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Singapore ‘vulnerable’ to capital flows

Friday 18 November 2011 – by Andrew Hickley

Financial institutions in Singapore must remain vigilant in guarding against the risks emanating from the eurozone crisis, even if its economy has so far remained resilient to the eurozone crisis.

In its annual financial stability review, released on Friday, the Monetary Authority of Singapore argues Asia is vulnerable to sudden capital flows “which could easily reverse”, resulting in volatility in foreign exchange, equity and bond markets.

“While Asia’s policy responses and accumulated reserves provide some buffer, the risk of destabilising capital flow reversals cannot be ruled out,” the regulator says.

Although stability risks increased significantly in the second half of 2011, Singapore’s financial system has remained resilient, the report says.

Corporate balance sheets remain healthy, while earnings have picked up across most sectors and access for financing for has also continued to improve, it says.

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However the report warns that a slowdown in growth could harm corporate earnings, which could tempt banks to lower the quality of their loan portfolios.

The authority said it would monitor banks to ensure they maintain sound underwriting standards and manage their credit concentration risks.

The report also highlights that external shocks and contagion could trigger funding stresses that could mean banks have to reprice their risks. The strains could lead to higher borrowing costs and curtailing lending as a result.

To counter these risks, “MAS expects financial institutions to manage their liquidity and market risks prudently, including monitoring their currency and cashflow mismatches closely, as well as implementing robust stress tests and drawing up contingency funding plans,” the report states.

Currently the Singapore financial sector has only “negligible” exposures to the EU crisis, with contagion from the sovereign debt crisis being largely limited to the equity markets, it said.

“Although corporates, households and domestic financial institutions have strengthened their balance sheets during the economic recovery, there is a need to remain vigilant against risks as the external environment could deteriorate quickly.”

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