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December 2013

Macroeconomic Surveillance Department

Monetary Authority of Singapore

ISSN 1793-3463 Published in December 2013 Macroeconomic Surveillance Department Monetary Authority of Singapore http://www.mas.gov.sg All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanised, photocopying, recording or otherwise, without the prior written permission of the copyright owner except in accordance with the provisions of the Copyright Act (Cap. 63). Applications for the copyright owner's written permission to reproduce any part of this publication should be addressed to: Macroeconomic Surveillance Department Monetary Authority of Singapore 10 Shenton Way MAS Building Singapore 079117 Printed by Oxford Graphic Printers Pte Ltd

Financial Stability Review, December 2013

Monetary Authority of Singapore Macroeconomic Surveillance Department

PREFACE i

OVERVIEW ii

1 GLOBAL ENVIRONMENT

1.1 G3 Macroeconomic Environment and Financial System 1

Box A: A Twist to the Search for Yield Story? 5

1.2 Asia Macroeconomic Environment and Financial System 8

Box B: Intermediating Banking Flows in Asia 19

Box C: Potential Impact of Abenomics on Asia: Boon or Bane? 22

2 SINGAPORE’S MACROECONOMIC ENVIRONMENT AND FINANCIAL SYSTEM

2.1 Macroeconomic Developments and Financial Markets 26

2.2 Corporate Sector 30

Box D: Corporate Bond Issuance in Singapore 35

2.3 Household Sector 38

Box E : Update on the Singapore Private Residential Property Market 41

Box F: Singapore Household Sector: When the Tide Goes Out 44

2.4 Banking Sector 49

Box G: Unconventional Monetary Policies (UMP) and the Banking System: When the Music Fades

55

Box H: Stress Testing Financial Institutions: Going the Distance 57

2.5 Non-Bank Financial Sector

2.5.1 Insurance Sector 61

Box I: Monitoring the Singapore Insurance Sector’s Systemic Importance and Emerging Risks

64

2.5.2 Capital Markets Sector 66

Box J: Shadow Banking in Singapore? 69

Box K: Over-the-Counter (OTC) Derivatives Reforms: Still A Ways to Go 73

STATISTICAL APPENDIX 75



Definitions and Conventions

As used in this report, the term “country” does not in all cases refer to a territorial entity that is a state as

understood by international law and practice. As used here, the term also covers some territorial entities that

are not states but for which statistical data are maintained on a separate and independent basis.

In this report, the following country groupings are used:

Euro zone comprises Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy,

Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia and Spain

“G3” refers to the euro zone and United Kingdom, Japan, and the United States

“G20” refers to the Group of Twenty comprising Argentina, Australia, Brazil, Canada, China, France,

Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea,

Turkey, the United Kingdom, the United States and the European Union

“Asia-10” comprises China (CHN), Hong Kong (HK), India (IND), Indonesia (IDN), Korea (KOR), Malaysia

(MYS), the Philippines (PHL), Singapore (SGP), Taiwan (TWN) and Thailand (THA)

“Asia-7” comprises India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand

“NEA-3” comprises Hong Kong, Korea and Taiwan

“SEA-5” comprises Indonesia, Malaysia, the Philippines, Singapore and Thailand

Abbreviations used for financial data are as follows:

Currencies: Chinese Renminbi (RMB), Euro (EUR), Hong Kong Dollar (HKD), Indian Rupee (INR),

Indonesian Rupiah (IDR), Japanese Yen (JPY), Korean Won (KRW), Malaysian Ringgit (MYR), Philippine

Peso (PHP), Singapore Dollar (SGD), Taiwan Dollar (TWD), Thai Baht (THB), US Dollar (USD)

Stock Indices: Bombay Stock Exchange Sensitive Index (SENSEX), FTSE Bursa Malaysia KLCI (FBMKLCI),

Hang Seng Index (HSI), Ho Chi Minh Stock Index (VNINDEX), Jakarta Composite Index (JCI), Korea

Composite Stock Price Index (KOSPI), Nikkei 225 (NKY), Philippine Stock Exchange Index (PSEI),

Shanghai Composite Index (SHCOMP), Stock Exchange of Thailand Index (SET), Straits Times Index (STI),

Taiwan TAIEX Index (TWSE)

Other Abbreviations

ABSD Additional Buyer Stamp Duty

ACU Asian Currency Unit

ADB Asian Development Bank

ADM Asian Dollar Market

AFC Asian Financial Crisis

ASEAN Association of Southeast Asian Nations

AUM Assets Under Management

BCBS Basel Committee on Banking Supervision

BIS Bank for International Settlements

BoE Bank of England

BoJ Bank of Japan

CAR Capital Adequacy Ratio

CCP Central Counterparty

CCR Core Central Region

CCS Credit Counselling Singapore



CDP Central Depository

CDS Credit Default Swap

CFTC Commodity Futures Trading Commission

CIS Collective Investment Scheme

CLO Collateralised Loan Obligation

CMBS Commercial Mortage-Backed Security

COE Certificate of Entitlement

CPF Central Provident Fund

CPI Consumer Price Index

CPSS Committee on Payment and Settlement Systems

DBU Domestic Banking Unit

DOS Department of Statistics

EBIT Earnings Before Interest and Tax

EC European Commission

EC Executive Condominium

ECB European Central Bank

EDB Economic Development Board

EME Emerging Market Economy

EMIR European Markets Infrastructure Regulation

ESM European Stability Mechanism

ETF Exchange-Traded Fund

EU European Union FAI Fixed Asset Investment FDI Foreign Direct Investment FI Financial Institution

FLS Funding for Lending Scheme

FMC Fund Management Company

FMI Financial Market Infrastructure

FSAP Financial Sector Assessment Programme

FSB Financial Stability Board

FSOC Financial Stability Oversight Council

FSR Financial Stability Review

GDP Gross Domestic Product

GFC Global Financial Crisis

GLS Government Land Sales

ICAAP Internal Capital Adequacy Assessment Process

IIF Institute of International Finance

IMF International Monetary Fund

IMFC International Monetary and Financial Committee

IOSCO International Organisation of Securities Commissions

IPTO Insolvency and Public Trustee’s Office

IWST Industry-Wide Stress Test

JGB Japanese Government Bond

LIBOR London Interbank Offered Rate

LCR Liquidity Coverage Ratio

LGFV Local Government Financing Vehicle

LSAP Large-Scale Asset Purchase

LTA Land Transport Authority

LTD Loan-to-Deposit

LTRO Long Term Refinancing Operations

LTV Loan-to-Value



M&A Mergers and Acquisitions

MAS Monetary Authority of Singapore

MMF Money Market Fund

MSD Macroeconomic Surveillance Department

MSR Mortgage-Servicing Ratio

NAO National Audit Office

NAV Net Asset Value

NEER Nominal Effective Exchange Rate

NIM Net Interest Margin

NPL Non-Performing Loan

OCR Outside Central Region

ODRG OTC Derivatives Regulators Group

OIF Offshore Insurance Fund

OIF Other Investment Fund

OIS Overnight Indexed Swap

OTC Over-the-Counter

PE Private Equity

PFMI Principles for Financial Market Infrastructures

PIK Payment-in-Kind

PPI Property Price Index

RBC Risk-Based Capital

RBI Reserve Bank of India

RCR Rest of Central Region

REIT Real Estate Investment Trust

ROA Return on Assets

S&P Standard & Poor’s

SBL Securities Borrowing / Lending

SEC Securities and Exchange Commission

SFA Securities and Futures Act

SFV Structured Finance Vehicle

SGS Singapore Government Securities

SGX Singapore Exchange Ltd

SGX-DC Singapore Exchange Derivatives Clearing Ltd

SIBOR Singapore Interbank Offered Rate

SIF Singapore Insurance Fund

SLOOS Senior Loan Officer Opinion Survey

SME Small and Medium-Sized Enterprise

SMX Singapore Mercantile Exchange

SOR Swap Offer Rate

SSM Single Supervisory Mechanism

STI Straits Times Index

TDSR Total Debt-Servicing Ratio

TED Treasury-Interbank

TR Trade Repository

TSC Transport, Storage and Communication

UMP Unconventional Monetary Policy

URA Urban Redevelopment Authority

WEO World Economic Outlook

WMP Wealth Management Product



i

PREFACE

The Monetary Authority of Singapore (MAS) conducts regular assessments of Singapore’s

financial system. Potential risks and vulnerabilities are identified, and the ability of the

financial system to withstand potential shocks is reviewed. The analysis and results are

published in the annual Financial Stability Review (FSR). The FSR aims to contribute to a

better understanding among market participants, analysts and the public of issues

affecting Singapore’s financial system.

Section 1 of the FSR provides a discussion of the macroeconomic environment and

financial markets both globally and in Asia. Section 2 starts by outlining key developments

in Singapore’s macroeconomic environment and financial system. This is followed by an

analysis of the corporate and household sectors, then the banking sector, which plays a

dominant role in Singapore’s financial landscape. Finally, a review of the non-bank

financial sector, which includes the insurance sector and capital market infrastructure and

intermediaries, is also provided.

The production of the FSR was coordinated by the Macroeconomic Surveillance

Department (MSD) team which comprises Chan Lily, Ng Heng Tiong, Patricia Chua, Foo

Suan Yong, Gay Bing Yong Kenneth, Ho Ruixia Cheryl, Ho Xinyi, Lam Mingli Angeline, Lee

Jia Sheng Harry, Lee Su Fen, Lim Ju Meng Aloysius, Lim Weilun, Qiu Qiaoling Angeline,

Soon Shu Ning Gael, Tan Si Jie, Teoh Shi-Ying, Wong Siang Leng, Yam Yujian, Yeo Siok Lee

Denise, Yeoh Lye Choon Brian, Yip Ee Xiu, Yoe Xue Ting Selene and Zhong Kemin under the

general direction of Dr Lam San Ling, Executive Director (MSD). Valuable statistical and

charting support was provided by members of the MSD Statistics Unit. The FSR also

incorporates contributions from the following departments: Banking Departments I, II &

III, Capital Markets Intermediaries Department, Economic Analysis Department, Economic

Surveillance and Forecasting Department, Insurance Department, International

Department, Investment Intermediaries Department, Market Conduct Department,

Markets Policy & Infrastructure Department, Monetary and Domestic Markets

Management Department, Prudential Policy Department and Specialist Risk Department.

The FSR reflects the views of the staff of the MSD and the contributing departments.

The FSR may be accessed in PDF format on the MAS website:

http://www.mas.gov.sg/Regulations-and-Financial-Stability/Financial-Stability/2013/Financial-Stability-

Review-2013.aspx

http://www.mas.gov.sg/Regulations-and-Financial-Stability/Financial-Stability/2013/Financial-Stability-Review-2013.aspx

http://www.mas.gov.sg/Regulations-and-Financial-Stability/Financial-Stability/2013/Financial-Stability-Review-2013.aspx



ii

OVERVIEW

G3 macroeconomic and financial

conditions have improved in 2013,

but challenges remain

The G3 economies have recovered in 2013 – the

US shrugged aside fiscal headwinds, the euro

zone exited from recession, and Japan’s growth

was aided by robust exports and consumption.

The risk of bank defaults in the G3 has receded as

banks’ balance sheets have strengthened.

Deposit outflows have abated while cost cutting

and lower provisions have boosted earnings. G3

sovereign borrowing costs have stayed low, due

to a combination of forceful policy actions, ample

global liquidity, and search for yield by some

investors.

But challenges remain. In the euro zone, credit

quality concerns could impede credit growth and

in turn threaten the fragile recovery. If global

liquidity tightens or market sentiment turns

abruptly, funding costs could rise rapidly for

countries with weaker fundamentals. Emerging

market economies (EMEs) could also come under

pressure, with implications for G3 corporates and

banks that have strong presence in these regions.

In the longer term, structural reforms in the G3

are needed to improve the sustainability of public

finances, break the adverse feedback loops

between sovereigns and banks, and enhance

economic competitiveness.

Unconventional monetary policies

(UMP) cannot be in place indefinitely;

policy normalisation needs to be

carefully planned and communicated

Much of the improvements in G3 economic and

financial conditions have been underpinned by

unconventional monetary policies (UMP).

However, these policies cannot be in place

indefinitely because they have potential

implications for monetary and financial stability.

As G3 policymakers consider policy

normalisation, it is important that they do so in

carefully-considered steps that are clearly

communicated.

Asia’s economic growth and financial

markets have held up amid abundant

global liquidity and risk appetite …

Turning to Asia, economic growth has held up

despite mixed conditions. UMP has helped to

bolster global growth in the near term, in turn

providing support for Asia. Some authorities

have also adopted fiscal measures to provide a

fillip to growth.

Meanwhile, the abundant global liquidity and risk

appetite underpinned by UMP have combined

with record low interest rates in the region to

keep financial markets buoyant for the most part.

… but considerable downside risks lie ahead

However, considerable risks lie ahead.

Uncertainties surrounding the G3 economic

recovery and domestic restructuring efforts in

Asia cloud the growth outlook for the region.

Although Asia is more resilient now than during

the Asian Financial Crisis (AFC), the financial

market turbulence in recent months attests to

the strains that G3 policy normalisation can have

on the region.

Of particular concern is the build-up of private

and public sector debt in recent years. If G3

policy normalisation triggers an abrupt tightening

of financial conditions, debt-servicing burdens in

Asia can rise sharply. A dip in confidence can

lead to currency depreciation, which can add to

debt repayment costs for those who had

borrowed in foreign currencies. With volatile

capital flows, banks may come under foreign-

currency funding pressure. They may also tighten

credit supply as defaults rise, leading to a vicious

cycle of declining asset quality, tightening credit

and slowing growth. The potential impact across



iii

Asia could be uneven, depending on market

perceptions of which economies are more

susceptible to external shocks.

Singapore’s economy and financial markets

have been resilient …

Singapore’s economic growth has held up in 2013

despite considerable swings in momentum, and is

expected to remain moderately positive in 2014.

Reflecting confidence in our economic

fundamentals and fiscal discipline, domestic

financial markets have stayed resilient.

Corporate and household balance sheets as

well as the banking system stay healthy …

Corporate and household balance sheets are

healthy in aggregate. The corporate sector’s

profitability has improved in a broad-based

manner while liquidity positions appear

adequate. Household net wealth continues to

grow, and stands at four times GDP.

The banking system has stayed resilient. Local

banks already meet Basel III capital requirements.

Loan growth has been firm, with increased

exposure to Asia. Asset quality remains healthy,

and Singapore Dollar (SGD) funding for domestic

lending remains adequate.

… but downside risks remain;

the need for vigilance is clear

However, several downside risks lie ahead. The

global environment could deteriorate, posing

uncertainties for Singapore’s growth outlook.

Interest rates – and therefore debt-servicing

burdens – could increase markedly and perhaps

unexpectedly soon. In turn, growth shocks and

financial market volatility could affect the

property market and the banking system.

Rising corporate and household sector

indebtedness could amplify strains

from higher interest rates

Corporate leverage has increased across almost

all sectors. Higher interest rates arising from G3

policy normalisation could leave the most

leveraged firms exposed to heavier debt-servicing

burdens.

Household sector debt has also trended up

alongside firm increases in assets and net wealth

over the past few years, albeit at a slower pace in

recent quarters. If mortgage rates rise by three

percentage points, the share of over-leveraged

households could rise to 10-15%. MAS has

introduced measures to encourage prudent

borrowing and help keep household debt in

check.

The property market continues to

warrant close monitoring

The Total Debt Servicing Ratio (TDSR) framework,

together with earlier policy measures by the

Government, has moderated property market

transaction activity and housing loan growth.

However, developer bids for land parcels remain

firm. The current uncertain environment

warrants continued caution and vigilance.

The banking sector needs to guard

against credit quality deterioration

and liquidity risks

The banking sector needs to guard against credit

quality deterioration and liquidity risks. In

particular, as banks expand their cross-border

lending to the region, they need to monitor these

exposures carefully.

In addition, banks need to continue managing

their liquidity risks prudently. The local banks

have been taking measures to improve their US

dollar (USD) funding profiles. They need to stay

vigilant on this front to avoid adverse effects

from any abrupt tightening in global USD

liquidity.

Macroeconomic Surveillance Department

Monetary Authority of Singapore

3 December 2013



1

GLOBAL ENVIRONMENT

1.1 G3 Macroeconomic Environment and Financial System

Macroeconomic and financial conditions in the G3 improved in 2013, supported by unconventional

monetary policies (UMP). However, loose monetary conditions cannot be in place indefinitely, and a

sustained economic recovery would need to be backed by appropriate structural reforms.

With the growth outlook in advanced economies still subject to considerable uncertainty, the mere

prospect of the US starting to normalise policy by tapering its large-scale asset purchase (LSAP)

programme triggered heightened volatility in global financial markets. This attests to the ramifications

that the G3’s economic growth, financial system resilience and policy actions can have globally.

Macroeconomic conditions in the G3 have improved

The G3 economies recovered in 2013 (Chart 1.1.1),

though growth has slowed in some economies in the

latest quarter. The US’ and the UK’s GDP growth

continued to pick up in Q3 2013. The euro zone

unexpectedly exited from recession in Q2 2013 and

continued to expand in Q3, albeit at a slower rate. In

Japan, growth slowed in Q3 after a pick-up in H1 2013,

helped by firm exports and robust consumption.

G3 banking systems have generally

strengthened over the past year

G3 banks – particularly European banks – have generally

strengthened over the past year, with higher earnings

driven largely by cost-cutting and lower provisions.

Market expectations of bank defaults have receded

dramatically, especially for European banks, as seen by

the narrowing of credit default swap (CDS) spreads

(Chart 1.1.2). Bank funding conditions have also

improved in the euro zone. Deposit outflows have

largely abated (Chart 1.1.3), except for Cyprus which

took a bailout package in April this year. Europe’s move

towards a banking union with a common supervisory

framework, as well as ongoing efforts to put in place a

common resolution framework, has been broadly seen

as a step in the right direction, even though

implementation will bring challenges.

Chart 1.1.1 GDP Growth: G3 Economies

Source: Datastream

Chart 1.1.2 iTraxx Europe Senior Financial Index

Source: Bloomberg

-20

-15

-10

-5

0

5

10

2007 2008 2009 2010 2011 2012 2013

Qo

Q S

AA

R %

Gro

wth

US Japan Euro Zone UK

Q3

50

100

150

200

250

300

350

2011 2012 2013

Basis

Po

ints

Nov



2

However, banking systems face

ongoing as well as new challenges

However, banking systems face ongoing as well as new

challenges. With economic growth in the euro zone still

modest and the risk of adverse changes in credit quality

persisting, credit supply has remained moribund. Euro

zone banks have continued to tighten lending standards

for firms (Chart 1.1.4), which may impede further

economic recovery. In contrast, bank lending standards

for firms have eased over the past year in the US (Chart

1.1.4) and in Japan (Chart 1.1.5).

Looking ahead, a potential growth slowdown in

emerging market economies (EMEs) could pose earning

headwinds for G3 corporates and banks with strong

presence in these regions. Upcoming stress tests and

asset quality reviews could yet indicate the need for

bank capital buffers to be increased.

