Crisis in the making: Economists raise the alarm over Singapore’s skyrocketing household debt

Consumer credit is now 75% of the GDP.

Singaporean households are clearly biting off more than they can chew when it comes to borrowing. The country’s ballooning household debt is becoming a steady source of concern for economists in the region, with most raising the alarm over the unsustainable and unprecedented rise in household credit.

For instance, a report by UBS warns that debt levels are now high relative to history while traditional measures of banking system liquidity are looking increasingly stretched.

“An often quoted MAS estimate is that about 5-10% of borrowers have a monthly debt servicing burden greater than 60% and that the percentage of over-leveraged households could increase to 10-15% should mortgage rates rise by 300bps. That might sound like a modest share of households, but consider that, according to Mortgage Bankers Association surveys, at the height of the US housing crisis in August 2008 only 9.2% of all US mortgages were estimated to be delinquent or in foreclosure and this rose to just 14.4% in September 2009,” noted UBS.

Meanwhile, ICAEW warns that there has been a fivefold increase in Singaporean household debt over the past decade, and that lending is going to consumers on a scale previously unseen in South East Asian nations.

“A number of factors make high consumer lending potentially destabilising for an economy. High leverage itself is dangerous in a system: when wage growth slows and households start to struggle with repayments, the businesses owed money struggle with wage bills. This is because they base decisions on future income streams being ever-larger,” stated the ICAEW’s Economic Insight South East Asia.

Fitch Ratings also notes that Singapore’s consumer credit grown at a fairly high pace, averaging 14%-15% annually since the 2008-2009 recession, aided by economic growth and a favourable interest rate environment.

“As a result, Singapore’s household debt has grown from about 66% of GDP at end-2010 to 75% of GDP at end-2013, compared with Hong Kong’s more moderate increase from about 59% to 65% over that period. Rising household debt remains a focus for the MAS. Macro-prudential measures aimed at curbing excessive borrowing by households since 2009 appear to be gradually taking effect, with household lending growth slowing since late 2013,” Fitch warns.

However, the reports also agree that government policies are working to curb the debt threat. Fitch states that while the yearly number of bankruptcy petitions and orders on individuals has been rising since 2011, overall numbers remain low.

“Singapore’s government has been trying to cap the credit expansion and has embarked on a programme of structural reform. This and other policy tools may help the authorities manage the adjustment we look for in the economy. However, we do not think the government will make a strenuous effort to prevent the economic adjustment,” added UBS.