Reply to COS Debate on Interest Rates, Debt, and Oversight on Financial Advisers
Date: For Parliament Sitting on 5 March 2014
Names and Constituencies of Members of Parliament
Ms Tan Su Shan, NMP
Ms Foo Mee Har, MP, West Coast GRC
Mrs Lina Chiam, NCMP
Debt, interest rates, real cost of money
Help individuals manage debt
Oversight on financial advisers
Answer by Mr Lawrence Wong, Acting Minister for Culture, Community and Youth on behalf of Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister in Charge of MAS:
1 Mdm Speaker, let me first address the macro-issues that were raised by Ms Tan Su Shan. I agree with her that there are strong external forces that can impact our economy, and we have to stay vigilant. Given the current uncertainties and volatile environment, it’s very difficult to predict how the external environment will change. The economists have different views, underpinned by different assumptions. Ms Tan cited forecast from a Bain report of a world flushed with money till 2020. But there are also many economists who predict that the days of low interest rates and cheap capital are over.
2 One thing that economists do agree on is that in a world of open capital flows, a country can either choose to manage its exchange rate or interest rate but not both. In Singapore, because of our small and open economy, we have chosen to focus on the exchange rate as the monetary policy tool to keep inflation in check. This exchange rate-centred framework has served Singapore very well for over three decades.
3 But the consequence is that our domestic interest rates will move in tandem with global rates. As Ms Tan has highlighted, such low interest rates are indeed one of the factors supporting the growth of domestic credit, including to the property sector.
4 Given this environment, Ms Tan has asked whether we ought to shift our monetary policy approach, i.e. to abandon the exchange rate-centred framework and switch to interest rates. In fact, this is something the MAS has studied very carefully. MAS regularly reviews its monetary policy approach and it does not take the status quo and what it does today as a given. MAS studies show that our current system has been effective and more importantly that a switch to a regime of managing interest rates will be highly destabilising.
5 First, the exchange rate continues to play an important role in household and business decisions, as Singapore’s high degree of openness has not diminished. In fact, the policy of keeping the Sing dollar on an appreciation path since April 2010 has dampened consumer inflation by an average of 2.3% points per year over the past four years. Taking a specific example, the stronger Sing dollar has kept food inflation at an average of 2.3% over the same period, significantly lower than the 5.2% in the ASEAN-4 and 3.7% in the NIE-3 economies.
6 Second, given our open economy, setting domestic interest rates above global rates will attract even more capital inflows to Singapore, especially with our strong macroeconomic fundamentals. This could fuel further asset price inflation. There are also potentially unpredictable costs associated with a shift in the monetary policy framework, which would affect the domestic financial system and the broader economy.
7 Hence, what MAS has chosen to do is to rein in the demand for property and mitigate the risks posed by low interest rates through a series of macro-prudential measures, while keeping our exchange rate-centred monetary policy focused on anchoring inflation expectations.
8 The effects of these measures have been encouraging. The property market is stabilising. Private residential property prices increased by just over 1% last year and, in fact, recorded a small sequential decline in the fourth quarter. There has been a clear moderation in transaction volumes. Mortgage loan growth slowed to 8.6% in January 2014, down from 16.2% a year earlier. On the whole, household balance sheets are sound, although some over-stretched households may come under pressure when interest rates rise.
9 That is a point which Ms Foo Mee Har highlighted, which is why besides property purchases, to encourage financial prudence, MAS has recently enhanced the rules for credit cards and unsecured credit, as highlighted by Ms Foo. In designing these measures, MAS has been conscious of the need to facilitate orderly deleveraging so as not to cause a hard landing or credit crunch and drive borrowers to unlicensed sources of credit. This is why the aggregate limit on unsecured borrowing from financial institutions has been set at a fairly generous level of 12 months of income with effect from June 2015. This rule was announced with an 18 months lead time. This should provide sufficient transition time and also flexibility for most borrowers.
