The week: High debt a concern as Singapore faces its most severe downturn, says Menon of MAS

The economic and health crisis brought about by the Covid-19 pandemic will have quite some ways to go. “We are not at the beginning of the end,” says Ravi Menon, managing director of the Monetary Authority of Singapore (MAS). “But rather [we are] at the end of the beginning,” he stressed in an online media briefing on July 16 which was held in conjunction with the release of the central bank’s annual report this year.

As Menon pointed out, Singapore is going through its most severe downturn since independence. The economy contracted 6.5% y-o-y in the first half of 2020 — the first decline since the Global Financial Crisis in 2008. Construction, travel-related and customer-facing domestic services — each comprising 4% of the country’s GDP — bore the brunt of the circuit breaker measures. In comparison, trade-related and modern services clusters were less impacted.

But now, as Singapore restarts its economy under Phase 2 reopening after going into lockdown during the “circuit breaker” period, things may get a little better. Menon conceded that a strong short-term bounce in growth is plausible, though this would be coming from a low base. The level of economic activity, however, will remain well below pre-crisis levels for “quite a while”.

Meanwhile, unemployment and bankruptcies are likely to increase in the months ahead, warned Menon. The longer-term recovery, he added, will likely be weak and gradual. All in, the central bank estimates that the economy will experience a full-year contraction of between 4% and 7% this year.

These are not the only worries that keep Menon awake at night. Corporate and household debt levels, which are expected to rise, are big concerns too. These could act as a further drag on growth and become a source of “vulnerability”, he warned.

As Menon explained, corporate debt levels were already high before the pandemic. The relief measures introduced by the government to help small and medium enterprises will inadvertently increase the amount of outstanding debt, though they provide temporary relief. Example of relief measures include deferred repayments on mortgage loans and insurance premiums.

Menon said these measures cannot go on indefinitely and will expire towards the end of the year. As a result, borrowers could face unintended “cliff effects” come Jan 1, 2021. “That would be too sudden. Many people would be unprepared,” he says.

As such, MAS is currently conducting a “deep analysis” with banks on borrowers who have chosen to defer repayments, said Menon. Following that, the central bank will announce measures that will help ease borrowers and policyholders into gradually resuming repayments, he added.

“Our hope is that the economic situation improves to the point where they can start to make repayments, not all but it can’t be zero. We will have to figure out what that gradual phase of repayment will look like. We have to consider the economic situation closer to the end of the year,” he says.

Despite the downturn seen by the broader economy, MAS is not too worried about the local financial system. In a stress test conducted by MAS, Menon said the major banks and insurers were shown to remain resilient in an adverse scenario. The stress test simulated how the banks would fare in 2020 and 2021, given a 6% drop in GDP, unemployment rate of 6%, and more than 30% decline in equity, oil and property prices. “The banks’ capital ratios, while diminished, remained above MAS’s minimum requirement,” he says.

Still, MAS is not taking any chances. Menon said the central bank is in close discussions with banks and insurers on their capital management plans. “We want to ensure that they retain adequate capacity to continue providing financial services to support the economy even in extreme adverse scenarios,” he says. “Sustaining the safety and soundness of our financial sector is critical to supporting the broader recovery of the real economy.”