Debt-ridden Singapore firms at risk as interest rates rise

Indebted households are also in danger.

Risks will intensify for a number of heavily-leveraged Singaporean companies and households when the US Federal Reserve begins raising its interest rates next year, the Monetary Authority of Singapore (MAS) said in a reply to a parliamentary question yesterday.

The MAS noted that normalising interest rates should be viewed positively as it will benefit Singapore’s exports. However, rate hikes will adversely impact vulnerable debt-ridden firms and individuals.

“Higher interest rates will impact some existing groups of borrowers, in Singapore as elsewhere. Companies and households that have borrowed heavily when interest rates were low will be vulnerable. Highly leveraged companies, especially those with low net profit margins, may find the increase in borrowing costs eroding their cash flow,” noted the MAS.

The MAS also assured that the Government will continue to monitor financing conditions, and ensure that viable businesses, especially SMEs, have continued access to affordable loan financing.

Here’s more from the MAS:

The overall financial position of the household sector remains healthy. However, as MAS has indicated before, a small segment of highly leveraged households could be vulnerable, should interest rates rise more quickly than expected.

We have taken a series of measures to encourage financial prudence. These measures have prevented borrowers from taking on excessive leverage for their property purchases, and reduce the impact of eventual interest rate hikes. MAS has also introduced new regulations on credit card and unsecured credit to help those individuals with credit problems avoid accumulating further debt.

Taken together, the measures have tempered the growth of household debt, from a peak of nearly 13 percent year-on-year in Q3 2011 to 5.6 percent in Q2 2014. New housing loans have lower loan-to-value ratios and shorter loan tenures. The proportion of borrowers taking multiple housing loans has also declined.