Published November 29, 2008

The state of our finances

Households and corporates face the storm with strong balance sheets

By SIOW LI SEN
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AS Singapore's economy enters a turbulent phase, it is time for some stock-taking. Households here can look with some pride at the state of their assets. They stood at a combined $1,131 billion in the third quarter this year - having raced ahead from a figure of $1,096 billion a year ago and $931 billion in Q3 2006.

But then household debt is rising too. It stood at $170.9 billion at end-September 2008 from $162.6 billion a year ago. In other words, while household assets grew 3.23 per cent in a year, Singaporeans saw their liabilities climb 5.11 per cent over the same period. They are taking on debt faster than the rise in the value of their assets.

Looking ahead, though, the borrowing is expected to ease. The growth of housing loans, which account for the bulk of households' borrowing, has moderated from 15 per cent in Q4 2007 to 10 per cent in Q3 this year, according to the latest Financial Stability Review released by the Monetary Authority of Singapore (MAS) yesterday.

Property prices are also starting to dip, which probably explains why total household assets peaked at $1,149.6 billion in Q2.

Related link:

Click here for MAS' Financial Stability Review

The good news, of course, is that household assets are now seven times household liabilities. In fact, cash and CPF balances alone exceed the total liabilities of households. The level of household debt is important for the soundness of Singapore's banking sector as it extends two-fifths of non-bank loans to households, and relies on household deposits as a primary source of funding.

Corporates are not doing too badly either, with much stronger balance sheets compared to the ones that they took into the Asian financial crisis in 1997.

They have reduced their leverage, for one.

The corporate sector's median debt-to-equity ratio stood at around 40 per cent in Q2 2008, compared to 60 per cent in the pre-Asian crisis period.

In the past few years, the rate of growth of household remuneration has outpaced that of household debt such that the household debt to remuneration ratio has fallen from a 10-year high of 208 per cent in 2003 to 166 per cent in 2007, the latest data available shows.

'Looking ahead, even as unemployment rises moderately in tandem with weaker economic activity, the current healthy financial position of the household sector suggests that the impact on households is likely to be manageable,' MAS said.

It noted that the proportion of housing loans that is delinquent is low, at less than one per cent, and most housing loans have low loan-to-value ratios. The charge-off rate for credit cards is also low, at around 3-4 per cent.

'We expect the banking system's non-performing loans (NPLs) from households to rise moderately and should not materially affect the soundness of the banking system,' it said. 'On the whole, households are much better placed to face the current economic slowdown relative to their position before the Asian financial crisis.'

But the MAS warned that the impact is not uniform across different household income groups. 'There is likely to be distress among those who are retrenched or those who rushed into the recent property boom and leveraged up beyond their means.'

However, as robust lending standards in the banking sector were maintained, the loan exposure to this vulnerable group will be limited, and should not affect the stability of the banking system, it said.

The corporate sector also appears to have sufficient liquid assets to cover short-term liabilities and barring a 'deep and prolonged recession', it should be able to weather the turmoil, MAS said. Though corporate insolvencies crept up to 65 in Q2 this year from 46 in Q4 2007, the number is no different from the 66 in Q2 2006.