The current period of relative calm therefore presents a

window of opportunity for structural reforms to prevent

the re-emergence of adverse feedback effects between

banks and sovereigns.1 In this regard, the euro zone has

made some progress by allowing direct bank

recapitalisation through the European Stability

Mechanism (ESM), therefore bypassing sovereign

balance sheets.2

Sovereign borrowing costs are currently low,

but fiscal imbalances persist

The sovereign yields of major G3 countries have stayed

low, even after rising somewhat following indications

from the US Federal Reserve that it could start tapering

its LSAP soon (Charts 1.1.6). In the euro zone periphery,

yields are significantly lower than at the height of the

euro zone crisis (Chart 1.1.7). Emboldened by forceful

Chart 1.1.3 Deposit Growth Rates:

Selected Euro Zone Economies

Source: European Central Bank (ECB)

Chart 1.1.4 Net Percentage of Banks Tightening Lending

Standards to Firms: Euro Zone and US

Source: ECB, US Federal Reserve * Commercial and Industrial

1 An example of an adverse bank-sovereign feedback effect is when bank insolvency impinges on sovereign strength, as any

government bailout of a bank would weaken the government’s fiscal position. Conversely, if public finances are weakened, this can affect the perceived strength of banks that rely on implicit support from their governments. Weak banks could face funding problems, and these could exacerbate or morph into solvency concerns. 2 However, the implementation of this arrangement has been delayed till after the euro zone-wide Single Supervisory Mechanism

(SSM) is set up.

-25

-15

-5

5

15

25

2008 2009 2010 2011 2012 2013

Yo

Y %

Gro

wth

Cyprus GreeceIreland ItalyPortugal Spain

Oct

-100

0

100

2008 2009 2010 2011 2012 2013

Net P

erc

en

tag

e

Euro Zone Large Firms Euro Zone SMEsUS C&I* Loans to Large and Middle-Market FirmsUS C&I Loans to Small Firms

Q3

Easing

Tightening



3

policy actions and an environment of ample global

liquidity, some investors have continued their relentless

search for yield. Their demand for higher-yielding assets

has in turn contributed to lower interest rates overall.

This could bring about new risks. If global liquidity

tightens or market sentiment turns abruptly, funding

costs could rise rapidly for countries and firms with

weaker fundamentals (Box A).

The longer-term sustainability of public finances in many

G3 countries remains questionable. Their debt-to-GDP

ratios remain high compared to historical trends (Chart

1.1.8). Some euro zone countries under bailout

programmes may require additional funds to cover

financing gaps. In the US, budget deficits are expected

to persist at least over the next decade, making

improvements to the country’s public debt trajectory a

challenge. Furthermore, any standoff between US

policymakers during the annual budget process and

negotiations to raise the statutory debt ceiling would

likely add uncertainty to global financial markets and

economic sentiment. Japan’s government debt has

been largely held by domestic investors. However,

domestic banks have started diversifying their

investment portfolios even as the stock of Japanese

Government Bonds (JGBs) crossed the psychological one

quadrillion yen mark. In future, the sustainability of

Japan’s public finances may well be more exposed to

changes in foreign investor sentiment.

Unconventional monetary policies, which have

underpinned improvements in G3 economic and

financial conditions, cannot continue indefinitely

UMP have underpinned much of the improvements in

economic and financial conditions in the G3.

The US Federal Reserve has continued with its LSAP over

the past year. In the euro zone, the European Central

Bank (ECB)’s programmes to provide a backstop to

sovereigns as well as long-term financing for banks last

year have continued to bring relief to financial markets.

More recently, the ECB and the Bank of England (BoE)

Chart 1.1.5 Diffusion Index of Credit Standards

for Firms: Japan

Source: Bank of Japan (BoJ)

Chart 1.1.6 Ten-Year Sovereign Bond Yields:

Selected G3 Economies

Source: Bloomberg

Chart 1.1.7 Ten-Year Sovereign Bond Yields: Selected Euro Zone Economies

Source: Bloomberg

-6

0

6

12

18

24

30

2008 2009 2010 2011 2012 2013

Perc

en

tag

e P

oin

ts

Japan Large-Sized FirmsJapan Medium-Sized FirmsJapan Small-Sized Firms

Q3

Easing

0

1

2

3

4

5

6

2007 2009 2011 2013

Per C

en

t

France Germany Japan UKUS

Nov

0

10

20

30

40

0

5

10

15

20

2007 2009 2011 2013

Per C

en

t

Per C

en

t

Ireland ItalyPortugal SpainGreece (RHS)

Nov



4

have used forward guidance on interest rates to try to

allay concerns that premature interest rate rises could

derail Europe’s fledgling recovery. The BoJ also started

an aggressive quantitative easing programme in April to

replace its previous asset purchase programme.

However UMP cannot be in place indefinitely. Such

policies have led to sharp expansions in the balance

sheets of major central banks since 2008 (Chart 1.1.9).

This has potential implications for monetary and

financial stability, and could also lead to financial market

distortions.

Looking ahead, it is vital to normalise policy

in carefully-considered steps

Looking ahead, as G3 policymakers begin to consider

normalising policy, it is important that they pay

attention to the potential spillover effects. A case in

point is the heightened volatility in global financial

markets and spillover effects on EMEs after the US

Federal Reserve indicated that it could start tapering its

LSAP programme.

Leaders of the International Monetary and Financial

Committee (IMFC) have stressed that the eventual

transition toward the normalisation of monetary policy

should be well timed, carefully calibrated, and clearly

communicated. G20 leaders have also called for

cooperation to manage these spillovers to other

countries.

Chart 1.1.8 Public Debt-to-GDP Ratio:

Selected G3 Economies

Source: International Monetary Fund (IMF) World Economic Outlook (WEO)

Chart 1.1.9

Central Bank Assets: Selected G3 Economies

Source: Bloomberg

0

50

100

150

200

250

300

1990 1995 2000 2005 2010 2015

Per C

en

t

France GermanyGreece IrelandItaly JapanPortugal SpainUnited Kingdom United States

Estimates as at 2013

2018

50

150

250

350

450

2008 2009 2010 2011 2012 2013

Ind

ex (Jan

2008 =

100)

Federal Reserve ECBBank of England Bank of Japan

Nov



5

Box A

A Twist to the Search for Yield Story?

Rising search for yield in advanced economies may exacerbate risks

Over the past few years, UMP in the advanced economies and ample global liquidity have led to investors

migrating down the creditworthiness ladder in a search for yield. This search for yield is also evident in EMEs,

including Asia, where strong capital inflows have put upward pressure on asset prices. Indication by the US

Federal Reserve in May that it could start tapering its LSAP programme soon led to capital outflows from and

exchange rate volatility in EMEs. Looking ahead, as investors reassess the risk-return profile of EME

investments, the tide may turn, with investors, including those from EMEs, looking more to the advanced

economies for yield. This could result in a further build-up of risk in the more vulnerable market segments in

the advanced economies.

More signs of search for yield in advanced economies

There have been growing signs of search for yield in the advanced economies:

Sovereign bonds of euro zone periphery: Sovereign bond yields for peripheral euro zone countries have

remained low despite high public sector debts and slow progress in reforms to achieve fiscal

sustainability. While strong policy actions have staved off the risk of an immediate crisis in the euro

zone, some of the yield compression could also have been due to investors’ willingness to purchase

these sovereign bonds in the search for yield.

High-yield corporate debt in Europe and the US: Speculative-grade bond yields in Europe and the US

remain low (Chart A1), a sign of strong demand for high-yield debt. European high-yield corporate

bond issuance so far this year has exceeded the record issuance in 2012 (Chart A2), in spite of a dip in

June due to LSAP tapering concerns.

Chart A1 Speculative-Grade Corporate Bond Yields:

Europe and US

Source: Bloomberg

Chart A2 Speculative-Grade Corporate Bond Issuance:

Peripheral Euro Zone and Rest of Europe

Source: Dealogic

0

6

12

18

24

30

2008 2009 2010 2011 2012 2013

Per C

en

t

Europe US

Nov

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012 2013Oct

ytd

€B

illio

n

Peripheral Euro Zone Rest of Europe



6

High-risk practices and use of leveraged instruments in US credit markets: Earlier this year, US Federal

Reserve governor Jeremy Stein3 highlighted an increase in high-risk practices such as the issuance of

payment-in-kind (PIK) notes and covenant-lite loans, as well as the use of dividend recapitalisations and

leverage in large buyout deals.4 The US Financial Stability Oversight Council (FSOC)5 also highlighted

that there were signs of weakening underwriting standards in covenants for some newly-issued bonds

and loans, and that the issuance of collateralised loan obligations (CLOs)6 was close to peak levels. The

use of leveraged exchange traded funds (ETFs) to amplify the returns on underlying indices also poses

concerns.

Commercial mortgage-backed securities (CMBS) market: There has been renewed interest in CMBS,

following the sharp drop in issuance activity during the Global Financial Crisis (GFC). US CMBS issuance

has been gaining traction, though it remains below pre-GFC highs (Chart A3). CMBS issuance in Europe

has also shown signs of pick-up, particularly in Germany, where it totalled €6.9 billion in the first ten

months of 2013, the highest level since 2009.

Chart A3 Worldwide CMBS Issuance

Source: Dealogic

Chart A4

Property Market Price Indices: US and UK

Source: Bank for International Settlements (BIS)

Property markets: Property prices in the US and UK have picked up (Chart A4). In particular, house

prices in the UK have surpassed the 2008 peak. This is in part due to market normalisation after the

GFC, as economic conditions gradually improve. Policies that facilitate mortgage lending, such as the

UK’s Funding for Lending Scheme (FLS)7, could also have aided the housing price recovery. Some

investors could also have responded to the introduction or tightening of macroprudential rules in Asia

3 US Federal Reserve Governor Jeremy C. Stein, (February 2013), “Overheating in Credit Markets: Origins, Measurement, and

Policy Responses”. http://www.federalreserve.gov/newsevents/speech/stein20130207a.htm. 4 PIK notes allow borrowers to pay interest or dividends to investors with additional debt or equity instead of cash. Covenant-lite

loans are loans where financing is given with limited restrictions on the borrower. Dividend recapitalisations involve the use of borrowings to pay private equity (PE) shareholder dividends. A leveraged buyout is when a company is bought with a significant amount of borrowed bonds or loans, structured such that the company’s cash flows or the assets are used as collateral to secure and repay the money borrowed. 5 FSOC, (April 2013), “2013 Annual Report”.

http://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf. 6

CLOs are securities backed by receivables on loans, and provide investors with leveraged exposure to non-investment grade corporate credit. 7 The FLS is designed to incentivise banks and building societies to boost their lending to the UK real economy. It does this by

providing funding to banks and building societies for an extended period, with both the price and quantity of funding provided linked to their lending performance. The BoE has recently re-focused the FLS away from mortgages, in recognition of of the pick-up in housing activity and increased momentum in house price inflation.

0

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http://www.federalreserve.gov/newsevents/speech/stein20130207a.htm

http://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf



7

by seeking returns in other property markets.

Risks that could arise from the search for yield

Lack of impetus for change could result in build-up of longer-term risks in peripheral Europe

Low sovereign bond yields in peripheral Europe have reduced the immediate pressure on governments to take

hard decisions on fundamental structural reforms. Longer-term risks could build up and be more painful to

unwind down the road.

Have investors understood sufficiently the risk implications?

The strong demand for high-yield debt raises the question of whether investors have sufficiently priced in the

possibility of increased default rates and widening credit spreads should markets turn.

Signs of stress in the CMBS market have emerged – the number of CMBS defaults in Europe in H1 2013 was

double that in the same period last year, though the number of defaults later fell in Q3 2013. Falling prices for

commercial properties outside major cities could suggest that some loans which support CMBS arranged during

boom times have been failing to repay at maturity. The US FSOC8 has warned that the commercial real estate

sector remains vulnerable to refinancing risks in the event of a sharp rise in interest rates, which could lead to

more CMBS defaults.

The US Securities and Exchange Commission (SEC)9 had highlighted previously that some ETFs could have

unusual investment objectives or use complex investment strategies that might be difficult to understand. For

example, leveraged ETFs may be unsuitable as long-term investment tools, as their investment objectives are

typically set on a short-term basis, something which may not be clear to unsophisticated investors. At a

broader level, the Federal Reserve10 has warned that trading activity of leveraged ETFs during bouts of market

volatility could lead to a cascading reaction that may destabilise the broader market.

The strong demand for high-yield debt could also be encouraging products with structures that may be

disadvantageous to investors, such as PIK toggle deals which give borrowers the option to repay lenders with

more debt rather than cash. These disadvantageous structures could become apparent to investors only in the

future should defaults pick up or (re)financing suddenly becomes more difficult.

Could new asset bubbles be forming?

Could the pace of house price increases in the US and the UK be a sign that asset bubbles are forming again?

Beyond risks to investors, there are also concerns that another asset bubble could lead to renewed risks for

bank asset quality.

Policymakers must stand prepared to manage risks

Although all eyes have recently been on heightened volatility in EMEs, it is important to be watchful of capital

inflows to vulnerable sectors in the advanced economies, which could lead to a build-up of risks. Peripheral

euro zone countries need to implement structural reforms to improve their economic competitiveness and

fiscal sustainability. Investors need to exercise caution when dealing with high-yield debt and other new

investment products. Policymakers need to stay vigilant and be prepared to take measures to manage risks

that may emerge.

8 FSOC, (April 2013), “2013 Annual Report”.

http://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf. 9 US SEC (August 2012), “Investor Bulletin: Exchange-Traded Funds (ETFs)”. http://www.sec.gov/investor/alerts/etfs.pdf.

10 Tugkan Tuzun, US Federal Reserve (July 2013), “Are Leveraged and Inverse ETFs the New Portfolio Insurers?”.

http://www.federalreserve.gov/pubs/feds/2013/201348/201348pap.pdf.

http://www.treasury.gov/initiatives/fsoc/Documents/FSOC%202013%20Annual%20Report.pdf

http://www.sec.gov/investor/alerts/etfs.pdf

http://www.federalreserve.gov/pubs/feds/2013/201348/201348pap.pdf



8

1.2 Asia Macroeconomic Environment and Financial System

Over the past few years, an unusual combination of factors – abundant global liquidity and risk appetite

underpinned by advanced economies’ UMP, record low interest rates and various fiscal measures in Asia –

has made it possible for Asia’s economic growth to hold up and financial markets to be buoyed by bullish

sentiment for the most part. This has been fuelled, in part, by a build-up of public and private sector debt.

The environment could soon change, as the US leads the way in starting to normalise monetary policy by

tapering its LSAP programme, even as uncertainties surround the G3 economic recovery and restructuring

efforts in Asia. Global financial tightening can lead to stresses, including interest rate increases, shifts in

sentiment and volatile capital flows. These stresses can manifest themselves quickly for borrowers,

financial markets and banking systems, with uneven impact on different parts of the region.

Asia as a region is more resilient today than during the Asian Financial Crisis (AFC). Various policy

measures have helped to reduce vulnerabilities to external shocks. Nonetheless, further progress in this

respect will strengthen the resilience of individual countries as well as the entire region.

Asia’s economic growth momentum has been

mixed, and considerable risks lie ahead

Asia’s economic growth momentum has been mixed,

slowing in some countries while exhibiting resilience

in others. Considerable downside risks remain.

Economic growth in several parts of Asia ex-Japan

moderated in 2013. This was due to certain country-

specific factors, still-tepid external demand from

major advanced economies and some effects of

China’s domestic restructuring efforts.

India’s growth slowed to 4.4% y-o-y in Q2 (Chart

1.2.1), the weakest pace since Q1 2009, reflecting a

broad-based deceleration across both the industrial-

and services sector, before picking up moderately to

4.8% y-o-y in Q3. From a longer-term perspective,

infrastructure gaps and policy gridlock have been key

factors behind persistent drags on growth.

In most parts of Southeast Asia, growth decelerated

(Chart 1.2.2), as domestic demand slowed and export

growth remained subdued. Thailand slipped into a

technical recession in Q2, as post-flood

reconstruction spending tapered off and private

Chart 1.2.1 GDP Growth: Selected Asian Economies

Source: Bloomberg

Chart 1.2.2 GDP Growth: Selected Asian Economies

Source: Bloomberg

-5

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India Korea

Taiwan

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9

consumption was restrained by high household debt,

before returning to modest sequential growth in Q3.

Indonesia’s growth continued to ease as tighter

credit conditions crimped firms’ investment and low

commodity prices weighed on exports.

In contrast, economic growth momentum in Korea

picked up in Q2 and Q3 (Chart 1.2.1) as fiscal policy

measures provided a fillip to domestic spending,

compensating for somewhat sluggish external

demand. Hong Kong’s growth moderated in Q3, but

is expected to benefit from firmer growth in

advanced countries and China in the period ahead.

China’s growth picked up moderately in Q3 to 7.8%

y-o-y (Chart 1.2.1), after successive quarters of

slowdown due to external headwinds and some

effects from efforts at economic rebalancing. With

government measures such as tax breaks for small

businesses and acceleration of rail construction

providing some support, investment has been the

main driver of the pick-up.

Looking ahead, the risks for Asia’s economic growth

are tilted to the downside.

Within Asia, China’s economic expansion is likely to

be more modest than in the past, as authorities strive

to strike a balance between maintaining robust

growth in the near term and implementing longer-

term structural reforms. India needs to address

issues related to infrastructure bottlenecks to tame

inflation, revive investment and improve its fiscal and

current account positions. In the rest of the region,

exports will likely continue to be restrained by still-

subdued growth in the advanced economies (Chart

1.2.3), even as domestic demand slows.

Advanced economies’ unconventional monetary

policies have made Asia’s future growth outlook

more uncertain and played a part in its debt build-up

Against this backdrop, while advanced economies’

Chart 1.2.3 G3 GDP Growth & Asia-10 Export Growth

Source: CEIC, MAS estimates

Chart 1.2.4

Cumulative Net Capital Flows: Asia-7

Source: IMF Balance of Payments, CEIC Note: Asia-7 comprises India, Indonesia, Korea, Malaysia, the Philippines, Taiwan and Thailand.

Chart 1.2.5

Corporate Debt-to-GDP Ratio: Selected Asian Economies

Source: BIS

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UMP have helped bolster global economic growth in

the near term, they have also made Asia’s future

growth outlook more uncertain and played a part in

the build-up of debt within the region.

UMP have made it more difficult to gauge whether

advanced economies’ trend growth is now

structurally lower compared to pre-crisis levels.

There is hence less clarity over the support which

Asian economies can expect to get from the demand

recovery in advanced economies.

UMP have also underpinned abundant global liquidity

and risk appetite. Together with record low interest

rates in Asia, these have contributed to capital

inflows and the build-up of private sector debt in

several parts of the region.

In recent years, Asia, along with other EM regions,

received substantial financial flows in a global search

for yield. Much of these inflows were in the form of

portfolio and other investment flows (Chart 1.2.4),

widely regarded as shorter-term in nature.

Corporate debt relative to GDP has remained

elevated in a few economies (Chart 1.2.5), although

financial leverage appears to have largely remained

stable across the region (Chart 1.2.6).

Household debt relative to GDP has continued to rise

across several economies (Chart 1.2.7). For some,

there have been signs that the pace of increase is

moderating. For others, however, the pace has

picked up somewhat despite various government

measures to restrain the growth in household

leverage and asset prices, in particular property

prices which have risen briskly across several

economies (Chart 1.2.8).

Investors were also buying into higher risk

instruments. For example, issuance of high-yield

bonds in Asia shot up in 2013, with a larger

proportion of the issues rated B1 or lower (Chart

Chart 1.2.6 Corporate Sector Debt-to-Equity Ratio

(Median): Asia-10

Source: Thomson Financial

Chart 1.2.7 Household Debt-to-GDP Ratio: Asia-10

Source: CEIC

Chart 1.2.8

Property Price Index (PPI): Selected Asian Economies

Source: CEIC, Singapore Urban Redevelopment Authority (URA)

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1.2.9). Further, Moody’s reported that many issuers

were able to refinance at lower rates (Chart 1.2.10)

Interest in Asian real estate investment trusts (REITs)

also grew, with the market capitalisation of Asian

REITs growing by 67% between 2010 and 2013 (Chart

1.2.11).

Meanwhile, some fiscal measures taken by

authorities to bolster growth are not without risks

Meanwhile, some fiscal measures taken by

authorities in different parts of Asia to bolster growth

and help lower-income groups are not without risks.