10 For those who have already exceeded the borrowing limit, Ms Foo was worried about a sudden credit crush in June next year. I would like to assure her that MAS has anticipated this, and put in place measures to avoid such a situation. From 2008 to 2012, there were about 6,000 individuals counselled by Credit Counselling Singapore with debts exceeding their annual income. Such individuals will be given additional time – till 2019 – before the aggregate limit takes effect. Furthermore, they will not be forced to make immediate repayment of existing loans, as the limit is designed to prevent accumulation of additional debt. I should also clarify that the lending limits do not extend to education and business loans, which are not consumption-based.
11 I agree with Ms Foo that individuals may need help to restructure and bring their debts down over time. MAS has been working with industry partners such as financial institutions, Credit Counselling Singapore, MoneySENSE and the credit bureaus to facilitate the transition. MAS has also adjusted the relevant rules to facilitate the transfer of a borrower’s debt from one financial institution to another to enable re-financing and re-structuring across financial institutions.
12 To encourage responsible lending, the Association of Banks in Singapore has issued Codes of Practice relating to credit cards and unsecured lending on the relevant information that should be communicated to their customers. In addition, MoneySENSE will continue to step up its education efforts through a variety of media channels.
13 Ms Foo also asked about borrowing from moneylenders and having a common centralised credit bureau. I agree with her that information on non-bank credit channels is useful in having a more complete assessment of an individual’s borrowing capacity and this is why MAS has been working closely with MinLaw to align the rules governing the grant of credit by financial institutions as well as moneylenders. For example, for housing loans, the Total Debt Servicing Ratio Framework already takes into account all credit facilities extended by both financial institutions and moneylenders. Going forward, MinLaw is looking to put in place a mechanism to limit the total amount that individuals can borrow across all moneylenders. MAS and MinLaw are also exploring how relevant data can be captured in the credit bureaus. The Government will study the data and monitor the effects of the recent measures, to assess the need for further measures.
14 Let me now turn to the point that Mrs Lina Chiam highlighted on the role of Financial advisers and the need for regulatory oversight. Financial advisers play an important role in helping Singaporeans meet their insurance and financial planning needs. The industry is regulated under the Financial Advisers Act and I would like to assure the member that MAS does keeps a close watch over the business conduct standards of the financial advisory (FA) firms and their representatives, and that includes the representatives in the banks.
15 MAS uses various tools to supervise the FA industry. MAS carries out regular risk assessments of FA firms, and conducts onsite inspections to assess the adequacy of their risk management systems and level of compliance with regulatory standards and industry guidelines. MAS also commissions periodic mystery shopping exercises to assess the quality of advice and adequacy of information disclosure provided by FA firms and their representatives.
16 Where laws or regulations have been breached, MAS has taken appropriate disciplinary actions. These include issuing reprimands, imposing composition fines, and prohibiting persons who have committed serious offences from working in the FA industry for a specified period.
17 In recent years, MAS has continued to strengthen regulatory requirements in the FA industry to better safeguard the interests of consumers and this process will continue.
18 Mdm Speaker, let me wrap up by going back to the broader picture. Looking ahead, we are prepared for a scenario of higher global interest rates, as highlighted by Ms Tan. In some ways, this is not necessarily a bad outcome for Singapore. Should there be a tightening of monetary policies abroad, this will be commensurate with the restoration of a more “normal” state of the world economy. As global growth returns to trend and inflation pressures gradually pick up, interest rates abroad and in Singapore will eventually rise.
19 In some ways, this is not necessarily a bad outcome for Singapore. What is critical is how the US Federal Reserve does its tapering of asset purchases. Last year, uncertainties over the timing and pace of tapering resulted in sharp corrections in financial markets. Since then, financial markets have been more discriminating, and capital outflows have largely been from emerging economies with weak macroeconomic fundamentals.
20 Nevertheless, we must be prepared for further bouts of financial market volatility and capital outflows from emerging economies. I would like to assure members that MAS and the relevant government agencies are closely monitoring the impact of changes in global monetary conditions on the Singapore economy and property market. Overall, Singapore is well-placed to weather external shocks. Our fundamentals remain sound: a balance of payments surplus, sound public finances, stable banking sector, and a credible exchange rate system. These are advantages most countries do not have. As underlying economic and financial conditions evolve, the government will adjust its policy measures as necessary to ensure overall macroeconomic and financial stability.