http://www.businesstimes.com.sg/arch...-debt-20130626

Published June 26, 2013

UBS flags rapid rise of S'pore household debt

High debt-GDP ratio could hurt in face of global slowdown

By livia yap


THE rapid rise in household debt here, coming amid the uncertainty of global financial markets, has been red-flagged.

Kelvin Tay, the regional chief investment officer for the Southern Asia-Pacific for UBS Wealth Management, said the high household debt levels, coupled with high property prices, could make Singapore vulnerable to a rise in unemployment, a reduction in incomes and asset deflation if a slowdown in global economic markets happens.

Singapore's household debt - total consumer loans of Domestic Banking Units - stood at 279 per cent of the total gross domestic product in the first quarter of this year, up from 177 per cent in the corresponding quarter in 2007.

The 279 per cent figure is even higher than the 198 per cent recorded in the first quarter of 2009, after the 2008 financial crisis.

Mr Tay said 80 per cent of household debt here is made up of mortgages, which, coupled with the climb in property prices since 2009, explains why household debt as a percentage of GDP shot up so sharply from 2007.

He said: "With (household debt) at such significant levels, it will be difficult for the government or policy makers to stimulate demand to offset the sluggish exports we are currently experiencing."

This has been worsened by panic selling of risk assets, such as US high yield and Asian local currency bonds, since the US Federal Reserve's indication last week that it might start tapering its bond-buying programme later this year.

Mr Tay said a rise in US treasury yields usually leads to a rise in Singapore government bond yields. As the USD is a major component in the basket of currencies used to manage the SGD, interest rates here usually follow the trends of USD interest rates.

"Given the sharp rise in credit growth over the last few years, I would not be surprised if an increase in interest rates is followed by deterioration in the loans portfolio of banks and other financial institutions; this would in turn lead to a tightening of credit supply and a higher cost of financing for credit in general."

He still believes the Asian market will continue growing, despite the impending halt of liquidity from the Fed. He rejects the notion that this could lead to a repeat of the Asian financial crisis "because the circumstances of both the global economy and, more importantly, the Asian economies, are now very different from 1994".

Mr Tay said the Asian economies, excluding Japan, have strong fundamentals, with total foreign exchange reserves comprising more than half the world's GDP (52 per cent), much higher than in 1994 (23.6 per cent). Corporate balance sheets are similarly healthy, and although the net debt-to-equity ratio increased to 26.1 per cent from 18.3 per cent after the Lehman Brothers' crisis in 2008, this is still well below the 41.8 per cent in 1994, when the Fed began to raise interest rates.

Despite a relatively sharp rise in debt over the past few years, the gross debt-to-GDP ratio for Asian economies excluding Japan averaged 46.4 per cent, with GDP growth for this year and the next likely to average 6.3 per cent. This is well above the 3 per cent growth rate for the world.

Mr Tay said: "In short, the Asian story not only remains intact, but is also more attractively valued than before.

"Compared to the years just before the Asian financial crisis, Asia excluding Japan has significantly more FX reserves, lower net debt-to-equity levels and sovereign debt levels and healthy growth rates."