For example, some subsidies and assistance

programmes have contributed to increases in public

debts relative to GDP (Chart 1.2.12) but may not help

strengthen growth drivers in future. For China, while

central government finances appear sound,

estimates drawing from official sources indicate that

local government debt has more than doubled since

2007, rising to 23% of GDP (Chart 1.2.13).

The unusual combination of factors

making it possible for economic growth to hold up

and debt-servicing burdens to remain manageable

could soon change

The unusual combination of factors making it

possible for growth in Asia to hold up and debt-

servicing burdens to remain manageable could soon

change.

The US Federal Reserve plans to begin normalising its

monetary conditions when economic and financial

conditions justify such a move, through tapering its

LSAP. In the euro zone, while the ECB has committed

to keeping interest rates low for an extended period

of time, it could still raise rates earlier than expected

should the economic recovery there pick up speed.

While the start of policy normalisation is expected to

coincide with firmer growth recovery in the advanced

economies, the benefits of such a recovery would

Chart 1.2.9 Moody’s Rated Asian High-Yield Bond Issuance:

Ratings Composition

Source: Moody’s

Chart 1.2.10 Moody’s Rated Asian High-Yield Bond Issuance:

Weighted Average Coupons

Source: Moody’s

Chart 1.2.11

Market Capitalisation of Asian REITs

Source: Bloomberg

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12

take some time to filter through to Asia.

Furthermore, growth in advanced economies could

soften again after the start of policy normalisation if

unanticipated shocks occur.

Therefore, debt-servicing burdens in Asia could well

rise markedly even as the region’s growth outlook

remains subject to considerable uncertainty. As

financial conditions tighten globally and interest rates

rise, the private sector’s resilience will be tested.

Sovereign balance sheets may also come under

greater scrutiny.

Tighter financial conditions and volatile capital

flows likely ahead, and impact could be uneven

Looking ahead, Asia – like other EM regions – is likely

to face tighter financial conditions and volatile capital

flows. This is an unavoidable part of the necessary

path to more normalised global monetary conditions.

The impact of these financial stresses could be

uneven, as shown by the market turbulence in recent

months.

In recent years, Asia, along with other EM regions,

received substantial financial flows in a global search

for yield. This trend was boosted by ample global

liquidity, as well as a general sentiment that Asia had

sound fundamentals and would remain resilient to

shocks.

From late-May 2013 onward, the prospect of the US

starting LSAP tapering led to an abrupt shift in

sentiment towards EMEs, including Asia. For several

weeks, financial conditions tightened across Asia and

stresses emerged in several areas.

Differentiation between markets within the region

was quite stark. Dips were sharpest for stock

markets which had rallied the most when risk

appetite was strong, and for countries perceived as

relatively more susceptible to adverse external

shocks due to certain vulnerabilities such as

Chart 1.2.12 Public Debt-to-GDP Ratio: Selected Asian Economies

Source: IMF, CEIC

Chart 1.2.13 China Local Government Debt

Source: MAS’ estimates based on findings by China National Audit Office (NAO)

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Total Local Government Debt/ GDP (RHS)



13

persistent and sizeable current account deficits, fiscal

deficits and/or external (re)financing needs (Chart

1.2.14). On a cumulative basis, net fund outflows

from Asia-10 equities amounted to US$27.7 billion

(Chart 1.2.15) over the five months between late May

and late October, reversing close to half of the net

fund inflows since 2012.

Similarly, investor sentiment turned quickly in the

bond markets. Concerns that credit spreads might

have become too narrow and that there could be too

much supply in both the investment-grade and high-

yield markets rapidly came to the fore, and persisted

over several weeks. Market conditions tightened

markedly. According to market sources, prospects of

higher rates and yields in the near future doused

what had until very recently been strong investor

demand and issuer appetite. Issuance activity for

local-currency corporate bonds – which make up the

bulk of the outstanding stock across Asia – weakened

for quite a few countries between June and

September (Chart 1.2.16). Credit spreads widened in

several instances (Chart 1.2.17), while various

accounts suggested that some investors became

more inclined towards tightening covenants.

Meanwhile, currencies depreciated to varying

degrees (Chart 1.2.18). While economic

fundamentals across the region have remained

generally sound, those economies perceived to be

relatively more susceptible to adverse external

shocks came under heavier selling pressure. Some

currencies hit troughs against the US dollar which

had not been seen since the most severe phase of

the GFC.

For some economies with a substantial or rising

proportion of corporate bonds denominated in

foreign currency (Chart 1.2.19), risk aversion was

compounded by concerns that prolonged currency

depreciation could sharply increase debt repayment

burdens for borrowers, weaken firms, and result in

more defaults. This in turn perpetuated negative

Chart 1.2.14 Stock Market Indices: Asia-10

Source: Bloomberg

Chart 1.2.15 Cumulative Net Fund Flows: Asia-10

Source: EPFR

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sentiment and further weighed on financial

conditions.

The sovereign credit space was not immune. Asian

sovereign yields rose markedly (Chart 1.2.20), albeit

largely parallel to the rise in US Treasury rates. For

some countries, the magnitude of increases mirrored

the extent of yield tightening during the period of

strong capital inflows following advanced economies’

UMP. The reversal was notably sharp for countries

perceived to be relatively vulnerable to external

shocks. This was exacerbated by a sell-off of

domestic currencies by foreign investors who were

not fully hedged. Accordingly, foreign appetite for

Asian sovereign credit weakened significantly (Chart

1.2.21).

Bank credit conditions have remained resilient,

providing an important counterweight

to the recent financial market turbulence

An important counterweight to the recent turbulence

in financial markets is that bank credit conditions

have remained resilient.

For most Asian economies, loan growth has remained

buoyant in the double-digit range. This is despite

some moderation in recent months (Chart 1.2.22),

possibly due to concerns over imminent interest rate

increases amid still-uncertain economic conditions,

which have prompted firms and households to be

more cautious about taking on credit. Loan demand

appears to be softening (Chart 1.2.23). In contrast,

Asian banks have not yet decisively tightened credit

and banks from outside Asia have continued to

increase their claims on Asia-10 moderately (Chart

1.2.24).

However bank credit conditions may become

less favourable in the period ahead

In the period ahead, several factors may make bank

credit conditions in Asia less favourable.

Chart 1.2.16 Local Currency Corporate Bond Issuance:

Selected Asian Economies

Source: Asian Development Bank (ADB) Asian Bonds Online

Chart 1.2.17

Corporate Bond Spreads: Asia-10

Source: JP Morgan Chase

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Credit quality deterioration has not materialised in a

broad-based manner so far, with notable increases in

banking-system non-performing loan (NPL) ratios

confined to India, Korea and the Philippines (Chart

1.2.25). However, some banks have reportedly

exercised greater “forbearance” towards certain

borrowers, in anticipation that an improvement in

economic conditions next year or a cyclical turn for

certain industries would enable these borrowers to

realise healthier incomes streams and repay their

loans.

In the meantime, some signs of strains have already

emerged in various sectors across different

economies. These range from small and medium-

sized enterprises (SMEs) in China, Korea and Malaysia

to utility firms and shipbuilders in Korea, as well as

borrowers from the aviation, textile and telecoms

industries in India.

Individually, some banks may have sizeable cross-

border exposures to borrowers whose capacities to

repay foreign currency-denominated debt have been

weakened by prolonged depreciation of their

domestic currencies.

In the coming months, alongside the possibility of

further increases in NPLs, funding conditions may

tighten for some banks as global financial conditions

change.

Furthermore, although foreign-currency loans

account for quite a small share of total loans for most

Asian banking systems, the corresponding loan-to-

deposit (LTD) ratios are quite high for several

economies (Chart 1.2.26). Banks in these economies

could come under foreign-currency funding pressure

if wholesale markets tighten alongside volatile capital

flows.

If global financial conditions tighten abruptly, and

especially if loan defaults rise, some Asian banks

could react by holding more liquid assets in the near

Chart 1.2.18 Currency Indices: Selected Asian Economies

Source: Bloomberg

Chart 1.2.19 Foreign Currency-Denominated Corporate

Bonds as a Share of Total Outstanding: Selected Asian Economies

Source: ADB Asian Bonds Online Chart 1.2.20

Sovereign Bond Yields: Asia-10

Source: Bloomberg

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11

WMPs are typically short-term financial products marketed as high-yield alternatives to bank deposits in China. Banks issue the

majority of outstanding WMPs, though trust companies, insurers, brokerage firms and private equity funds are also issuers. Funds raised from WMPs are invested in a variety of assets including real estate loans and local government financing vehicle (LGFV) loans. WMPs pose potential maturity- and liquidity mismatch risks to banks (and other issuers) because investors may demand their monies quite soon whereas much of the proceeds which banks get from issuing these WMPs tends to be tied up in various illiquid longer-term assets.

term, reducing credit supply, setting more stringent

lending standards, and raising loan rates. This could

lead to a vicious cycle of worsening asset quality,

tightening credit conditions and slowing growth. The

impact could be compounded by a renewed

retraction of cross-border banking flows.

For the Chinese banks, authorities have

acknowledged that the increasing volume of wealth

management products (WMPs)11 offered by banks

poses some maturity- and liquidity mismatch risks.

Asia as a region is more resilient now

than during the Asian Financial Crisis,

but there is scope to reduce vulnerabilities further

Asia as a region is more resilient now than during the

AFC in the late 1990s.

Exchange rate regimes have become more flexible

over time. Reliance on foreign-currency external

borrowings has been reduced. International reserves

have been built up judiciously, so that coverage of

imports, for instance, has been maintained at

prudent levels (Chart 1.2.27).

Across the region, policies have become more

focused on reducing vulnerabilities to external

shocks. There has been greater emphasis on more

balanced growth, involving sustainable expansion of

domestic demand without straining public finances.

Several countries, including China, Korea, Malaysia

and Indonesia, have taken steps to make growth

drivers more broad-based, reduce fiscal- and current

account deficits or improve trade balances. China

has completed a comprehensive audit of local

government debt.

Chart 1.2.21

Share of Government Bonds Held by Foreigners: Selected Asian Economies

Source: ADB Asian Bonds Online

Chart 1.2.22 Loan Growth: Selected Asian Economies

Source: CEIC

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Some countries have taken measures to check

increases in household- and corporate sector

leverage, and cushion adverse effects from potential

fallouts. For example, Korea’s financial regulators

have been working with banks on ways to improve

risk assessments of more heavily-indebted corporate

borrowers and loan-restructuring. Some authorities,

including those in Hong Kong and Indonesia, have

taken measures to cool property markets, which

would also help curb household leverage.

Finally, some countries have taken action to mitigate

potential strains from global liquidity tightening.

Authorities in China and other countries have

reminded banks to manage liquidity risks while

indicating their readiness to ensure that funding

markets function smoothly. Some central banks have

extended swap lines. The Reserve Bank of India (RBI)

has adjusted its earlier liquidity tightening measures,

imposed more restrictions on imports of non-

essential items, and liberalised external financing

(including raising overseas borrowing limits for

banks) to help stabilise the rupee.

Looking ahead, more progress in implementing

policies for improving economic and financial system

fundamentals will strengthen the resilience of

individual countries, as well as the entire region by

reducing the likelihood of cross-border contagion.

Chart 1.2.23 Credit Standards and Loan Demand

in Emerging Asia

Source: Institute of International Finance (IIF) Note: “Emerging Asia” includes China, India, Indonesia, Korea, Malaysia, the Philippines and Thailand. The diffusion index captures the average value of responses of all the banks in a region to each question in a survey. A diffusion index reading of 50 should be interpreted as a neutral reading; a reading above 50 indicates rising loan demand and vice versa.

Chart 1.2.24

Cross-Border Bank Claims on Asia-10

Global Bank Claims

Euro Zone Bank Claims

Source: BIS Note: “Others” include Indonesia, Malaysia, Thailand and the Philippines.

30

40

50

60

70

2010 Q1

2011 Q1

2012Q1

2013 Q1

Dif

fusio

n In

dex

Credit Standards Demand for Loans

Q3

0

700

1400

2100

2800

2010 2011 2012 2013

US

$ B

illio

n

China Hong Kong IndiaKorea Singapore Taiwan Others

Q2

0

150

300

450

2010 2011 2012 2013

US

$ B

illio

n

China Hong Kong IndiaKorea Singapore TaiwanOthers

Q2



18

Chart 1.2.25 Non-Performing Loan (NPL) Ratios: Asia-10

Source: CEIC

Chart 1.2.27

International Reserves: Months of Import Cover: Selected Asian Economies

Source: IMF

Chart 1.2.26 Foreign-Currency Loan-to-Deposit Ratios and

Share of Total Loans Accounted for by Foreign-Currency Loans: Selected Asian Economies

Source: CEIC

-2

0

2

4

6

2010 2011 2012 2013

Per C

en

t

China Hong Kong IndiaIndonesia Korea MalaysiaPhilippines Singapore TaiwanThailand

Sep

0

5

10

15

20

25

Ch

ina

Ho

ng

Ko

ng

Ind

ia

Ind

on

esia

Ko

rea

Mala

ysia

Ph

ilip

pin

es

Sin

gap

ore

Th

ailan

d

Mo

nth

s

1997 2012

0

70

140

210

280

350

0 10 20 30 40 50

Fo

reig

n C

urr

en

cy

Lo

an

-to

-D

ep

osit

Rati

o (%

)

Foreign Currency Loans as % of Total Loans

Thailand

Malaysia

Taiwan

China

Korea

Indonesia

HongKong



19

Box B

Intermediating Banking Flows in Asia

Singapore hosts a rising amount of intra-region bank credit intermediation Singapore hosts a large number of banks for which cross-border credit intermediation has been a key activity.

Much of this activity is intra-Asia. Asia12 (excluding Singapore) is the source of about half of the cross-border

deposits and also the destination for the bulk of the cross-border loans (65% as of September 2013)

intermediated by banks in Singapore.

The nature of the risks which cross-border banking activity poses to Singapore’s banking system is changing as banks’ business models evolve Some banks’ business models have evolved over the past several years since the GFC. For example, before the

GFC, some banks tended to rely on interbank funding. Since the GFC, recurrent concerns over counterparty

credit risks have prompted some of these banks to depend more on cross-border intra-group funding to

underpin the expansion of their non-bank loans to the region. Further, UMP could have played a role in

keeping banking flows to Asia buoyant – with interest rates and yields kept low in advanced economies,

investors’ search for yield has centred on EMEs, including Asia.

With evolving business models, the nature of the risks that Singapore’s banking system faces from its cross-

border activities also changes over time. External shocks can be transmitted through several channels.

Firstly, adverse shocks which arise from or affect the home country of foreign banks in Singapore could lead to

cutbacks in head office funding, and therefore non-bank lending to Asian borrowers.

Secondly, cross-border banking activity may carry greater currency mismatch risk than intra-country lending.

Loans are more likely to be denominated in foreign currencies. Sharp or prolonged depreciation of domestic

currencies may weaken borrowers’ capacities to repay such foreign currency-denominated loans.

Thirdly, in the current environment where the US Federal Reserve is expected to start tapering its LSAP as a first

step to normalising monetary conditions, pronounced shifts in interest rate or yield gaps between the advanced

world and emerging Asia could lead to unexpectedly sharp changes in cross-border banking flows.

Banks based in Singapore have been lending more to China and India

Another significant trend is the growing importance of China and India as lending destinations for Singapore’s

banking system, even as they continue to provide material amounts of cross-border funding. The gross flows of

funds (both loans and deposits) post-Lehman between Singapore and China and between Singapore and India

have grown by 85% and 129% respectively, compared to pre-Lehman. However, a key difference is that China,

which was previously a net lender to Singapore, is now a net borrower from Singapore, whereas India has

remained a net borrower.

The total volume of loans (comprising interbank loans, non-bank loans and trade bills) to China has been

trending up since 2009 (Chart B1). During this period, the composition of loans has changed significantly. Since

August 2011, trade bills overtook interbank loans to become the primary contributor of loans to China. As of

September 2013, trade bills accounted for about 65% of total loans from Singapore to China (Chart B2). The

12

Asia includes Australia, Bangladesh, Brunei, Cambodia, China, Hong Kong, India, Indonesia, Japan, Korea, Laos, Macau, Malaysia, Myanmar, Nepal, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam and New Zealand.



20

large increase in trade bills over the last two years has come alongside rapid growth of trade between the

economies of the Association of Southeast Asian Nations (ASEAN) and China. Meanwhile, the share accounted

for by non-bank loans has remained relatively stable, standing at about 11% as of September 2013 (Chart B2).

Chart B1 Volume of Loans

from Singapore’s Banking System to China

Chart B2 Composition of Loans to China

Source: MAS Source: MAS

In comparison, although loans to India have similarly trended upward since 2009, the increase tapered off

towards end-2011 (Chart B3). Another key difference between India and China is that non-bank loans have

been the primary driver of the increase in loans to India, and accounted for more than half of all loans to India

as of September 2013 (Chart B4). A third difference is that the increase in volume of trade bills to India has

been more gradual than for China.

Chart B3 Volume of Loans

from Singapore’s Banking System to India

Chart B4 Composition of Loans to India


With the significant increase in lending to the two countries, loans to China and India now represent 9.2% and

4.2%, respectively, of total loans made by local banking groups13 and foreign banks located in Singapore. For

China, portfolio concentration is higher for local banking groups than for foreign banks, and the divergence has

become more accentuated over the past two years (Chart B5). For India, the reverse is true – portfolio

13

Loan figures for local banking groups are compiled on an ultimate-risk basis, whereas loan figures for foreign banks based in Singapore are compiled on an immediate-borrower basis.

0

300

600

900

1200

1500

2004 2007 2010 2013

Ind

ex (S

ep

2004 =

100)

Sep Sep Sep Sep

0

20

40

60

80

100

2004 2007 2010 2013

Per C

en

t

Interbank Loans Non-Bank Loans Trade Bills

Sep Sep Sep Sep

0

100

200

300

400

500

600

2004 2007 2010 2013

Ind

ex ( S

ep

2004= 1

00)

Sep Sep Sep Sep

0

20

40

60

80

100

2004 2007 2010 2013

Per C

en

t

Interbank Loans Non-Bank Loans Trade Bills

Sep Sep Sep Sep



21

concentration has been higher for foreign banks than for local banking groups (Chart B6). MAS’ analysis

indicates that some of the largest India-related borrowers are from the manufacturing sector as well as the

financial institutions sector. The largest Chinese borrowers are from the general commerce and transport,

storage and communication (TSC) sectors.

Chart B5 Portfolio Concentration of Loans to China

by Bank Type

Chart B6 Portfolio Concentration of Loans to India

by Bank Type


Banks need to manage the risk implications of their growing exposures to China and India

The risk implications of the growing credit exposures to China and India need to be seen in the context of the

rising economic and financial importance of both countries, uncertain economic growth prospects, possibility of

financial conditions tightening ahead, and country-specific factors. Even as banks expand their businesses, they

need to take active steps to understand and manage the attendant risks.

For example, as advanced economies progress towards policy normalisation, global interest rates will likely rise

from current record lows and funding conditions could tighten. Cross-border banking flows may then increase

at a slower rate or even contract. Domestic banks in Asia may also tighten credit to conserve liquidity and

manage asset quality risks. Banks and non-bank borrowers that have managed their financial risks prudently

will be more resilient to potential stresses arising from such developments.

0

4

8

12

16

2010 2011 2012 2013

Per C

en

t

Local Banking Groups Foreign Banks

Sep Sep Sep Sep

0

2

4

6

8

2010 2011 2012 2013

Per C

en

t

Local Banking Groups Foreign Banks

Sep Sep Sep Sep



22

Box C

Potential Impact of Abenomics on Asia: Boon or Bane?

