Escalating debt puts Singapore economy under threat

Resident credit to GDP is at a record high.

A report released today by UBS revealed that Singapore's maturing credit cycle is increasingly acting as a drag on the economic outlook.

UBS notes that resident credit to GDP is now higher than it was in the late 1990s, and rising leverage should continue to draw policy responses from the authorities concerned about elevated house prices, stretched balance sheets and unwarranted speculation. 

“We expect a maturing credit cycle to undermine support for Singapore’s economy and financial markets. . In addition to the macro-prudential policy drag on growth, the elevated levels of debt may eat into confidence,” noted UBS.

Here’s more from UBS:
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. 

It is true that assets, in particular for households, far outstrip liabilities in the aggregate; but a likely uneven distribution of assets and liabilities may leave some indebted parties exposed to deterioration in (housing) asset prices.

In a similar vein, the extension of Singapore bank credit on a regional basis may have provided some diversification for the financial sector, but has increased exposure to maturing credit cycles elsewhere in ASEAN and China.