Financial Stability

The global financial system has shown resilience to higher interest rates. That said, pockets of financial vulnerabilities remain, even as interest rates could stay high for longer. The juxtaposition of heightened geopolitical tensions and attendant supply-side shocks, present additional challenges to the macro-financial backdrop.

Corporates and households looking to refinance this year will face considerably higher rates from pre-COVID low levels. At the same time, economic activity is likely to moderate as real interest rates remain at elevated levels amid stable inflation expectations.

Volatility in global financial markets is also expected to remain elevated. Markets are prone to repricing in their anticipation of the timing and magnitude of rate cuts by the major central banks in the last mile of disinflation. Further, asset valuations that were predicated on sustained low levels of interest rates could experience corrections. These may interact with leverage and funding vulnerabilities among market participants, amplifying shock to the global financial system. Emerging market economies reliant on external financing will be vulnerable to the ensuing risk of large and disorderly capital outflows amid heightened risk aversion.

Singapore’s financial system remains sound and resilient over the past year. The banking sector has strong capital and liquidity positions that are supported by healthy profits. Results from the Industry-Wide Stress Test 2023 exercise show that the domestic systemically important banks would have adequate capital buffers to weather potential downside risks arising from severe macrofinancial stresses, including a global recession and a further tightening in financial conditions. For the non-bank sector, insurers remain well-capitalised and investment funds have demonstrated sound liquidity management.

The financial positions of corporates and households in Singapore continue to be resilient despite the challenging macroeconomic environment. Firms’ borrowing costs have risen further with the continued pass-through of high interest rates. At the same time, nominal earnings growth has dipped amid the moderation in economic activity. That said, most firms’ debt servicing obligations have remained manageable as they have been actively deleveraging, drawing on the earlier build-up of precautionary cash holdings during the pandemic to pay down existing debt or to fund their operations. Households have also generally weathered the pass-throughs of higher interest costs, including higher mortgage repayments during refinancing, reflecting conservative credit assessment practices by banks which were part of macroprudential policies put in place earlier.

Corporate and household resilience are reflected in the healthy asset quality of Financial Institutions (FIs). The overall corporate sector non-performing loans (NPL) ratio has remained low at 2.1% as at Q1 2024, declining from 2.3% in Q1 2023. Household NPLs among mortgages extended by FIs have also remained limited, with the aggregate NPL ratio increasing marginally from a low level of 0.25% in Q4 2023 to 0.28% as at Q1 2024.

MAS’ stress tests further show that corporates and household sectors have adequate buffers to mitigate the impact of income and financing cost shocks. Most firms and households are expected to remain resilient although a small segment of highly leveraged borrowers will be vulnerable.