Japan and Asia-10 economies have long had strong trade and investment links. The advent of Abenomics14

along with new quantitative easing programmes in Japan raises the question of how these policies would

impact different parts of Asia. If Abenomics does bring about a sustained economic recovery in Japan, would

linkages between Japan and Asia become more or less extensive? Could new impact transmission channels be

formed? And would the impact of Abenomics – including potential risks – on different parts of the region vary

significantly?

Japan has close trade and financial linkages with Asia

Japan is among the top trading partners for each of the Asia-10 economies. Exports to Japan are particularly

important for the Southeast Asian economies of the Philippines, Indonesia, Malaysia and Thailand, accounting

for more than 10% of the exports of each of these economies (Chart C1). In addition, financial flows from

Japan to the region have increased sharply following the most severe phase of the GFC, partially fuelled by the

strength of the Japanese yen. From 2010 to 2012, net financial flows to Asia-10 economies from Japan totalled

34.2 trillion yen (Chart C2) and accounted for approximately 16% of Asia-10’s total gross financial inflows.15

Since 2010, Japan has been a significant contributor of inward foreign direct investment (FDI) to Asia-10

economies, particularly to Thailand, the Philippines and Korea where they account for more than 20% of the

inward FDI (Chart C3). In 2012, about two-thirds of Japan’s FDI in Asia-10 were to the manufacturing sector.

Chart C1 Chart C2

Trade Linkages with Japan: Asia-10 (2012)

Cumulative Financial Flows from Japan to Asia-10

Source: CEIC

Note: The sizes of the bubbles indicate the dollar amounts of

exports in 2012.

Source: BOJ

14

The BOJ introduced a “Quantitative and Qualitative Easing” programme in April 2013, which increased its purchases of different types of assets including money market securities, JGBs, ETFs and Japanese real estate investment trusts (J-REITs). The goal was to expand the monetary base at an annual pace of 50-60 trillion yen and the outstanding amount of JGBs at an annual pace of 50 trillion yen. 15

Figure excludes Malaysia which has not published gross financial inflow numbers for 2010-2012.

0

2

4

6

8

10

0 4 8 12 16 20

% o

f G

DP

% of Total Exports

China Hong Kong IndiaIndonesia Korea MalaysiaPhillippines Singapore TaiwanThailand

-10

0

10

20

30

40

50

2000 2003 2006 2009 2012

Tri

llio

n Y

en



23

Chart C3 Average FDI from Japan as a Share of

Total Inward FDI (2010-2012 Average): Asia-10*

Source: CEIC, national authorities

*Excludes 2012 for Singapore and Hong Kong

Japanese banks have also increased lending to Asia-10 economies

Japanese banks have more than doubled their cross-border claims on Asia-10 economies (Chart C4), from

US$158 billion as at Q1 2009 to US$339 billion as at Q1 2013. Within Asia-10 economies, Japanese banks

account for material shares of domestic credit in Thailand, Singapore and Indonesia (Chart C5).

Chart C4 Bank Claims by Japanese Banks and Syndicated

Loans Arranged by Japanese Megabanks: Asia-10*

Chart C5 Share of Economies’ Banking Assets

Accounted for by Japanese Banks 2012*: Asia-10

Source: BIS, Bloomberg *Loans arranged by Sumitomo Mitsui Financial Group, Mitsubishi UFJ Financial and Mizuho Financial Group – major Japanese banks that are active in the international market.

Source: BIS, CEIC, national authorities *Data for India is as of March 2012, the last available data point.

Japanese banks are known to have followed their corporate clients into Asia-10. A large part of Japanese banks’

loans in Asia are to the overseas affiliates of Japanese companies. Post-GFC, Japanese banks have also

increased lending to non-Japanese corporates. This has helped ameliorate the impact of a pullback by

European banks (Chart 1.2.24) in the region. This trend is reflected especially in the rapid growth of syndicated

loans by Japanese banks – which primarily go to large corporate borrowers in Asia-10, with the volume of such

loans rising more quickly than Japanese banks’ total claims on Asia-10 (Chart C4).

0

10

20

30

40

50T

hailan

d

Ph

ilip

pin

es

Ko

rea

Mala

ysia

Taiw

an

Ind

ia

Sin

gap

ore

Ind

on

esia

Ch

ina

Ho

ng

Ko

ng

Per C

en

t

Average across Asia-10

0

6

12

18

24

30

0

70

140

210

280

350

2006 2008 2010 2012

US

$ B

illio

n

US

$ B

illio

n

Japanese Banks' Claims on Asia-10

Japanese Banks' Syndicated Loans (RHS)

0

2

4

6

8

Th

ailan

d

Sin

gap

ore

Ind

on

esia

Ko

rea

Ho

ng

Ko

ng

Mala

ysia

Ph

ilip

pin

es

Ind

ia

Taiw

an

Ch

ina

Per C

en

t

Average across Asia-10



24

As a regional financial centre, Singapore intermediates funds to Asia from other regions, with 65% of the

banking system’s cross-border loans going towards Asia. In particular, loans to emerging Asia16 accounted for

almost 50% of the cross-border loans by the Singapore banking system at end-2012. For Japanese banks in

particular, Singapore serves as a regional hub to deploy funds from Japan to the rest of Asia. In 2012, 49.3% of

the gross financial outflows from Japan to Asia-10 were channelled through Singapore.

In comparison, portfolio flows from Japan to Asia-10 economies remain small

Relative to FDI and banking flows, portfolio flows from Japan to the rest of the region have remained small.

Japan accounted for an average of 1.4% of portfolio inflows to Asia-10 economies between 2010 and 2012

(Chart C6). Bond investments out of Japan have largely gone to North America and Europe. From 2010 to

2012, Asia accounted for 2.4% of Japan’s outward portfolio investments. In contrast, the US accounted for 37%

and Europe accounted for 17%.

Chart C6

Gross Portfolio Inflows to Asia-10 (2010-2012)

Source: BOJ, IMF Balance of Payments

Japan’s extensive linkages with Asia-10 carry both potential benefits and risks for economies in the region

The close trade and financial linkages between Japan and Asia-10 economies have the potential to benefit these

economies should Japan’s economic recovery pick up. A firm economic recovery for Japan could lead to

increased trade with and greater direct investment in Asia-10 economies, which would have a positive impact

on economic growth and employment in Asia-10. A sustained growth uplift in Japan should lead to an

expansion of Japanese production activity and investments in Asia-10, as Japanese companies set up more

operations in different parts of the region as a means to meet Japan’s domestic demand.

In contrast to the recent volatility in Asia-10 financial markets following the US Federal Reserve’s indication that

it could soon start tapering its LSAP, an economic recovery and attendant rollback of monetary loosening

measures in Japan would probably not have a significant negative impact on Asia-10 markets. This is because

portfolio flows from Japan to Asia-10 have been relatively small (Chart C6).

Conversely, the continued banking and FDI flows from Japan to Asia-10 are supported by economic and

demographic fundamentals, and may partly mitigate the effects of a withdrawal of funds from Asian markets

upon policy normalisation in the US and Europe. Notwithstanding an economic recovery in Japan, the effects of

Japan’s aging population might not be easily reversed, and Asia would likely remain an attractive destination for

16

Emerging Asia is defined here as Bangladesh, Brunei, Cambodia, China, Hong Kong, India, Indonesia, Korea, Laos, Macau, Malaysia, Myanmar, Nepal, Pakistan, Philippines, Sri Lanka, Taiwan, Thailand and Vietnam.

-20

0

20

40

60

80

100

Ch

ina

Ko

rea

Ho

ng

Ko

ng

Ind

ia

Mala

ysia

Ind

on

esia

Th

ailan

d

Ph

ilip

pin

es

Taiw

an

Sin

gap

ore

US

$ B

illio

n

Gross Portfolio Inflows Japan's Portion



25

financial flows from Japan.

Nonetheless, some risks exist. Authorities in Asia-10 need to guard against the risk of any further build-up of

financial imbalances in the region alongside what has already been fuelled by other advanced economies’ UMP.

Any excessive dependence on financial flows from Japan could have risk implications should there be

intermittent stops in these flows, for example, due to temporary weaknesses in the yen.

There could also be increased risks to the region should Japan’s economic recovery slow or stall, and cause

Japanese banks to pull back their lending to the region. Nonetheless, the impact of any potential credit

withdrawal by the Japanese banks would be tempered by their lending profile. Japanese banks have thus far

tended to lend to Japanese companies and large Asian firms (Chart C4). These companies would be in better

positions to find alternate sources of funding than SMEs should a loss of confidence in Japan’s recovery put

pressure on the health of Japanese banks and lead them to cut back lending to Asia-10.

Abenomics in Japan will bring both potential benefits as well as potential risks to Asia-10 economies

Looking ahead, bank lending and foreign direct investment will probably continue to drive investment flows

between Japan and the region. Asia-10 economies look likely to benefit from their substantial and growing

economic and financial linkages with Japan. However, these linkages may pose risks regardless of whether

Abenomics succeeds in bringing about a sustained economic recovery in Japan. How these linkages change

over time should be closely watched, and the attendant risks carefully managed.



26

2 SINGAPORE’S MACROECONOMIC ENVIRONMENT AND FINANCIAL SYSTEM

2.1 Macroeconomic Developments and Financial Markets

Singapore’s economic growth momentum has experienced swings through 2013, alongside changes in

global demand conditions and general sentiment. While a continued recovery in the external

environment should provide some upside momentum for Singapore’s economic growth into 2014, several

risks remain.

Singapore’s financial markets have remained resilient despite some volatility in global financial markets.

Looking ahead, volatility in domestic financial markets may increase if uncertainty over the timing and

course of the US’ policy normalisation persists and concerns over potential spillover effects on global

markets intensify.

Singapore’s GDP growth is expected to be

moderately positive for both 2013 and 2014,

but several risks remain

Singapore’s economic growth momentum has

experienced swings through 2013.

GDP growth in Q2 surged to 17.4% q-o-q SAAR, up

from 2.3% in the preceding quarter (Chart 2.1.1).

This was supported by a robust rebound in trade-

related manufacturing activity, in tandem with the

turnaround in the global IT cycle and a surge in

biomedical and transport engineering output.

Domestic-oriented sectors also fared well, with the

construction sector expanding strongly on account of

a bumper crop of private residential units.

However, in Q3, faced with fresh external headwinds,

the Singapore economy experienced a broad-based

pullback, and contracted mildly by 1.3% q-o-q SAAR.

Expectations that the US Federal Reserve would soon

start tapering its LSAP combined with a growth

downshift in EMEs to weigh on general sentiment

and economic activity. There was some retrenchment of activity in the financial services

sector, especially the sentiment-sensitive cluster.

Trade activity was also sluggish, in line with

weakening export performance for several

regional economies.

Chart 2.1.1 Singapore’s GDP Growth

Source: Department of Statistics (DOS)

Looking ahead, while a continued recovery in

the external environment should provide

some upside momentum for Singapore’s

economic growth, several risks remain. In

the US, there are potential policy missteps

associated with the start of policy

normalisation by the US Federal Reserve, as

well as considerable uncertainty over

whether political standoffs over the budget

and debt ceiling could be satisfactorily

resolved. In the euro zone, given that public

debts are still high and governments are still

running fiscal deficits, concerns over

sovereign creditworthiness could intensify

again and present renewed setbacks to the

still-tentative economic recovery. In Asia,

a downshift in activity could occur if the

-15

0

15

30

45

2008 2009 2010 2011 2012 2013

Per C

en

t

QoQ SAAR YoY

Q3



27

17 On 9 September 2013, the Land Transport Authority (LTA) announced a new set of categorisation criteria that would take into consideration both engine power and capacity.

Chinese economy experiences an unexpected hard

landing, or if economies in the region encounter

balance-of-payment difficulties triggered by less

accommodative global monetary conditions.

All factors considered, the Singapore economy should

achieve growth of 3.5-4.0% for 2013, and 2.0-4.0%

for 2014.

Price pressures eased in H1 alongside subdued

economic conditions before picking up in Q3

Meanwhile, external inflationary pressures have

remained broadly subdued, as weaker economic

activity in China as well as other EMEs have kept

global prices stable.

Overall, MAS Core Inflation moderated from a multi-

year peak of 3.1% y-o-y in Q1 2012 to 1.6% in Q2

2013 (Chart 2.1.2), before inching up to 1.7% y-o-y in

Q3 due to stronger pass-through of domestic

business costs to consumer prices. Tightness in the

labour market supported stronger wage growth, and

higher domestic cost pressures.

Domestic cost pressures will continue to build up, as

supply-side factors become more binding, and

businesses will likely pass on more of the

accumulated cost increases alongside improving

consumer sentiment. On the other hand, external

price pressures are expected to stay largely benign in

2014, helped by the slack in labour markets and

favourable supply conditions for commodities.

On the whole, MAS Core Inflation is expected to rise

from 1.5-2% in 2013 to 2-3% next year.

As for Consumer Price Index (CPI)-All Items inflation,

this came in at 1.6% y-o-y in Q2 2013, having fallen

from 4.0% in the previous two quarters, reflecting the

sharp correction of car prices following the tightening

of financing rules for motor vehicle

purchases, as well as a moderation in underlying price pressures in the economy.

Imputed rental inflation also moderated

alongside slower foreign labour inflows and

immigration, as well as a significant supply of

residential units.

CPI-All Items Inflation is expected to come in

at 2.5-3% in 2013 and 2-3% in 2014. While

imputed rentals will probably continue to

moderate gradually, car prices could rise

further in the short term due to uncertainties

over the re-categorisation of Certificates of

Entitlement (COEs).17

Chart 2.1.2

CPI-All Items and MAS Core Inflation

Source: MAS

-2

0

2

4

6

8

2008 2009 2010 2011 2012 2013

Per C

en

tCPI-All Items MAS Core Inflation

Q3



28

In October 2013, MAS maintained its monetary

stance of a modest and gradual appreciation of the

Singapore dollar nominal effective exchange rate

(S$NEER) (Chart 2.1.3), taking into account the

medium-term impact of tighter foreign worker

policies alongside other factors which could exert upward pressure on prices. This policy stance will

help to ensure medium-term price stability, and keep

the economy on a path of restructuring towards

sustainable growth.

Singapore’s financial markets have remained

resilient, but could become more volatile ahead

Singapore’s financial markets have remained stable

through 2013, with advanced economies’ UMP

keeping global financial conditions easy and

Singapore’s economic growth holding up despite

considerable swings in momentum. However

markets are expected to experience more volatility in

the period ahead, partly due to uncertainty over

when the US Federal Reserve will start to taper its

LSAP, how quickly this will proceed, and what

spillover effects this may have.

In line with accommodative global monetary

conditions, Singapore’s domestic interest rates have

remained close to historical lows, with the three-

month SGD Singapore Interbank Offered Rate (SIBOR)

and three-month SGD Singapore Swap Offer Rate

(SOR) staying below 0.40% (Chart 2.1.4). The Asian

Dollar Market (ADM) has also continued to function

well, as the US’ UMP has kept US dollar (USD)

interest rates, including USD SIBOR, well-anchored.

Meanwhile, concerns related to liquidity risks and

counterparty credit risks have remained muted, as

reflected in the low and stable SGD and USD

interbank overnight indexed swap (OIS) and

Treasury-interbank (TED) spreads (Chart 2.1.5).

For most of H1 2013, Singapore’s equity market

rallied on positive market sentiment arising from

expectations that the US would continue its LSAP.

The Straits Times Index (STI) rose by 9.1% between

Chart 2.1.3 S$ Nominal Effective Exchange Rate (S$NEER)

Source: MAS

Chart 2.1.4

Three-Month Interbank Rates

Source: Bloomberg Note: LIBOR refers to London Interbank Offered Rate

Chart 2.1.5 Money Market Spreads

Source: Bloomberg Note: USD TED Spread is the difference between the three-month interbank rate and the yield on US three-month Treasury bills. SGD TED Spread is the difference between the three-month interbank rate and the yield on three-month MAS bills.

95

100

105

110

115

2010 2011 2012 2013

S$NEER

Oct

Ind

ex (1-7

Jan

2010 A

vera

ge=100)

-1

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013

Per

Cen

t

USD LIBOR USD SIBORSGD SIBOR SGD SOR

Nov

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013

Per C

en

t

USD LIBOR-OIS SpreadUSD TED SpreadSGD SIBOR-OIS SpreadSGD TED Spread

Nov



29

January and May (Chart 2.1.6). However between

late-May and September, expectations that the US

would soon start tapering its LSAP led to capital

outflows from Asian markets, dragging the STI 13.0%

lower amid increased volatility.

During this period of heightened uncertainty, ten-

year Singapore Government Securities (SGS) yield

increased by 135 bps between late-May and early

September (Chart 2.1.7). However, since the US

Federal Reserve’s decision to delay the start of LSAP

tapering, ten-year SGS yields have fallen by a greater

extent than ten-year US Treasury yields. Together

with the continued stability of two-year SGS yields,

this reflects sustained confidence in Singapore’s

economic fundamentals and fiscal discipline.

Looking ahead, volatility in domestic financial

markets may increase if uncertainty over the timing

and course of the US’ policy normalisation persists

and concerns over potential spillover effects on

global markets intensify.

Chart 2.1.6 Straits Times Index and MSCI World Index

Source: Bloomberg

Chart 2.1.7 SGS Two- and Ten-Year Benchmark Yields

and US Ten-Year Treasury Yield

Source: Bloomberg

500

1000

1500

2000

1000

2000

3000

4000

2008 2009 2010 2011 2012 2013

Ind

ex L

evel

Ind

ex L

evel

Straits Times IndexMSCI World Index (RHS)

Nov

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013

Per C

en

t

SGS Two-YearSGS Ten-YearUS Treasuries Ten-Year

Nov



30

2.2 Corporate Sector18

Corporate balance sheets have stayed firm, but leverage has continued to increase, and interest rates may

rise in the not-too-distant future. The corporate sector must guard against multiple headwinds including a

weaker economic environment, tighter financial conditions and heavier debt-servicing burdens.

With Singapore’s growth holding up and financial

markets remaining resilient, corporate balance

sheets have stayed firm and sentiment has picked up

For the corporate sector as a whole, profitability has

broadly improved while liquidity positions appear to be

healthy. The median return on assets (ROA) rose

slightly from 3.9% in Q4 2012 to 4.0% in Q2 2013 (Chart

2.2.1), and the uptick applied to all sectors except multi-

industry and manufacturing. The median interest

coverage ratio remained at a healthy 5.6 times in Q2

2013, though slightly below the medium-term average

of 6.5 times (Chart 2.2.2). The overall current ratio

remained broadly stable at 1.7 times, also in line with its

medium-term average (Chart 2.2.3). Accordingly, the

NPL ratio for banks’ corporate loans remained healthy

and below its medium-term average (Chart 2.2.4).

Given such conditions, corporate sector confidence has

generally remained firm despite some signs of

sentiment regarding the next few months turning more

cautious (Chart 2.2.5).19

However if interest rates were to rise

from their currently low levels, firms’

debt-servicing burdens could increase significantly

While the 54 firms wound up in H1 2013 represent a

30% drop compared to H1 2012, the number of

bankruptcy petitions filed inched up to 102 from 98 a

year ago (Chart 2.2.6). Looking ahead, an expected rise

in interest rates could put further strains on over-

leveraged firms.

Chart 2.2.1 Return on Assets (Median)


Chart 2.2.2

Interest Coverage Ratio (Median)

Source: Thomson Financial Note: Interest coverage ratio refers to earnings before interest and tax (EBIT) divided by interest expense.

18

All corporate financial data cover only firms listed on the Singapore Exchange (SGX). The latest data point provided is for Q2 2013, as most of the companies that are required to report earnings on a half-yearly basis tend to do so in Q2 and Q4. 19

A net weighted balance of 1% of manufacturing firms expect a less favourable business situation in the six months ending March 2014, while a net weighted balance of 8% of firms in the services sector retain a positive outlook for the same period. Economic Development Board (EDB) (October 2013), “Survey of Business Expectations of the Manufacturing Sector, Q4 2013”. DOS (October 2013), “Business Expectations Survey, Q4 2013”.

