Deleveraging is inevitable for highly-indebted Singapore: Morgan Stanley

But reducing the leverage ratio is easier said than done.

Singapore needs to deleverage in order to gear up for its next growth cycle, but reducing the city-state’s extremely high leverage-to-GDP ratio is easier said than done.

According to a report by Morgan Stanley, the “sizeable” build-up in Singapore’s leverage makes the republic vulnerable to rising interest rates, declining asset prices, and weakening macroeconomic conditions.

“We note that leverage ratios can stay high without collapsing as long as macroeconomic conditions remain favourable. However, high levels of leverage raise the vulnerability of the Singapore economy to financial instability. It also gives policymakers less flexibility in dealing with a growth slowdown,” Morgan Stanley said.

Reducing debt is not the only way to reduce the leverage-to-GDP ratio, however. The report noted that in order to deleverage, Singapore needs to ensure that domestic income grows faster than the leverage pick-up.

“Reducing the debt-to-GDP ratio typically does not happen via leverage (numerator) falling but rather via income (denominator) growing faster than the leverage pick-up. In this context, the secular growth slowdown from a change in immigration policy would hamper the economy’s ability to reach escape velocity and shake off the leverage drag. Hence, we expect an elongated process of leverage digestion for the economy and slower credit growth for longer,” the report said.

“As we see it, a combination of factors suggest that the economy could remain caught in a circle of high leverage dampening growth, which together with the structural slowdown in immigration policy, hampers the likelihood of growth reaching escape velocity and the economy shaking off the leverage drag, unless productivity improves materially,” Morgan Stanley noted.