Analyst warns central banks in Asia of looming financial crisis

Will Singapore be spared?

In a major report on Asia’s rising risk premium, Nomura's economics team studied the rising risk of financial crises in Asia and highlighted China, Hong Kong, India and Indonesia as countries in the high-risk zone of potential financial crises and put Singapore and Malaysia in the medium-risk category.

Here's more:

The authors warn central banks in Asia about the limits of macro-prudential policies to moderate the rise in financial assets and see the need for them to focus on the financial cycle in addition to the business cycle.

The sharp rise in private debt in Singapore by 50 percentage points over the past four years is one of the red flags the authors have raised in the report.

Our economists highlight an interesting phenomenon common in the past in the US, Japan and Europe and China (dubbed the 5 – 30 rule), that is that financial crises in large economies are often preceded by the domestic debt to GDP ratio rising sharply by 30 percentage points in the five years before the crisis is triggered.

To the extent that the low interest environment in Singapore has sucked in significant investments into property, there is a concern that the high leverage is due to overinvestment in property. One indicator is the increased contribution of construction to GDP, which in 2012 was 14% of GDP, compared to 11% in 2007.