0

3

6

9

12

2004Q4

2006 2008 2010 2012

Per C

en

t

Commerce ConstructionHotels & Restaurants ManufacturingMulti-Industry PropertyTSC Overall

2013Q2

0

5

10

15

20

2004Q4

2006 2008 2010 2012

Rati

o


2013Q2



31

Such strains could be amplified by the continued rise of

corporate leverage. The median debt-to-equity of listed

non-financial firms reached 38% in Q2 2013 (Chart

2.2.7). With the exception of the multi-industry and

commerce sectors, the median debt-to-equity ratios of

all sectors have risen.

The increased leverage could be explained by several

factors. As Singapore’s economic growth has held up

and the external environment has not worsened

materially, firms may have been under less pressure to

deleverage. Second, the environment of prolonged low

interest rates has made it possible for some firms to

borrow more than they probably would have otherwise

(see Box D: Corporate Debt Issuance in Singapore).

Third, some firms could have taken on more debt to

grow through mergers and acquisitions (M&A) or to

ramp up fixed asset investments (FAI) as part of a

corporate sector-wide restructuring drive to improve

productivity. Indeed, the investment commitments of

firms in the manufacturing and services industries rose

by 17% from 2011 to 2012.

However, the low interest rate environment could

change rapidly once the US Federal Reserve starts

tapering its LSAP. Further, as other advanced

economies achieve more broad-based growth

recoveries, they would likely start to normalise

monetary policy as well, which could lead to further

interest rate increases globally. While corporate

profitability could be supported by improved economic

conditions, a sharp rise in interest rates would leave the

most leveraged firms exposed to heavier debt-servicing

burdens.

A sharp increase in interest rates could also pose

specific challenges for real estate investment trusts

listed in Singapore (S-REITs). As S-REITs are required to

distribute 90% of any taxable income to unit-holders,

they have limited retained earnings, and are dependent

on capital markets and banks to meet their financing

needs. Based on MAS’ estimates, if interest rates were

to rise by 300 bps, the median interest cover for S-REITs

would decline from 6.8 to 3.5 times (Chart 2.2.8).

Chart 2.2.3 Current Ratio (Median)

Source: Thomson Financial Note: Current ratio refers to current assets divided by current liabilities.

Chart 2.2.4

Corporate NPL Ratio

Source: MAS

Chart 2.2.5

General Business Outlook

Source: DOS, Business Expectations Survey; EDB, Survey of Business Expectations of the Manufacturing Sector

0.5

1.5

2.5

3.5

2004Q4

2006 2008 2010 2012

Rati

o


2013Q2

0

2

4

6

8

2004Q3

2006 2008 2009 2011 2013Q3

Per C

en

t

-60

-40

-20

0

20

40

2007 2008 2009 2010 2011 2012 2013

Per C

en

t

Manufacturing Services

Q3



32

Further, higher interest rates would likely increase

interest expenses and lower dividend payouts for

investors. This could reduce the attractiveness of S-

REITs and constrain their ability to tap on the capital

markets for further financing.

Nevertheless, the debt maturity profile of S-REITs has

improved compared to during the GFC, with a smaller

proportion of debt due for refinancing in the next two

years (Chart 2.2.9).

Financing conditions for SMEs have recovered

after a slowdown in H2 2012, but SMEs need to guard

against abrupt changes in economic conditions

Financing conditions for SMEs have recovered after a

slowdown in the amount of credit extended in H2 2012,

but there is a need to be vigilant against abrupt changes

in economic conditions.

The volume of loans extended to SMEs slowed in H2

2012, but has since returned to moderate growth. Total

SME loans increased by almost 6% y-o-y in H1 2013,

compared to 0.3% as at end-2012 (Chart 2.2.10). This

was mainly due to a rise in the volume of non-trade

facilities, and corroborated by findings from a survey of

banks, which indicated increased demand for and

supply of SME credit in H1 2013.

The commerce and construction sectors continue to

account for more than half of total outstanding SME

loans, at 33% and 26% respectively (Chart 2.2.11).

Foreign banks are also starting to account for a larger

share of SME loans, at 46.2% in H1 2013 compared to

45.6% in H1 2012. The outlook for SME lending remains

optimistic, with banks surveyed expecting demand for

and supply of SME credit to rise more quickly over the

next two quarters.

Reflecting the low interest rate environment and

competition, net interest margins (NIMs) on SME loans

narrowed slightly from 2.1% in H1 2012 to 2.0% in H1

2013 (Chart 2.2.12). A survey of banks indicates that

credit terms and conditions are expected to remain

broadly unchanged over the next two quarters, though

Chart 2.2.6 Corporate Bankruptcies

Source: Ministry of Law, Insolvency and Public

Trustee’s Office (IPTO)

Chart 2.2.7 Debt-to-Equity Ratio (Median)


Chart 2.2.8

Sensitivity Test on S-REITs’ Interest Coverage Ratio

Source: Thomson Financial, MAS estimates

25

50

75

100

125

2007 H1

2008 2009H1

2010 2011H1

2012 2013H1

Nu

mb

er o

f C

om

pan

ies

Companies wound up Petitions filed

0

20

40

60

80

2004Q4

2006 2008 2010 2012

Per C

en

t


2013Q2

0

2

4

6

8

10

Inte

rest C

overa

ge R

ati

o

25th Percentile Median 75th Percentile

Base Case 300 bps Increase



33

spreads may widen in anticipation of G3 policy

normalisation.

The overall credit quality of banks’ SME loan portfolios

has remained strong. The NPL ratio for SME loans has

stabilised at around 1% in the past year (Chart 2.2.13),

after a period of gradual reduction. While a majority of

SME loans are collateralised by property (mainly

commercial and industrial), the amount of unsecured

loans has risen marginally (Chart 2.2.14).

Although the recovery in SME financing conditions in H1

2013 is positive, this could reverse if adverse changes in

economic conditions materialise. A renewed weakening

of global economic growth, coupled with a rise in

interest rates, could lead to tighter credit conditions for

SMEs.

The corporate sector as a whole needs to

guard against tighter financial conditions

For the corporate sector as a whole, there is a need to

be mindful that downside risks to economic growth

remain considerable and an increase in debt-servicing

burdens is likely in the not-too-distant future.

Firms should consider the use of leverage carefully, and

exercise financial prudence alongside restructuring

efforts for more sustainable long-term growth.

Chart 2.2.9 Debt Maturity Profile of S-REITs

Source: MAS, Bloomberg Note: T refers to the initial year for each time series (i.e. T+1 refers to the whole of 2009 and 2014 respectively).

Chart 2.2.10

SME Loans Outstanding

Source: MAS

Chart 2.2.11

SME Loans by Sector (as at Q2 2013)

Source: MAS

0

10

20

30

40

T T+1 T+2 T+3 T+4 > T+4

Per C

en

t

As of Dec 2008 As of Dec 2013

0

5

10

15

20

25

0

15

30

45

60

75

2010Q2

2010Q4

2011Q2

2011Q4

2012Q2

2012Q4

2013Q2

Per C

en

t

S$ B

illio

n

Loans Outstanding YoY Growth (RHS)

Manufacturing

8%

Construction26%

Agriculture, Mining &

Quarrying, Electricity,

Gas & Water

2%

Commerce33%

TSC8%

Business Services

4%

Non-Bank Financial

Institutions11%

Other Services

8%Manufacturing

8%

Construction 26%



34

Chart 2.2.12 Net Interest Margin on SME Loans

(Weighted Average)

Source: MAS

Chart 2.2.14 Outstanding SME Loans by

Type of Collateralisation

Source: MAS

Chart 2.2.13 NPL Ratio: SME Loans

Source: MAS

1.0

1.5

2.0

2.5

3.0

2010H1

2010H2

2011H1

2011H2

2012H1

2012H2

2013H1

Per C

en

t

0

20

40

60

80

100

2010Q2

2010Q4

2011Q2

2011Q4

2012Q2

2012Q4

2013Q2

Per C

en

t

Collateralised by PropertyCollateralised by OthersUnsecured

0.0

1.0

2.0

3.0

2010Q2

2010Q4

2011Q2

2011Q4

2012Q2

2012Q4

2013Q2

Per C

en

t



35

Box D Corporate Bond Issuance in Singapore

Bond issuance by Singapore-incorporated companies20 reached a high in 2012 but has since fallen

Bond issuance by Singapore-incorporated companies reached a historical high of US$32.8 billion in 2012

(Chart D1), against the backdrop of (i) positive economic growth in Singapore and the advanced

economies, (ii) low interest rates and investment yields globally, and (iii) search for yield amid ample

global liquidity underpinned by UMP in advanced economies. However, bond market activity fell in 2013,

with issuance in the first ten months of the year (US$14.1 billion) totalling less than half the issuance in

the corresponding period in 2012 (US$31.2 billion).

Chart D1 Value of Bonds Issued by Singapore Firms

Source: Dealogic

This box examines the characteristics and risks

associated with bond issuance in Singapore in

2012-2013. The spike in bond issuance in 2012

during a period of low interest rates raised

concerns over the risks posed to bond issuers

when interest rates normalise. Issuers with

predominantly short-term debt may be exposed

to roll-over risks, liquidity pressures and higher

debt burden, should interest rates rise. In

addition, the increased issuance of foreign

currency-denominated bonds could raise issuers’

debt-servicing burden if foreign currencies

strengthen. Further, an increase in the share of

high-yield bonds suggests increased leverage by

companies with poorer credit quality. Such bonds

may experience higher default rates during

episodes of stress. This could subsequently affect

the ability of other companies to raise debt in the

bond markets.

Our analysis found that the record bond issuance by Singapore companies in 2012 was unlikely to have

increased risks to bond issuers significantly: the bonds issued were mainly investment-grade, had

maturity periods above five years, and were denominated in SGD or USD. In contrast, bond issues in

2013 warrant closer monitoring. A smaller share of the bond issuance in 2013 was of investment grade

and the average term to maturity of the bonds also declined.

Bond issues in 2012 were mainly of investment-grade, denominated in SGD or USD, and with maturity

periods above five years…

The record bond issuance in 2012 was driven primarily by activity in the investment-grade space.21

Investment-grade bonds accounted for 50% of issuance in 2012, up from 37% in 2011 (Chart D2). In fact,

20

This box is based on data from Dealogic, which show bond issuances by Singapore-incorporated companies, regardless of where the issuances are arranged. MAS’ annual publication ‘The Singapore Corporate Debt Market Review’ is based on MAS’ Return on Debt Securities, and shows debt securities arranged or co-arranged in Singapore, including for non-Singapore companies.

8.2 8.8 9.2

18.416.9

32.8

14.1

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013Oct

ytd

US

$ B

illio

n



36

most of the bonds issued in 2012 were rated A- or better. High-yield22 bond issuance accounted for

another 1%, while the rest were unrated23 (Chart D2).

Bonds issued by Singapore-incorporated companies in 2012 were predominantly of medium or longer-

term maturity, with perpetuals accounting for 9% of the value of bonds issued. By value, the share of

bonds with maturities of over five years increased from 40% in 2011 to 60% in 2012 (Chart D3). Longer

maturities allowed issuers to lock in low interest rates, and mitigate rollover risks.

Chart D2 Value of Bonds Issued:

Breakdown by Credit Rating

Source: Dealogic

Chart D3 Value of Bonds Issued:

Breakdown by Maturity

Source: Dealogic

Most of the bonds issued by Singapore-

incorporated companies in 2012 (about 90% in

value) were denominated in SGD or USD24 (Chart

D4). Risks from currency mismatches were

mitigated given that the increase in USD bond

issuance mainly reflected interest from

Singapore-based FIs to fund growing regional

demand for trade finance (largely denominated in

USD), as well as interest by firms to match their

USD revenue streams. In particular, Singapore-

based banks accounted for more than half of the

value of USD bonds issued in 2012.

Chart D4 Value of Bonds:

Breakdown by Currency

Source: Dealogic

…while bonds issued in 2013 have shorter terms to maturity, with a smaller share that are investment-

grade

The number of investment-grade bond issues fell sharply in the first ten months of 2013, and accounted

21

These bonds have credit ratings of between BBB- to AAA at launch. Most of the bonds issued in 2012 had credit ratings of A- and above. 22

Defined as bonds with credit ratings of BB+ or below at launch. 23

Dealogic has classified most of these unrated bonds as “investment grade” because covenants relating to restricted payments

or debt incurrence were not present. Based on Dealogic’s “investment grade” criterion, the share of investment grade bonds issued in Singapore in 2012 would be over 90%. 24

The other currencies of denomination include AUD, CNY, HKD, IDR, INR, JPY, and MYR.

0

20

40

60

80

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013Oct

ytd

Per C

en

t

US

$ B

illio

n

Investment GradeHigh YieldNot RatedShare of Investment Grade (RHS)

0

20

40

60

80

0

10

20

30

40

2007200820092010201120122013Oct

ytd

Per C

en

t

US

$ B

illio

n

1 year and less2-5 years6-10 years11-40 yearsPerpetualShare of >5 year (RHS)

20

40

60

80

100

0

10

20

30

40

2007 2008 2009 2010 2011 2012 2013Oct

ytd

Per C

en

t

US

$ B

illio

n

Singapore DollarUS DollarOther Foreign CurrencyShare of SGD & USD denominated (RHS)



37

for only 26% of the total value of bonds issued in the period, compared to 50% in 2012 (Chart D2). The

rest of the issues were largely unrated, though there was a higher share of high yield bonds (6% by

value). The share of bonds with maturities over five years fell from 60% in 2012 to 28% in the first ten

months of 2013 (Chart D3). Most of the bonds (about 85% by value) issued by Singapore-incorporated

companies were denominated in SGD or USD (Chart D4).

Record bond issuance in 2012 did not lead to a significant increase in risks to bond issuers but risks

have surfaced in 2013

The record bond issuances by Singapore-incorporated companies in 2012 were mostly of investment

grade, denominated in SGD or USD (and matched to currencies of trade finance or revenue streams), and

had maturity periods of above five years. These characteristics help to mitigate risks associated with

issuers’ debt repayment capacity, currency mismatches and rollover strains. However, these risks have

increased in 2013, with a larger share of the bonds issued being unrated or below investment grade and

having shorter maturities. MAS will continue to monitor risks in the domestic bond market.



38

2.3 Household Sector25

On an aggregate basis, Singapore’s household balance sheets have remained resilient. Household net

wealth has grown robustly over the past ten years, and currently stands at about four times GDP.

However caution is in order; uncertainties and risks remain.

Alongside firm growth of household sector assets and net wealth over the past few years, household debt

has trended up, with mortgage loans accounting for a large share of household sector liabilities. Some

households or individuals could also have overextended themselves in other ways, such as taking on

bigger motor vehicle loans and unsecured credit.

More sluggish economic growth, less favourable labour market conditions and less bullish sentiment could

lead to a turn in the property cycle, possibly at the same time that interest rates rise. Such a scenario

could lead to a concurrent erosion of household net wealth and higher debt-servicing burdens. Over-

leveraged households would be more vulnerable to such shocks.

MAS has introduced measures to encourage financial prudence and help keep household debt

manageable.

25

The assessment of households’ health in this section is based on aggregated household balance sheets, and does not involve a characterisation of the distribution of households by income groups, due to lack of disaggregated data.

On an aggregate basis,

household balance sheets have remained resilient

On an aggregate basis, Singapore’s household balance

sheets have remained resilient. Household net wealth

(defined as household assets less household debt) has

grown at an average rate of 9.1% per annum in the

past ten years (Chart 2.3.1). As at Q3 2013, household

net wealth stood at $1.44 trillion – four times GDP, and

up 6.5% from a year ago. Singapore’s household sector

net wealth relative to GDP is broadly comparable to

other advanced economies (Chart 2.3.2).

Property assets account for a large share

of household assets; property price increases

have been the key driver of growth in

household net wealth

Property assets account for a large share of household

assets, and property price increases have been the key

driver of the significant rise in household net wealth

over the past few years.

Chart 2.3.1 Household Net Wealth

Source: DOS Note: Household net wealth is the difference between household assets and debt. Data for 1997-2007 are as at Q4.

300

325

350

375

400

425

0

300

600

900

1200

1500

1997 2005 2009Q1

2011 Q1

2013 Q3

Per C

en

t

S$ B

illio

n

Net Wealth % of GDP (RHS)



39

On an aggregate basis, the value of property assets,

estimated at $838 billion in Q3 2013, accounted for

about half of household assets (Chart 2.3.3). This share

has remained broadly stable since 2010. The value of

property assets has increased by an average of 13% y-

o-y since Q1 2010. (See Box E: Update on the

Singapore Private Residential Property Market)

In recent quarters, the value of financial assets –

which account for the other half of household assets

– has grown more quickly than property assets

Since Q3 2012, the value of financial assets held by the

household sector – which comprise about half of

household assets – has increased more quickly than

the value of property assets. This is partly due to a

slowdown in the pace of property price increase, even

as financial markets have been buoyant for the most

part.

As of Q3 2013, the value of financial assets stood at

$875 billion, up 7.7% from a year ago. In comparison,

the value of property assets was 5.8% higher than that

of the corresponding quarter last year.

The growth in the value of liquid financial assets such

as cash and deposits, and Central Provident Fund (CPF)

savings has remained strong, at about 10% y-o-y

growth in Q3 2013.

Household debt has trended up over the past few

years, with housing loans continuing to account for

a large share of household sector liabilities

Household sector debt has trended up alongside the

increase in household sector assets and net wealth

over the past few years, though the pace of increase

has slowed markedly in recent quarters.

Housing loans continue to account for a large share of

household sector liabilities (74%) (Chart 2.3.4). This

proportion is broadly comparable to that of several

other economies including Hong Kong, Taiwan,

Australia, the US and UK (Chart 2.3.5). The next

Chart 2.3.2 Household Net Wealth-to-GDP Ratio:

Country Comparison

Source: MAS estimates, CEIC, national statistical agencies, central banks, Japan Cabinet Office Note: Based on latest available country estimates.

Chart 2.3.3

Household Assets and Household Debt

Source: DOS Data for 1997-2007 are as at Q4.

Chart 2.3.4

Household Debt

Source: DOS Note: Data for 1997-2007 are as at Q4.

4.04.5

4.9

4.0

4.7

6.1

4.6

0

2

4

6

8

Sin

gap

ore US

UK

Can

ad

a

Au

str

ali

a

Taiw

an

Jap

an

Net

Wealt

h t

o G

DP

0

300

600

900

1200

1500

1800

1997 2005 2009

Q1

2011

Q1

2013

Q3

S$ B

illio

nCash & Deposits CPF & Pensions

Life Insurance Shares & Securities

Property Household Debt

0

50

100

150

200

250

300

1997 2005 2009

Q1

2011

Q1

2013

Q3

S$ B

illio

n

Housing Loans Motor Vehicle Loans Credit/Charge Card Loans Others



40

26

The most commonly-cited reasons for debt problems are related to employment and overspending.

biggest component after housing loans is motor vehicle

loans, which constituted 4.6% of household liabilities

as of Q3 2013.

The generally benign environment of moderate

economic growth, tight labour market conditions and

low interest rates could change in the period ahead.

These could pose strains on some households.

Data from Credit Counselling Singapore (CCS) shows

that the average outstanding debt owed by individuals

seeking credit counselling has increased by 15% over

the past four years, from $69,600 to $79,700.26

The number of individual bankruptcy orders made has

been trending up, from about 1,500 cases in 2011 to

about 1,700 cases in 2012 (Chart 2.3.6). This trend has

continued for the first three quarters of 2013

compared to the same period last year.

