Highly-leveraged households grapple with intensifying debt threat

Problems will worsen when interest rates rise.

Highly-leveraged Singaporean borrowers should get ready to shell out more cash for debt servicing next year. According to UBS, Singapore will have to raise its interest rates next year, in line with the expected rise in the US Federal Reserve’s rates.

UBS notes that other highly-leveraged countries in the region, such as Korea, have the capacity to slash their rates to boost growth, but Singapore cannot recourse to such an action.

“Not all countries in the region have control over domestic interest rates. In Hong Kong and Singapore interest rates are basically linked to US rates, because of their exchange rate regimes. Rates in Hong Kong and Singapore should rise with the US Fed Fund rate next year and that should push up the debt service burden for households in those two dollar-linked financial systems,” noted UBS.

“The bottom line is that households in Hong Kong and Singapore will have to set aside an increased portion of their disposable income for debt service. Furthermore, the potential for property prices to fall in Hong Kong and Singapore assuming rising interest rates could be a significant complicating factor for household debt as outlined earlier,” the report added.