Here’s the real deal behind Singapore’s escalating household debt

Why are economists so worried?

The spike in Singapore’s household debt is a growing cause of concern for both economists and policymakers alike. In the Monetary Authority of Singapore’s annual Financial Stability Report, the central bank stated that the number of highly leveraged Singaporean borrowers bears close watching.

The household debt-to-income ratio has risen from a low of 1.9 times in 2008 during the Lehman crisis to 2.3 times in 2013. These households are weighed down by high monthly debt service commitments, such as property loans, credit card debt, and unsecured debt.

“At higher levels of indebtedness, households are more vulnerable to payment difficulties in the event of interest rate or income shocks. Under an adverse scenario, households with debt at high TDSR levels may have limited room to cut back on spending in order to keep up with monthly debt repayments. For a highly leveraged household, reducing the level of debt will take time, and it will need to work with its bank and a credit counselling agency to reduce its debt via a debt repayment plan. In some cases, the sale of investment properties or rightsizing of homes may be necessary,” the MAS stated.

Meanwhile, economists are raising the alarm over Singapore’s maturing credit cycle. In UBS’ Asian Economic Outlook 2015-2016, economist Edward Teather warned that the credit cycle is increasingly acting as a drag on the economic outlook.

“We expect a maturing credit cycle to undermine support for Singapore’s economy and financial markets. Debt levels are high, interest rates are set to rise and physical asset prices are already falling. Exports should provide only a modest offset. We expect real GDP growth to slow from 2.8% in 2014E to 2.6% in 2015E and 2.4% in 2016E,” he said.

UBS further noted that the MAS will soon have to grapple with higher interest rates and the retarding effect they will have on Singapore's relatively leveraged economy. The central bank may well have to change its exchange rate policy during 2015 as economic slack becomes more obvious.

“We believe the predictability of the currency’s appreciation is one tool by which the authorities have chosen to induce structural adjustment in the economy. This suggests a high bar to changes in MAS policy, but as the credit cycle weighs on the economy and employment demand weakens the Monetary Authority should act,” Teather added.