Over-leveraged individuals and households would be

more vulnerable to adverse shocks. If the economy

slows down and labour market conditions become less

favourable, the property cycle could turn. Some

households’ financial resilience could deteriorate – the

value of their assets could fall even as their debt-

servicing burdens increase in tandem with rising

interest rates as advanced economies embark on

monetary policy normalisation.

To limit excessive increase in household leverage and

help households build up financial buffers, MAS

introduced a series of measures to encourage financial

prudence among borrowers. Broadly, these cover:

housing loans, motor vehicle loans and unsecured

credit. (See Box F: Singapore Household Sector: When

the Tide Goes Out)

Chart 2.3.5 Country Comparison of Housing Loans

Source: MAS estimates, CEIC, Datastream, national statistical agencies, central banks Note: Latest available estimates are used when 2013 data are not available.

Chart 2.3.6 Number of Individual

Bankruptcy Orders Made

Source: Ministry of Law, IPTO

40

50

60

70

80

90

100

-4 -2 0 2 4 6 8 10 12 14 16 18

Ho

usin

g L

oan

s a

s %

of

Ho

useh

old

Deb

t, 2

013

Average Annual % Growth in Housing Loans, 2008 - 2013

Singapore

UK

US

Australia

Taiwan

HongKong

Korea

Malaysia

23

China

Canada

0

1

2

3

4

5

1997 2002 2007 2012

Un

its (T

ho

usan

d)

2007 2012

Jan-Sep

2013



41

Box E

Update on the Singapore Private Residential Property Market

The Government announced further cooling measures on 11 January 2013 to stabilise the private residential

property market. These measures were formulated to be tighter on property purchases for investment and by

foreigners. To discourage over-borrowing, financing conditions for housing were also tightened. On 28 June

2013, MAS introduced the Total Debt Servicing Ratio (TDSR) framework for all property loans granted by FIs.

The framework is a structural measure, i.e. in place for the long term, intended to encourage financial

prudence among borrowers and strengthen credit underwriting practices by FIs. While not specifically aimed

at addressing current conditions in the property market, the TDSR is consistent with previous measures to cool

the market, and could have had shorter-term cyclical effects.

Private Property Prices and Transactions

The series of property-related measures taken by the Government over the past few years has dampened

momentum in the market. The increase in the private residential PPI has moderated since Q3 2009, with the

average q-o-q rise of 0.67% in the first three quarters of 2013 lower than the 0.70% for 2012 and 1.43% for

2011 (Chart E1).

Chart E1 Private Property Price Index (QoQ Change)

Source: URA

Chart E2 Number of Private Property Transactions

Source: URA

Momentum has varied across different market segments. Prices of private residential properties in the Outside

Central Region (OCR) on average increased by 2.5% per quarter in 2013. In contrast, prices in the Rest of

Central Region (RCR) and the Core Central Region (CCR) have started to show some weakness, turning negative

in Q3 2013.

Overall transaction activity27 in the private residential property market has fallen in 2013. Average monthly

transactions moderated to 2,100 units in the first ten months of this year, from 3,200 units last year. The fall in

overall sales was driven by resale transactions, which fell by about half in 2013 (from an average of 1,100 units

per month in 2012 to 600 units in 2013) (Chart E2). New sales also dropped significantly to an average of 900

27

This encompasses new sale, resale and sub-sale transactions.

-15

-10

-5

0

5

10

15

20

2004 2006 2008 2010 2012

Per

Cen

t

2013Q3

0

1

2

3

4

5

2011Jan

2011Jul

2012Jan

2012Jul

2013Jan

2013Jul

Un

its (T

ho

usan

d)

Sub-SaleResaleNew SaleMonthly Average since 2011

Oct



42

units per month between July and October 2013 (compared to an average of 1,600 units per month between

2011 and 2012) following the implementation of the TDSR framework in end-June. Sub-sale activity28 has

remained subdued (Chart E2).

Housing Loans

The property-related measures are intended to prompt prospective property buyers to consider their positions

carefully before making a commitment. The measures appear to have had a tempering effect on the growth of

outstanding housing loans, with the y-o-y growth moderating from a peak of 22% in September 2010 to 12% in

September 2013 (Chart E3). The volume of new housing loans, which reflects trends in overall demand in the

property market, has contracted from $13.5 billion in Q3 2012 to $8.8 billion in Q3 2013. The share of new

housing loans with loan-to-value (LTV) ratios higher than 70% has also fallen from a peak of 77% in Q2 2010 to

stabilise at about 66% since 2012. The average LTV ratio of outstanding housing loans was 47.3% as of Q3

2013. The asset quality of property-related loans remains robust with the NPL ratio being less than 0.5% as of

Q3 2013 (Chart E4).

Chart E3 Property-Related Loan Growth

Chart E4 Property-Related NPL Ratios


Demand Conditions

The property-related measures have also led to significant shifts in the profiles of property buyers. For

example, the recovery in property market buying activity in 2010 was driven by both owner-occupier and

investment/speculative demand. Borrowers taking up a second or subsequent housing loan, a proxy for

investment/speculative demand, accounted for about 30% of new housing loans in 2011. Following several

rounds of property-related measures, this share has dipped to 14% in Q3 2013. (See Box F: Singapore

Household Sector: When the Tide Goes Out)

The share of foreign purchases in total transactions continues to be small, at 9% as of Q3 2013 following the

implementation of the Additional Buyer Stamp Duty (ABSD) (Chart E5).

Supply Conditions

The supply of private residential units has continued to rise as a result of the ramp-up in the Government Land

28

A sub-sale is defined as the sale of a unit by one who has signed an agreement to purchase the unit from a developer or a subsequent purchaser before the issuance of the Certificate of Statutory Completion and the Subsidiary Strata Certificates of Title or the Certificates of Title for all the units in the development.

-15

0

15

30

45

60

0

5

10

15

20

25

2005 2007 2009 2011 2013

Per C

en

t

Per C

en

t

Housing, YoY Growth

Building & Construction, YoY Growth (RHS)

Sep

0

2

4

6

8

2004Q2

2006Q2

2008Q2

2010Q2

2012Q2

Per C

en

tBuilding & Construction LoansHousing & Bridging Loans

2013 Q3



43

Sales (GLS) programme. As at Q3 2013, there was a total supply of about 84,900 uncompleted private

residential units from projects in the pipeline, an increase of about 13% compared to the average supply in the

last three years. Of these uncompleted units, about 37% remained unsold as at Q3 2013 (Chart E6). Apart

from these, there were also 12,400 Executive Condominium (EC) units in the pipeline. In addition, another

10,000 units will soon be added to the pipeline supply.29 In all, there will be about 107,400 private housing and

EC units in the pipeline, many of which are expected to be completed over the next three to four years.

Chart E5 Private Property Transactions

By Purchaser Type

Source: URA

Chart E6 Pipeline Supply of Private

Residential Units (Excluding ECs)

Source: URA

Conclusion

While the property-related measures taken over the past few years have dampened momentum in the market,

vigilance is needed. Price levels remain high. The Government will continue to monitor the property market

closely, and if necessary, step in to ensure stability and sustainability in the market.

29

These units are from GLS sites that have been awarded to developers, but for which planning approvals have not yet been obtained as at Q3 2013, as well as Confirmed List sites from the H2 2013 GLS Programme which have not yet been awarded.

0

20

40

60

80

100

2005 2007 2009 2011 2013

% S

hare

Foreigner Company

Permanent Resident Singaporean

Q30

20

40

60

80

100

2005 2007 2009 2011 2013

Un

its (T

ho

usan

d)

Unsold Sold

Q3



44

Box F

Singapore Household Sector: When the Tide Goes Out

While the overall financial position of Singapore’s household sector is healthy in aggregate (see Section 2.3),

household sector debt has been on a rising trend. Some households could have taken on excessive leverage

over the past few years, lulled by rising property prices as well as relatively easy credit conditions, made

possible by low interest rates and stretched loan tenures. As the vast majority of mortgage loans offered by FIs

in Singapore are floating-rate packages, these households may encounter greater difficulty servicing their debts

should interest rates rise. Lower-income households may be more adversely affected given their smaller

financial buffers.

Overall Household Sector Leverage

The household debt-to-income ratio has risen, from a low of 1.9 times in 2008 during the Lehman crisis to 2.1

times in 2012 (Chart F1). In addition, household debt has grown more quickly than household assets since Q2

2011 (Chart F2).30

Chart F1 Household Debt and Income

Source: MAS estimates, DOS Note: Estimates of household debt are as at Q2, to be consistent with household income estimates.

Chart F2 Growth of Household Assets and Debt

Source: DOS

Housing Debt

Housing loans account for about three-quarters of total household liabilities, and could be a significant source

of risk for households. The credit profile of certain housing loans was a source of concern. For example, the

share of new housing loans with LTVs above 70% rose from 62% in Q1 2009 to 77% in Q2 2010 (Chart F3). Also,

the share of new loans accounted for by borrowers taking on a second or subsequent housing loan (and who

may be taking on greater risk) was about 30% in 2011 (Chart F4). The average loan tenure of new housing

loans lengthened from about 25 years as of Q1 2009 to a record 30 years in Q3 2012 (Chart F5).

However, following successive rounds of property-related measures, the credit profile of housing loans has

improved. For example, with more stringent rules for LTVs and loan tenures, the share of new housing loans

with LTVs above 70% has fallen from a peak of 77% in Q2 2010 to stabilise at about 66% since 2012 (Chart F3).

For outstanding housing loans, the share of loans with LTVs above 70% has fallen from a high of 35% in Q3

30

In Q3 2013, household debt grew by 7.9% y-o-y, while household assets grew by 6.8% y-o-y.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

50

100

150

200

250

300

1997 2001 2005 2009

Rati

o

S$ B

illi

on

Estimated Household IncomeHousehold Debt

Household Debt-to-Income Ratio (RHS)

2012

-5

0

5

10

15

20

2004Q1

2006 2008 2010 2012 2013 Q3

Yo

Y %

Gro

wth

Assets Debt



45

2009 to 26% in Q3 2013. The share of housing loans in negative equity also remains negligible (Chart F6).

Borrowers taking up a second or subsequent housing loan, accounted for about 30% of new housing loans in

2011. This share has dipped to 14% in Q3 2013 (Chart F4). Furthermore, the average loan tenure of new

housing loans has shortened from 30 years in Q3 2012, to about 24 years currently (Chart F5). While the NPL

ratio for housing loans remains low, close monitoring is warranted. Strains on borrowers can quickly

materialise if the economic outlook and employment conditions worsen, or interest rates – and therefore

mortgage repayments – increase.

Chart F3 New Housing Loans by LTV Ratios

Source: MAS

Chart F4 Share of New Housing Loan Borrowers

with Existing Housing Loans

Source: MAS

Note: The number of housing loans includes new housing loans

under application.

Chart F5 Average Loan Tenure of

New Private Housing Loans

Source: MAS

Chart F6 Outstanding Housing Loans by LTV Ratios

Source: MAS

Simulations show that the current mortgage-servicing burden (mortgage payment as a share of total income)

among households remains manageable. However, certain segments could be vulnerable to adverse changes

in economic and financial conditions. The vast majority of mortgage loans offered by FIs in Singapore are

floating-rate packages. As some households may have over-leveraged in order to buy properties which are

priced higher now than before, strains can quickly materialise if interest rates rise after being at a low level for

a prolonged period of time. For instance, in a scenario where mortgage rates rise by 300 bps, households with

0

20

40

60

80

100

2008 Q1

2009 Q1

2010 Q1

2011 Q1

2012 Q1

2013 Q1

Per

Cen

t

LTV > 80% LTV between 70%-80%

LTV < 70% LTV between 60%-70%

LTV between 50%-60% LTV < 50%

Q30

20

40

60

80

100

2011Jan

2011Jul

2012Jan

2012Jul

2013Jan

2013 Jul

Per

Cen

t

3 and more Loans 2 Loans 1 Loan

Sep

20

22

24

26

28

30

2009Q1

2010Q1

2011Q1

2012Q1

2013Q1

Lo

an

Ten

ure

(in

Years

)

30 years

24 years

Q30

20

40

60

80

100

2004Q2

2006 2008 2010 2012 2013Q3

Per C

en

t

< 70% 70% - 80%80% - 90% 90% - 100%> 100% (-ve equity)



46

a current mortgage-servicing ratio (MSR) of 30% could see their MSR rise by 11% points. Households that are

more leveraged would be more adversely affected, with the MSR of households with an initial MSR of 60%

estimated to increase by twice as much (21% points) (Chart F7).

While there is no precise measure to indicate whether a household is over-leveraged, a rough guide could be to

look at the total debt-servicing burden, or the proportion of monthly income used for loan repayments. By this

measure, MAS estimates that about 5-10% of borrowers have monthly debt-servicing burden greater than 60%

and that the percentage of over-leveraged households could increase to 10-15% should mortgage rates rise by

300 bps.

Chart F7

Sensitivity Test on Mortgage Servicing Burden

Source: MAS estimates Note: The sensitivity test uses assumptions of a housing loan tenure of 25 years and uses a medium-term interest rate for the MSR before stress.

MAS has taken a series of measures to promote financial prudence. The TDSR framework announced in June

2013 for property-related loans granted by FIs aims to encourage households to borrow within their means.

Other Components of Household Leverage

Apart from housing loans, MAS is also concerned about other types of household debt such as motor vehicle

loans and unsecured credit facilities (including credit cards). Although these loans account for a smaller share

of household debt compared to housing loans, there remains the risk in this low-interest rate environment that

some households could have overextended themselves in using these credit facilities.

Motor Vehicle Loans

Motor vehicle loans account for a relatively small proportion of overall household debt at 4.6% as of Q3 2013,

but there are signs of some borrowers having overextended themselves. The average motor vehicle loan

quantum increased from about $40,000 in 2006 to about $90,000 as of 2012 (Chart F8). LTVs also tend to be

quite high, despite motor vehicles being depreciating assets.

This year, MAS re-introduced financing restrictions on motor vehicle loans, to instill financial prudence among

households and to dampen the demand for motor vehicles and hence moderate COE prices and the CPI. Since

the introduction of the financing restrictions, the outstanding volume of motor vehicle loans has decreased

from $13.8 billion in Q1 2013 to $12.7 billion in Q3 2013.

2030

4050

607

11

14

17

21

0

20

40

60

80

100

Per

Cen

t

Increase in Mortgage-Servicing Ratio due to Medium-Term Interest Rate Rising by 300bps

MSR before Stress



47

Chart F8 Average Motor Vehicle Loan Quantum

Source: Credit Bureau Singapore (CBS)

Credit Cards and Unsecured Credit

Some households could have taken on excessive credit card debt. In the first nine months of this year, the

number of cards in active circulation increased from 9.4 million to 9.7 million, which translated to an average of

about five cards per cardholder. While the growing use of credit cards can be attributed to the marketing

activities of banks and credit card companies, the convenience provided by such cards and rising income among

households, it could also lead to excessive credit card borrowing. Indeed, outstanding credit card balances

have been rising, and currently stand at $10.3 billion (Chart F9).

Even though the credit card charge-off rates31 have remained largely stable at 4-5% since 2010, some risks exist

(Chart F10). For example, the number of frequent revolvers32 has increased over the last five years alongside

the rising number of credit cardholders across all age groups (Chart F11).

Accordingly, steps to pre-empt excesses from building up are necessary. The credit card and unsecured credit

policies recently announced by MAS aim to discourage individuals from spending beyond their means. These

include preventing FIs from extending further credit to a borrower who exceeds the cap on the total amount of

unsecured credit that can be obtained from across all FIs, or who is more than 60 days past due on his loans.

Chart F9 Outstanding Credit Card Balances

Source: MAS

Chart F10 Credit Card Charge-off Rates

Source: MAS

31

The charge-off rate refers to bad debts written off expressed as a percentage of total rollover balances. 32

“Frequent revolvers” refer to those who have not paid their outstanding balances in full for at least three consecutive months.

0

20

40

60

80

100

2006 2007 2008 2009 2010 2011 2012

Un

its (T

ho

usan

d)

0

5

10

15

20

0

3

6

9

12

2004 2006 2008 2010 2012

Per C

en

t

S$ B

illio

n

Total Outstanding Balance

YoY Growth of Total Outstanding Balance (RHS)

2013 Q3

0

2

4

6

8

10

2004 2006 2008 2010 2012

Per C

en

t

2013 Q3



48

Chart F11 Number of Frequent Revolvers Across Age Groups

and Number of Cardholders33

Source: CBS

Conclusion

With household leverage continuing to rise in a low interest rate environment, certain segments of

households, especially those with lower incomes and/or higher debt-servicing burdens, could be more

vulnerable to adverse shocks. The various measures MAS has recently taken aim to encourage greater financial

prudence among households on three fronts – housing loans, motor vehicle loans, and unsecured credit.

33

Note: Number of cardholders refers to main cardholders.

0.0

0.5

1.0

1.5

2.0

0

40

80

120

160

2004 2006 2008 2010 2012

Un

its (

Mil

lio

n)

Un

its (

Th

ou

san

d)

21-29 30-3940-49 50&OverNo of Cardholders (RHS)



49

2.4 Banking Sector

Singapore’s banking system has stayed resilient through 2013. The local banks remain well-capitalised,

and already meet Basel III capital requirements.

Reflecting confidence in Asia, the banking system’s cross-border exposure to the region has increased.

This confidence should be balanced with an appropriate dose of vigilance. Stresses arising from tightening

financial conditions can manifest themselves quickly. Banks need to monitor and manage the risks from

different types of exposures carefully.

At this juncture, asset quality remains healthy, but this could deteriorate if an unexpectedly sharp rise in

interest rates puts a strain on the debt-servicing ability of over-extended borrowers.

Banks should also continue to manage their foreign-currency liquidity risks prudently, as an abrupt global

financial tightening could result in US dollar liquidity stresses.

Singapore’s banking system has remained resilient

and overall loan growth has stayed firm,

with non-bank loans the key driver

Singapore’s banking system has remained resilient

through 2013 and loan growth has continued to be

firm, despite uncertainties in the outlook for the world

economy and considerable volatility in the global

financial system.

Several factors have been key – growth, interest rates

and the financial resilience of borrowers. Singapore’s

GDP growth has held up despite swings in momentum,

and is expected to do so as well in 2014. Despite some

indications of G3 policy normalisation in the not-too-

distant future, interest rates have continued to be low.

The balance sheets of both the corporate and

household sectors have remained healthy in aggregate.

Given such conditions, overall loan growth has stayed

firm through 2013, up from 1.3% y-o-y in Q3 2012 to

9.6% y-o-y in Q3 this year (Chart 2.4.1).

Non-bank loan growth has been the key driver,

accelerating from 9.7% in Q3 2012 to 16.4% y-o-y in Q3

2013. In particular, there has been stronger growth in

Asian Currency Unit (ACU) non-bank lending since Q3

2012.

Interbank lending has returned to positive growth of

Chart 2.4.1 Components of Overall Loan Growth

Source: MAS

Chart 2.4.2

Growth of ACU Cross-Border Interbank Loans by Region

Source: MAS

-15

-10

-5

0

5

10

15

20

25

2008 2009 2010 2011 2012 2013 Q3

% P

oin

t C

on

trib

uti

on

to Y

oY

% G

row

th

Total DBU Interbank LoansTotal ACU Interbank LoansTotal DBU Non-Bank LoansTotal ACU Non-Bank LoansYoY Growth

-60

-40

-20

0

20

40

60

2008 2009 2010 2011 2012 2013

Yo

Y %

Gro

wth

Asia AmericasEurope OthersTotal

Sep



50

0.6% y-o-y in Q3 this year, after contracting for six

consecutive quarters. ACU interbank loan growth

turned positive, offsetting the continued contraction in

DBU interbank loans.

Increased cross-border lending to Asia

reflect continued confidence in the region,

but there is a need to remain mindful of risks

The banking system’s cross-border exposure to Asia

has increased in both the interbank and non-bank

markets.

