the economy," said Mr Low.
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