Economy back on track, but risks remain

SINGAPORE'S financial system has weathered the crisis well and the economy has rebounded strongly from recession, but some risks still remain, said the Monetary Authority of Singapore (MAS).

Key among them is the possibility of another surge in property market speculation, the central bank said in its annual Financial Stability Review yesterday.

The report, which analyses potential risks to the financial system, said low interest rates have helped to fuel the recent housing boom.

Rates are expected to stay low for some time and, as the economy improves, more property buyers and speculators may be drawn to the market, driving up housing demand and prices, said the MAS.

Apart from property speculation, the MAS also highlighted the risk that the global economic recovery may stall. This would halt Singapore's fledgling rebound in its tracks and hurt company profits.

In this scenario, unemployment would also rise. With both companies and consumers less able to pay back loans, banks would be affected and turn cautious on making new loans, which would further hold back the recovery, the MAS said.

Despite the uncertainty over whether the nascent economic turnaround can be sustained, Singapore's stock market has already rebounded strongly, regaining about 90 per cent of its earlier losses.

Some pundits have warned that this rally has come ahead of a genuine improvement in company earnings. This prompted the MAS to flag possible market volatility down the road if investors were to suddenly turn more risk averse.

This could happen if, for instance, Asian central banks start removing the measures they put in place during the crisis. This might include reducing the liquidity they have been pumping into the markets, or raising interest rates.

But this does not mean that central banks can afford to hold back too long on withdrawing these steps, said the MAS.

Asian economies have recovered more quickly than developed ones and may have to withdraw their stimulus measures earlier.

But that also poses another possible danger: If Asian countries raise rates much earlier than the developed world, more money would flow into the region, putting pressure on the exchange rate and potentially resulting in asset price bubbles.

Higher interest rates could also badly hit firms and real estate investment trusts (Reits) that rely heavily on loans from banks. If rates spike, so will their borrowing costs.

Reits in particular were sorely tested during the financial crisis, finding it difficult to raise funds, said the MAS. Those that lack a strong sponsor could run into refinancing problems again, a risk that may be exacerbated if the recovery stalls and property rentals drop.

But the MAS concluded by saying that these challenges 'are not expected to be severe' or to significantly weaken Singapore's financial system.

Companies and households are still generally financially robust and domestic financial conditions should continue to improve as the economy recovers, it said.

'Singapore's strong economic fundamentals and sound financial system put it in good stead to weather the downside risks that may arise.'

Of the risks flagged by the MAS yesterday, economists pointed to the withdrawal of central banks' stimulus measures as the most crucial.

Timing the exit will be tricky, said HSBC economist Robert Prior-Wandesforde: 'The chances of every central bank getting the exit policy exactly right are very close to zero.'

But he believes it will be more dangerous to withdraw too late rather than too early. Leaving excess liquidity in the market for too long is a quicker way to fuel asset bubbles, he said.

Citibank economist Kit Wei Zheng said it is unlikely that central banks will raise interest rates too soon, but they will have to use other ways to manage the liquidity in the markets.


Source, Straits Times, 9 November 2009