The pick-up in outstanding ACU cross-border interbank

loan growth to 5.1% y-o-y in Q3 2013 has been driven

primarily by exposures to Asia (Chart 2.4.2). In

contrast, interbank loans to the Americas and Europe

have contracted for the most part since Q3 2012. As a

result, Asia now accounts for a substantially bigger

share of total ACU cross-border interbank loans than

pre-Lehman – 57% against 43% (Chart 2.4.3).

Meanwhile, the volume of ACU cross-border non-bank

loans has expanded in a broad-based manner across all

regions, although Asia dominates. The pace has picked

up from 0.9% y-o-y in Q3 2012 to 17.6% y-o-y in Q3

2013 (Chart 2.4.4). Asia now accounts for 60% of ACU

cross-border non-bank loans (Chart 2.4.5).

In terms of types of facilities, syndicated loans and

trade finance facilities have continued to grow

robustly, with the rate of expansion picking up from

three-year lows of 4.2% and 9.3% in Q3 2012

respectively to 7.3% y-o-y and 33.5% y-o-y in Q3 2013.

Local banks and other Asian banks operating in

Singapore have substantially increased their market

share for syndicated loan and trade finance activities

since the GFC (Chart 2.4.6). This is notwithstanding

recent signs of some European banks increasing their

trade finance activities, and regaining some market

share.

Clearly, Singapore-based banks have remained

confident about the prospects for their Asian

Chart 2.4.3 ACU Cross-Border

Interbank Loans by Region

Source: MAS

Chart 2.4.4 Growth of ACU Cross-Border Non-Bank Loans by Region

Source: MAS

Chart 2.4.5 ACU Cross-Border

Non-Bank Loans by Region

Source: MAS

0

150

300

450

600

750

2008 2009 2010 2011 2012 2013

S$ B

illio

n

Asia Americas Europe Others

Sep

-40

-20

0

20

40

60

2008 2009 2010 2011 2012 2013

Yo

Y %

Gro

wth

Asia AmericasEurope OthersTotal

Sep

0

70

140

210

280

350

2008 2009 2010 2011 2012 2013

S$ B

illio

n

Asia Americas Europe Others

SepSep



51

businesses, even as global investors re-evaluate their

EM exposures in the wake of G3 policy normalisation

concerns. As outlined previously, Asia as a region is

more resilient today than during the AFC, while policy

measures have also become more focused on reducing

vulnerabilities to external shocks.

Nonetheless, this confidence should be balanced with

an appropriate dose of vigilance. Stresses from a

tightening of global financial conditions can manifest

themselves quickly, with uneven impact on different

parts of the region. So banks need to monitor and

manage the risks from different types of exposures

carefully.

Domestically, non-bank loan growth

has continued to moderate

Non-bank loan growth in Domestic Banking Units (DBU)

has been moderating since the first quarter of 2013.

This has been partly due to the easing of housing loan

growth following multiple rounds of macroprudential

measures to encourage prudent borrowing and help

keep household debt in check. Nevertheless, along

with loans to the general commerce sector, property-

related loans (housing and building & construction

[B&C]) remain the top two drivers of DBU non-bank

loan growth for most of 2013 (Chart 2.4.7).

Based on a survey of banks, non-bank loan growth

could remain firm in the near future, with corporates

leading the way. Surveyed banks expect the demand

for and supply of corporate credit to continue

improving over the next quarter, particularly for SMEs.

However, the demand for and supply of consumer

loans is expected to continue tightening, due to

measures introduced recently to encourage greater

financial prudence.

Asset quality of non-bank loans remains healthy,

but could deteriorate should interest rates rise

The asset quality of DBU non-bank loans remains

healthy, but there is a need to guard against

deterioration should interest rates rise from their

Chart 2.4.6 Trade Finance and Syndicated Loan Market Shares by Bank Nationality

Source: MAS

Chart 2.4.7

DBU Non-Bank Loans by Sector

Source: MAS

Chart 2.4.8

Overall NPL Ratio

Source: MAS

0

20

40

60

80

100

Q208

Q211

Q313

Q208

Q211

Q313

Q208

Q211

Q313

Q208

Q211

Q313

Per C

en

t

Asia Europe Others

Export

/Import Bills

Letters

of Credit

Trust

Receipts

Syndicated

Loans

-5

5

15

25

35

2008 2009 2010 2011 2012 2013

% P

oin

t C

on

trib

uti

on

to Y

oY

% G

row

th

Agriculture Building & ConstructionBusiness Services General Commerce

Housing & Bridging Loans ManufacturingNon-bank Financial Institutions Professional & Private IndivTransport, Storage & Comm Others

Sep

0

1

2

3

4

5

6

2004Q3

2006 2008 2009 2011 2013Q2

Per C

en

t

Q3



52

current low levels.

The overall NPL ratio ticked up slightly to 1.3% (Chart

2.4.8). The rise in NPLs has been concentrated in the

general commerce sector, as well as the TSC sector

which has been impacted by the global slump in the

shipping industry.

Looking ahead, should advanced countries start

normalising policy, interest rates in Singapore could

rise from the low levels which they have been at. An

unexpectedly sharp increase, especially if it comes

earlier than expected, could strain the debt-servicing

ability of over-extended borrowers.

In this regard, it is notable that both corporate and

household sector leverage have trended up over the

past few years as evidenced by the increase in

corporate debt-to-equity ratios (Chart 2.2.7) and

household debt-to-income ratios (Chart F1) in recent

years.

With the economic outlook still uncertain but interest

rates increases looking more likely, the risk of banks’

asset quality deteriorating cannot be discounted.

Banks should therefore continue to maintain sound

underwriting standards, including pricing risks

appropriately and managing credit concentration risks

effectively. Banks should also continue to monitor

their borrowers’ financial health in line with sound risk

management practices.

SGD funding for domestic lending remains adequate,

but non-SGD funding risk persists

and warrants close monitoring

SGD funding for domestic lending remains adequate,

but non-SGD funding risk persists and warrants close

monitoring.

Both SGD (Chart 2.4.9) and non-SGD LTD ratios (Chart

2.4.10) have trended up over the past year, although

they remain far below their historical peaks.

Chart 2.4.9 Banking System SGD

Loan-To-Deposit Ratio

Source: MAS

Chart 2.4.10

Banking System Non-SGD Loan-To-Deposit Ratio

Source: MAS

Chart 2.4.11

Local Banks’ Profit Components and Net Interest Margin

Source: Local banks’ financial statements

40

60

80

100

120

Per C

en

t

2013 Sep

0

60

120

180

240

300P

er C

en

t

Sep

-4

-2

0

2

4

6

8

2008 2009 2010 2011 2012 2013

S$ B

illio

n

Net Interest IncomeStaff CostsOther Operating ExpensesProvisioning Expenditure and TaxOther IncomeNet Profit Attributable to Shareholders

2013 Q3



53

SGD funding remains adequate to support SGD loans,

with the SGD LTD ratio at 79.4% in Q3 2013, up from

74.7% a year before (Chart 2.4.9).

However, non-SGD funding risk persists, with the non-

SGD LTD ratio at 128.2% in Q3 2013 (Chart 2.4.10). If

global financial conditions tighten abruptly, for

instance due to renewed market turbulence arising

from G3 policy normalisation concerns, there could be

knock-on effects on the Singapore banking system (see

Box G).

Banks should therefore continue to manage their

foreign-currency liquidity risks prudently. This includes

monitoring their currency and cash flow mismatches

closely, implementing robust liquidity stress tests, and

enhancing contingency funding plans.

Local banks have remained resilient

and already meet Basel III capital requirements

Local banks have remained resilient. Their net profit

exceeded S$2 billion in each of the first three quarters

of 2013 (Chart 2.4.11) although lower than the peak in

Q3 2012. The fall in earnings was largely due to a

reduction in other income, while net interest income

rose slightly despite a slight narrowing of net interest

margins to 1.65% in Q3 2013 (Chart 2.4.12).

The asset quality of the local banking groups has

remained robust, as their aggregate NPL ratio fell to

1.1% in Q3 2013, despite a slight uptick in the absolute

amount of NPLs (Chart 2.4.13).

The local banking groups’ LTD ratio rose from 86.1% in

Q3 2012 to 88.8% in Q3 2013, as the increase in

volume of loans outpaced the increase in deposits, but

remains far below the peak of 100.7% in 1997 (Chart

2.4.14). With the local banks’ expansion into the

region, foreign-currency liquidity risks will have to be

monitored and managed carefully.

Local banks’ capital positions remain resilient. With an

Chart 2.4.12 Local Banks’ Net Interest Margin


Chart 2.4.13 Local Banks’ NPLs


Chart 2.4.14

Local Banks’ Loan-To-Deposit Ratio


1.0

1.5

2.0

2.5

3.0

2008 2009 2010 2011 2012 2013

Per C

en

t

Q3

0

2

4

6

8

10

0

1

2

3

4

5

2008 2009 2010 2011 2012 2013

S$ B

illio

n

Per C

en

t

NPL Ratio Total NPL Amount (RHS)

Q3

60

75

90

105

1995 2001 2008 Q1

2009Q3

2011 Q1

2012Q3

Per C

en

t

2013Q3



54

average Tier 1 Capital Adequacy Ratio (CAR) of 13.5% in

Q3 2013 (Chart 2.4.15), the banks are well above MAS’

regulatory requirement of 8% applicable from 1

January 2015.

Local banks must continue to be vigilant against

risks from a changing operating environment

Local banks must continue to be vigilant against risks

due to changes in their operating environment.

From their current position of resilience, local banks

should continue to manage their risks prudently.

These include maintaining prudent underwriting

standards and robust monitoring of credit

performance, and taking measures to improve their

USD funding profiles. In this regard, local banks have

already taken steps such as raising USD term funding,

diversifying USD funding sources and stepping up USD

deposit-taking efforts.

Chart 2.4.15 Local Banks’ Capital Adequacy Ratio (CAR)


0

5

10

15

20

2008 2009 2010 2011 2012 2013 Q3

Per C

en

t

Tier-1 CAR Total CAR

MAS Tier-1 CAR Minimum Requirement

MAS Total CAR Minimum Requirement



55

Box G

Unconventional Monetary Policies and the Banking System: When the Music Fades

G3 policy normalisation could start in the not-too-distant future

Led by the US, the advanced economies are expected to start normalising monetary policy when their

economic growth recovers. While a recovery in the advanced economies would be positive for the global

economy, the consequent policy normalisation could lead to a significant increase in global interest rates. This

could strain Asian economies, particularly if coupled with a sharp cutback in cross-border banking flows. This

box examines the potential impact of policy normalisation on Singapore’s banking system.

The impact on Asia and Asian banking systems could be substantial

Rising global interest rates would impact Asian economies by raising borrowers’ debt-servicing burdens. The

impact could be pronounced if this coincides with lacklustre economic growth in Asia due to local factors or the

benefits of stronger global demand not yet filtering through to the region.

Further, policy normalisation could cause global financial conditions to tighten and reduce cross-border flows

to Asia. Coupled with a potential credit tightening by domestic banks, Asian economies may face challenges in

securing sufficient funding to support growth.

Singapore’s banking system is likely to stay resilient even under extreme stress

MAS regularly conducts stress tests on major FIs in Singapore. The test scenarios are severe but plausible, and

reflect risks and vulnerabilities in the financial system (see Box H). The most recent industry wide stress test

(IWST) included scenarios of unprecedented stress, including a contraction in Singapore’s GDP for three

consecutive years, rising unemployment, and property prices falling by more than what was experienced during

the AFC. The IWST also considered a sensitivity analysis of additional interest rate shocks, in anticipation of

LSAP tapering.

The IWST results suggest that Singapore’s banking system is likely to remain resilient even under these

unprecedented stressed conditions. Local banking groups, in particular, would be able to maintain capital

ratios above MAS’ regulatory requirements (Chart G1).

Chart G1 Impact of Stress Tests on Local Banks’ Total Capital Adequacy Ratio

Source: MAS

0

5

10

15

20

25

2012 2013 2014 2015

Per C

en

t

Average



56

Independently, the IMF’s stress tests for Singapore, conducted as part of the Financial Sector Assessment

Programme (FSAP), yielded similar outcomes. The IMF concluded that stress tests suggest banks in Singapore

are resilient to adverse macroeconomic scenarios.

Domestic funding sources would likely be sufficient to meet domestic needs...

As a financial centre, Singapore’s banking system serves the financing needs of borrowers based in Singapore

as well as intermediates cross-border banking flows to and from Asia. The banking system does not rely on

foreign funding to support domestic lending. Funds sourced from within Singapore exceed loans to domestic

borrowers, both in the interbank (Chart G2) and non-bank markets (Chart G3). Ample funding from domestic

sources helps to insulate the economy from funding shortages during times of stress.

Chart G2 Banking System Interbank Funding vs. Lending

(As at Sep 2013)

Source: MAS

Chart G3 Banking System Non-Bank Funding vs. Lending

(As at Sep 2013)

Source: MAS

But USD liquidity challenges for some banks could affect their cross-border lending activity

However, a rapid cutback in cross-border banking flows could pose USD liquidity management challenges for

some banks. In the event of a very severe stress that causes the swap markets to stall, some banks may

encounter USD funding shortages and their cross-border lending activity could be adversely affected. To

mitigate this risk, banks have taken steps to diversify their funding sources, for example, by issuing USD debt.

Singapore is well positioned to weather spillover effects of G3 policy normalisation

Overall, Singapore is well positioned to weather strains which may result from policy normalisation by

advanced economies. The banking system is likely to remain resilient under stressed conditions and banks

have taken steps to diversify funding sources. MAS will remain vigilant in watching out for unforeseen risks and

their implications for the banking system as we transition to more normal monetary conditions globally.

0

250

500

750

1,000

InterbankDeposits

Interbank Lending

S$ B

illio

n

Singapore Rest of the World

0

300

600

900

1,200

Non-bank Deposits

Non-bank Lending

S$ B

illio

n

Singapore Rest of the World



57

Box H

Stress Testing Financial Institutions: Going the Distance

MAS stress tests major FIs regularly

MAS conducts regular stress tests of all major FIs in Singapore as part of its financial stability mandate. Key

banks and merchant banks, finance companies, insurers, capital markets services licensees, and the

Singapore Exchange participate in an annual industry-wide stress test (IWST) exercise, using scenarios set by

MAS.

The FIs are selected for the IWST based on their importance to the Singapore economy and financial system.

Banks are identified using “size” metrics (e.g. share of non-bank loans, deposits, or total banking system

assets) and “interconnectedness” with other banks in the domestic market.34 FIs which provide key services

to exchanges and clearing houses or have market-making roles in SGD products are also included in the

exercise. Supervisors may also exercise supervisory judgement to stress test FIs whose risk profiles have

changed materially, such as FIs which are growing certain activities rapidly.

MAS will conduct more frequent stress test exercises as and when necessary. This was done during the

2008-9 financial crisis. In addition to the annual IWST, banks perform regular stress tests which capture risks

that are unique to them individually. The stress tests conducted under banks’ Internal Capital Adequacy

Assessment Process (ICAAP) is one such example.

Stress testing draws on expertise from MAS’ central banking and supervisory functions

The IWST helps MAS to assess the health of individual FIs as well as the financial system as a whole. The

entire process (Figure H1) spans a few months and involves various MAS departments.

Figure H1

Overview of MAS’ IWST Process

The process begins with the identification of severe but plausible scenarios that reflect potential risks and

vulnerabilities in the financial system. The scenarios vary from year to year. The financial surveillance,

economic policy and supervisory departments are involved in this first stage of the IWST process. The

scenarios chosen for a particular year reflect MAS’ assessment of emerging trends in the external and

domestic macroeconomic and financial environment35, as well as our understanding of the potential

34

See Box J of the MAS’ 2011 FSR for details of the network analysis used to assess a bank’s interconnectedness. 35

Risk assessments by international organisations such as the IMF and the Financial Stability Board (FSB), and exchanges with other central banks and financial regulators, industry players and private sector analysts provide additional insights when developing the scenarios.

Design scenario(s) based on

potential risks and

vulnerabilities.

Translate scenarios into

macroeconomic and financial parameters.

Send reporting templates and instructions to

FIs.

Review FIs' submissions of

results and methodologies.

Meetings between MAS

and FIs.

Follow-up actions by MAS

and FIs.



58

vulnerabilities and transmission channels of the financial system, any new and fast-growing activities, and

FIs’ business models. This inclusive and rigorous process aims to minimise the possibility of key risks being

omitted or not given enough emphasis.

The scenarios selected are translated into macroeconomic and financial variables with specific numbers or

values attached, using a combination of quantitative tools and expert judgement. As Singapore is a very

open economy, the stress scenario(s) will include macroeconomic variables of external economies that have

significant trade and financial linkages with Singapore. MAS’ macro-econometric model of the economy is

used to ensure that the projections of Singapore’s macroeconomic variables are model-consistent with

forecasts of external macroeconomic variables. Financial market variables (such as credit spreads and yield

curves) are in turn produced through a variety of methods, including satellite models which link

macroeconomic variables with financial market rates or indices, benchmarking against historical stress

periods/crises, and views of industry analysts.

A common set of stress parameters, together with a qualitative description of the scenario(s) chosen, is

communicated to participating FIs for their stress tests. Relevant data templates and instructions are

included to facilitate the FIs’ stress tests and submissions to MAS. Upon receiving the FIs’ results, MAS

validates them for accuracy, reasonableness and robustness. While MAS does not prescribe the stress test

methodologies that FIs use, we assess them rigorously with a view to verifying that risk exposures are

sufficiently covered, and the methodologies employed are sensitive to such risks.

FIs in the IWST exercise vary greatly in terms of the size and complexity of their business operations, and

MAS encourages them to develop stress test methodologies which are commensurate with their risks. The

use of FI-specific granular data, an intimate understanding of customer profiles and knowledge of their own

global strategies and risk appetites enable FIs to customise the stress test methodologies to best suit their

needs.

MAS invests significant resources to analyse the stress test results submitted by FIs (“bottom-up” stress

testing). MAS meets FIs to establish a deeper understanding of the methodologies employed, including any

additional assumptions made. Given the common scenarios prescribed, peer analyses of the results allow

MAS to identify weaknesses arising from FIs’ risk exposures and stress testing methodologies. For example,

an analysis based on common borrowers across FIs is used to assess the relative severity of banks’

approaches.36

MAS complements the industry’s “bottom-up” stress testing with MAS’ own “top-down” stress testing.

Unlike the “bottom-up” stress test, a common methodology is applied for the “top-down” stress test, so as

to produce results that can be compared across the FIs. This provides an additional perspective and serves

as a robustness check of the banks’ stress test results.

Stress tests results are used to engage FIs on risk management issues and to assess financial stability

Stress testing is critical to FIs’ risk management. MAS expects the boards of directors and senior

management of FIs to be involved in the stress testing process, as part of their risk management oversight.

36

As an example, suppose Company X is a client of both Bank A and Bank B, i.e. Company X is a common borrower of Banks A and B. By comparing the degree of credit deterioration of Company X that Bank A and Bank B expect under the stress scenario, MAS obtains a perspective of the relative severity of stress testing methodologies of Bank A and Bank B.



59

Stress test results – from both “bottom-up” and “top-down” exercises – serve as useful inputs for MAS to

engage FIs in discussions on their resilience to plausible severe scenarios, their planned responses, and

actions to mitigate risk management gaps identified from the exercise.

MAS uses the stress test results in assessing Singapore’s financial stability. The stress test results help us

identify common vulnerabilities across FIs, such as exposures to a particular sector or country. Reverse

stress tests, where FIs describe scenarios in which their solvency would come under threat, provide further

insights on the risks that could impair Singapore’s financial system. Stress testing also allows MAS to assess

the sensitivity of the financial system to different stress events. Stress test results inform our regulatory and

macroprudential policies, such as the resilience of our banking system to property price corrections and the

appropriate capital requirements to impose on key FIs.

