Singapore threatened with unprecedented 500% increase in household credit: report

Record-low interest rates cannot last forever.

The entire South East Asian region is awash with capital, thanks to record-low interest rates and a loosening of credit underwriting standards. But economists now warn against the rapid fivefold increase in Singapore’s household debt, which has expanded at a staggering rate in just a decade.

According to a report by ICAEW, the fast increasing rate of household lending has already caused concern in other Southeast Asian countries such as Thailand and Malaysia. A key risk of a rising-consumption economy is a thirst for yield, where in speculators tempted by high returns bet on property prices rising, increasing the risk of a property bubble building up.

The skyrocketing amount of household debt has prompted the Singapore government to intervene by introducing several rounds of property cooling measures, which will slow consumer spending and provide a gentle drag on growth in the short term.

“In moderation, household debt is useful in allowing people to stay afloat between jobs, or to spread a large purchase across several months’ income. It also encourages the region to move from traditional export-driven growth typically seen in emerging economies towards a consumption-driven growth model, something already evident in Singapore’s move towards high value-added services,” noted the report.

But according to Mark Billington, Regional Director, ICAEW South East Asia, “It is important that economies with already high consumption rates take care to avoid artificially raising the standard of living. Allowing credit growth to offset weak wage growth in lower earnings groups may ultimately raise the number of non-performing loans. That, in turn, could result in increased risks of another financial crisis.”

ICAEW Economic Advisor and Cebr Director Charles Davis also noted that many banks got their fingers burnt by a sharp increase in non-performing business in the 1997 Asian Financial Crisis.

“Although reforms have been put in place – including the transformation of economic and financial legislation, bank consolidation and increased capital ratio requirements –post-crisis, many banks have ramped up their consumer lending. Given this, South East Asian economies need to maintain vigilance over lending standards so that they heed the lessons from the late 2000s financial crisis in the US and Europe,” he cautioned.