The 2013 stress test exercise was based on severe stress scenarios

The 2013 IWST exercise formed part of the IMF’s assessment of Singapore’s financial sector under its FSAP

this year. It featured a baseline scenario, consistent with what was covered in the IMF October 2012 WEO,

and two stress scenarios which were also formulated based on IMF’s requirements.

The scenarios capture a combination of economic and financial shocks which are severe by historical

standards. Key macroeconomic variables (i.e. parameters used for stress testing) were distilled from

previous stress tests based on the variables which would have the most impact on corporate and households

loans, and on banks’ overall exposure. For example, the performance of corporate loans tends to be

affected by overall or sectoral GDP growth, property prices, interest rates and sometimes exchange rates.

Consumer loans are sensitive to the unemployment rate, property prices and interest rates. Banks are also

impacted by the macroeconomic and financial variables of other countries to which they have exposures.

Feedback loops and contagion effects across variables were incorporated by judgmentally increasing the

severity of the stress parameters.

The first stress scenario is a ‘V-shaped’ recession in Singapore, driven by a hard landing in China and an

intensification of the euro zone crisis. The second stress scenario is triggered by depressed US economic

activity arising from fiscal uncertainty and a deeper recession in the euro zone. This leads to an

unprecedented downturn in Singapore which lasts three years. Singapore’s GDP contracts sharply in the

first scenario and enters a prolonged decline in the second scenario. In both scenarios, the local

unemployment rate rises above that seen during the AFC and property prices fall dramatically. The IWST

also included a sensitivity analysis of interest rate shocks arising from a potential LSAP tapering.

Key FIs remain resilient under extreme stresses

Results from this year’s exercise show that the major banks would remain solvent under severe stress

scenarios. In particular, the local banks’ capital adequacy ratios would remain above Basel III capital

requirements. The IMF’s stress test, which extends the stress period to five years, produced similar results,

underscoring the resilience of Singapore’s financial system. It also validates the robustness of MAS’ stress

testing framework.

The resilience of the major banks is corroborated by their current credit ratings. Moody’s continues to

assign the local banks the highest average credit ratings (Aa1) among banking systems globally. Likewise,

Standard & Poor’s (S&P) recently affirmed the local banks’ strong AA- ratings and “Stable” outlook, based on

their strong financial profiles and prudent management strategies.



60

MAS will continue to refine our “bottom-up” and “top-down” stress testing processes

Stress testing is and will remain integral to MAS’ surveillance of the financial sector and supervision of FIs.

MAS will work closely with industry participants to enhance their stress testing capabilities. At the same

time, MAS will refine its own stress testing methodologies to better incorporate macro-financial linkages,

feedback loops and contagion effects, to complement the microprudential focus of FIs’ stress tests. Like

other authorities, MAS will continue to leverage on simulations and stress tests to guide us in policy

formulation.



61

2.5 Non-Bank Financial Sector

2.5.1 Insurance Sector

The insurance industry remains well-capitalised,

with premium growth but weak investment income

The insurance industry in Singapore remains well-

capitalised. As at Q3 2013, more than 80% of our

insurers have CARs of above 200%, well above the

regulatory minimum of 120%. The average CAR for the

direct life and direct general insurance industry are

255% and 276% respectively (Chart 2.5.1.1).

New premiums have increased for the insurance

industry, consistent with economic growth. Direct life

insurers’ new business premiums in the first three

quarters of this year grew significantly by 24.9% from

the corresponding period last year. New premiums for

participating and non-participating products grew

substantially by 28.9% y-o-y and 33.1% y-o-y,

respectively. The growth was driven by healthy sales

across all product lines. In contrast, there was a

marginal drop of 2.1% in new business premiums

related to investment-linked policies (Chart 2.5.1.2).

Despite the strong growth of new business premiums,

direct life insurers’ net incomes fell significantly by

84.8% y-o-y to S$200 million for the first three quarters

of 2013, mainly due to large net investment losses in

Q2 2013 (Chart 2.5.1.3). The poor investment

performance was mainly due to unrealised losses in

debt securities as a result of rising bond yields.

Volatility in net incomes observed over the quarters

largely tracked the volatility in investment income due

to mark-to-market valuations of assets.

Similarly, the general insurance sector has had healthy

business growth for both the Singapore and Offshore

Insurance Funds (SIF and OIF respectively). Gross

premiums for direct general insurers’ SIF and OIF in

Q1-Q3 2013 grew by 4.3% y-o-y and 16.9% y-o-y

respectively (chart 2.5.1.4). Fire/Property and Motor

insurance continued to be the top two lines of

business, accounting for 25.8% and 21.8% respectively

Chart 2.5.1.1 Capital Adequacy Ratio of

Direct Life and Direct General Insurers

Source: MAS

Chart 2.5.1.2 Direct Life Insurers: New Business Premiums

Source: MAS

200

230

260

290

320

350

0

20

40

60

80

100

2008 2009 2010 2011 2012 2013

100≤CAR<120%120≤CAR<150%150≤CAR<200%≥200%CAR - Direct Life Insurers (RHS)CAR - Direct General Insurers (RHS)

Per C

en

t

Per C

en

t

Q3

-120

-60

0

60

120

180

0.0

0.2

0.4

0.6

0.8

1.0

2008 2009 2010 2011 2012 2013

Investment-linkedParticipatingNon-ParticipatingYOY % Growth - Link (RHS)YOY % Growth - Par (RHS) YOY % Growth - Non-Par (RHS)

S$ B

illio

n

Per C

en

t

Q3



62

of total direct general insurance premiums. Gross

premiums for general reinsurers also grew by 6.1%

y-o-y and 9.2% y-o-y for their SIF and OIF, respectively,

with OIF business accounting for 92.6% of total general

reinsurance premiums.

General insurers’ underwriting performance improved

significantly for the first three quarters of the year

compared to the corresponding period in 2012. Direct

general insurers’ underwriting profits grew by 35%

y-o-y to S$607 million, largely attributable to the

profits from the OIF Fire/Property business (Chart

2.5.1.5). General reinsurers’ underwriting gains

increased significantly from S$94 million in 2012 to

S$765 million in 2013 as a result of better claims

experience for the OIF Fire/Property business. In

terms of investment performance, direct general

insurers achieved investment income of S$171 million

in the first three quarters of 2013. General reinsurers

reported a net investment loss of S$170 million,

compared with an investment gain of S$156 million in

the corresponding period in 2012.

Uncertain global economic conditions

and rising interest rates pose considerable

short-term investment risks for insurers

Looking ahead, uncertainty surrounding the US’ policy

normalisation could introduce further uncertainty into

equity and bond markets, which could in turn affect

insurers’ investment performance and balance sheets.

Due to the nature of insurance liabilities, insurers tend

to invest in assets with long duration (particularly life

insurers) or assets which can be easily liquidated

(particularly general insurers). Insurers hold most of

their assets in corporate debt, government securities

and equities, in addition to cash and deposits (Chart

2.5.1.6). More than 80% of the debt holdings are in

investment-grade securities. A majority of insurers’

sovereign debt holdings are in SGS, while US Treasury

bills/bonds make up the largest proportion of insurers’

foreign sovereign debt holdings. Insurers’ equity

holdings are not overly concentrated in any particular

industry, and are largely Singapore-issued stocks.

Chart 2.5.1.3 Direct Life Insurers’ Net Income By Source

Source: MAS Note: Total Outgo = Net Premiums + Net Investment Income + Other Income - Net Income. Items under Total Outgo include net claims settled, increase/decrease in policy liabilities, expenses, etc.

Chart 2.5.1.4 Direct General Insurers: Gross Premiums

Source: MAS

Chart 2.5.1.5 Direct General Insurers: Operating Results

Source: MAS Note: The chart is truncated at -S$600 million. The underwriting loss and underwriting margin was S$2.1 billion and -254% in Q4 2011, respectively.

-0.9

-0.6

-0.3

0.0

0.3

0.6

0.9

-15

-10

-5

0

5

10

15

2008 2009 2010 2011 2012 2013

Net PremiumsNet Investment IncomeOther IncomeTotal OutgoNet Income (RHS)

S$ B

illio

n

S$ B

illio

n

Q3

-30

-15

0

15

30

45

60

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2008 2009 2010 2011 2012 2013

SIFOIFYOY % Growth - SIF (RHS)YOY % Growth - OIF (RHS)

S$ B

illio

n

Per C

en

t

Q3

-20

-10

0

10

20

30

40

-0.2

-0.1

0.0

0.1

0.2

0.3

0.4

2008 2009 2010 2011 2012 2013

Underwriting ResultsNet Investment IncomeUnderwriting Margin (RHS)

S$ B

illio

n

Per C

en

t

Q3



63

The annual stress test results indicate that widening

corporate credit spreads, rising yields and equity price

falls would generally have the greatest impact on

direct life insurers and direct general insurers in the

near term. However, rising interest rates would have

positive effects on the industry over the longer term

(Box I).

Chart 2.5.1.6 Asset Allocation of All Insurers

Source: MAS

0

20

40

60

80

100

Direct & Composite

Life Industry

Direct General

Industry

Reinsurance Industry

Per C

en

t

Government Debt Corporate Debt Structured DebtListed Equity Unlisted Equity CashProperty Loan DerivativesOther Assets



64

Box I

Monitoring the Singapore Insurance Sector’s Systemic Importance and Emerging Risks

MAS continuously monitors the systemic importance of Singapore’s insurance sector to the financial system

and real economy…

MAS has a macroprudential surveillance framework to examine the Singapore insurance sector’s connectedness

and linkages with the economy, financial markets and other financial intermediaries. In the 2011 FSR, we

outlined this macroprudential surveillance framework and the results of our preliminary study based on a

survey of a group of significant insurers. Since then, more granular data on all insurers’ asset and liability

exposures have been collected on both quarterly and annual bases. This allows MAS to perform

macroprudential surveillance analysis for the entire insurance industry on an ongoing basis. To date, findings

remain largely similar to those in 2011.

Insurers may have a fairly significant impact on the SGS and local corporate debt market. Based on an

analysis of end-2012 data, the sector collectively accounted for 17% and 12% of the SGS and local

corporate debt markets respectively. In contrast, insurers accounted for insignificant shares of the

Singapore Exchange’s (SGX) listed equities and derivatives markets.

The insurance sector poses negligible liquidity and credit risks to the domestic banking system.

Insurers’ deposits made up less than 1% of the non-bank deposits of the key banks in Singapore.

Moreover, insurers’ share of the total equity and debt capital issued by the local banks was only 5.2%.

Insurers are a source of business for Singapore fund managers. A few insurers outsourced their fund

management to related entities. As such, the failure of these insurers may have a negative impact on

the continued operation of some fund management companies.

The insurance industry’s linkages to financial markets and intermediaries via credit enhancements are

minimal. Singapore-licensed insurers currently underwrite only a small volume of inward mortgage

reinsurance and no financial guarantees or CDS. In addition, Singapore-based insurers have not issued

insurance-linked securities and there are currently no special purpose reinsurance vehicles to transfer

risk to capital markets in Singapore.

The market for most of the general insurance business lines is not overly concentrated, except for

Marine & Aviation (Hull & Liability) business. The Marine & Aviation business accounted for only 8% of

the overall gross premiums written in Singapore, and coverage for this line of business is available from

insurers based overseas. These factors mitigate concerns over lack of substitutability.

Direct general insurers ceded around 30% of their SIF business to reinsurers, of which only 30% was

ceded to onshore registered direct general insurers and general reinsurers. In turn, general reinsurers

ceded out less than one-third of their SIF insurance risks, with around half ceded to onshore

retrocessionaires. In contrast, direct life insurers ceded less than 5% of their insurance risks and

therefore would bear the brunt of any losses. Therefore, direct general insurers are more

interconnected with reinsurers than life insurers.

Overall, our analysis showed that Singapore insurers pose limited systemic risk. However, we will

continue to closely monitor developments that could raise the systemic importance of the insurance

industry in Singapore.

MAS also monitors the impact of emerging risks on Singapore’s insurance sector…

Direct life insurers and direct general insurers are required to conduct annual stress tests, where emerging risks

form part of the stress test scenarios. MAS monitors the impact of emerging risks on Singapore’s insurance

sector on an ongoing basis.



65

Rising interest rates

Interest rates have been low for a prolonged period of time.37 Rising rates will have a negative impact on

insurers in Singapore in the short term. However, there will be positive effects on insurers in the longer term if

higher interest rates persist for a prolonged period. The impact on life insurers will be more significant than on

general insurers.

General insurers typically hold shorter-duration fixed-income assets which are less sensitive to interest rate

changes. In addition, most of the policy liabilities of general insurers are short-term, and not required to be

discounted under the current capital framework. As such, general insurers will be less impacted by rising

interest rates.

In contrast, life insurers tend to hold longer-duration fixed-income assets to match their longer-term liabilities.

This causes them to be more sensitive to interest rate movements. Higher interest rates will cause an

immediate reduction in the mark-to-market values of fixed income assets held by insurers. The impact on

policy liabilities varies over time due to the operation of the current valuation rules.38 In the short term, as the

long-term risk-free discount rate used to value policy liabilities adjusts only gradually to rising interest rates, the

values of policy liabilities do not fall as quickly as the mark-to-market values of fixed income assets held by

insurers. As a result, life insurers will be affected negatively in the immediate aftermath of an interest rate

increase. However, if higher interest rates persist, the discount rate will rise and the value of policy liabilities

will decline more quickly. In addition, insurers will benefit from the higher interest rates through higher coupon

income from new fixed-income assets in their portfolios. As a result, life insurers’ balance sheets as well as

capital positions are expected to improve over the longer term.

Increasing exposure to catastrophe risk

With offshore insurance business growing, insurers are increasingly exposed to greater catastrophe risk, which

may cause a one-time spike in claims experience. Such increase in claims experience could have a significant

impact on an insurer’s solvency, particularly if the insurer is exposed to risks concentrated in a particular area or

business line. Recent natural disasters, including the earthquakes in Japan and New Zealand, and floods in

Thailand, have shown that catastrophe risk is a real risk to insurers in Singapore writing offshore risks in the

region.

MAS is reviewing the Risk- Based Capital (RBC) framework to help insurers better manage emerging risks

The RBC framework was first introduced in 2004. Since then, there have been developments in international

standards and market practices. MAS is reviewing the RBC framework (RBC 2 review) to improve the

comprehensiveness of its risk coverage and its risk sensitivity.

MAS recognises that for predictable liability cash flows, the fixed-income assets used to back the policy

liabilities are more likely to be held to maturity and therefore do not face the risk posed by short-term interest

rate movements. MAS is studying ways to recognise this under RBC 2.

MAS is also working towards incorporating an explicit catastrophe risk charge in the RBC 2 framework, to help

ensure that insurers are capitalised to meet potential liabilities arising from a 1-in-200 year catastrophic event.

37

MAS’ annual stress test results show that low interest rates are not a major stress factor for the Singapore insurance sector as the level of investment guarantees within the insurance products sold in Singapore is not high, and insurers also sell a significant amount of investment-linked and pure protection products. 38

Currently, where the duration of a liability is 20 years or more, insurers are required to use a long term risk free discount rate (LTRFDR). LTRFDR is relatively stable, as it is calculated as a weighted average of the historical yield since inception of the 15 and 20 year SGS (90% weight), and the recent 6 month average yield of the 20 year SGS (10% weight).



66

2.5.2 Capital Markets Sector

39

A Singapore qualifying hedge fund is defined as a hedge fund with net asset value (NAV) greater than US$500 million and managed by a Singapore hedge fund manager. 40

This is based on MAS’ Return on Debt Securities and includes all corporate debt (including commercial paper) issued or co-arranged in Singapore, regardless of where the issuers are incorporated. This is different from the analysis in Box D, which is based on Dealogic data on bond issuances by Singapore-incorporated companies, regardless of where the issuances are arranged.

Capital market intermediaries continue to

maintain sound financial positions

as capital markets remain orderly

MAS monitors the financial strength of capital market

intermediaries and maintains close engagement with

exchanges and clearing houses responsible for

frontline oversight of their members.

Securities and derivatives members of SGX and the

Singapore Mercantile Exchange (SMX) have maintained

adequate financial resources to meet regulatory

requirements, and remain vigilant in monitoring

customer exposures.

SGX and SMX have not experienced any member

default, and hence have not had to draw on their

clearing funds.

The investment management industry

has grown despite continued volatility

in global financial markets

The investment management industry has grown over

the past year despite continued volatility in global

financial markets.

Assets under management (AUM) increased by 21.5%

y-o-y to $1.63 trillion as at end-2012. Following the

implementation of the enhanced regulatory regime for

fund management companies (FMCs) in August 2012,

there are a total of 611 FMCs operating in Singapore as

at end-October 2013. These include former exempt

fund managers which have since become licensed or

registered fund management companies.

MAS participated in the International Organisation of

Securities Commissions (IOSCO)’s 2012

global hedge fund survey, together with 14

other securities regulators from Asia Pacific,

Europe and the Americas. The survey found

that Singapore qualifying hedge funds 39

accounted for 1% of the total number of

qualifying hedge funds globally.

Qualifying hedge funds from Singapore are

mainly equity-oriented and multi-strategy

funds and generally have low leverage. As

the majority of such funds in Singapore do

not engage in credit intermediation, they

may pose less of a shadow banking concern

(see Box J).

Investments by Singapore-based funds,

including hedge funds, were estimated to

account for only about 5% and 12% of

Singapore’s equity and bond markets

respectively. On the whole, the portfolios

are liquid and fund managers have indicated

that they do not expect any difficulty

liquidating their portfolios to meet investor

redemptions.

Singapore’s capital markets

continue to deepen

Fund-raising activity has continued to grow

in 2013. While IPO activity on both the SGX

Main Board and Catalist has remained

stable (Chart 2.5.2.1), corporate debt 40

issuance rose to $127 billion in the first

three quarters of 2013, up from $103 billion

in the same period last year (Chart 2.5.2.2).



67

In addition, Singapore, Malaysia and Thailand have

signed an agreement to implement an ASEAN

Collective Investment Scheme (CIS) framework. This

framework will allow Singapore-based fund managers

to offer their retail funds directly to investors in the

other two countries under a streamlined process.

MAS has also fine-tuned the regulatory framework for

CIS by (i) enhancing disclosure requirements for offers

of CIS to both retail and non-retail investors, and (ii)

regulating closed-end funds as CIS so that investors in

these funds are accorded the same level of protection

as investors in open-end funds.

More initiatives have been put in place to support

safety and efficiency of clearing houses and

transparency of markets

More initiatives have been put in place to support the safety and efficiency of clearing houses and to promote transparency of markets. In January 2013, MAS published the Monograph on

Supervision of Financial Market Infrastructures (FMIs)

in Singapore. The monograph describes MAS’

approach in supervising FMIs in Singapore to foster

their safety and efficiency. The monograph also

explains MAS’ application of the Principles for Financial

Market Infrastructures (PFMI) issued by the Committee

on Payment and Settlement Systems and the Technical

Committee of the International Organisation of

Securities Commissions (CPSS-IOSCO).

The PFMI contains international standards designed to

ensure that the infrastructure supporting global

financial markets is robust and well-placed to

withstand financial shocks. All systemically-important

payment systems, central counterparties, securities

settlement systems and central securities depositories

in Singapore are required by MAS to comply with the

PFMI.

In line with the PFMI, the Central Depository (CDP) and

Singapore Exchange Derivatives Clearing Limited (SGX-

DC) have implemented various initiatives over the past

Chart 2.5.2.1 Initial Public Offerings

Source: SGX, Bloomberg

Chart 2.5.2.2 Corporate Debt Issuance

Source: MAS

0

2

4

6

8

10

0

15

30

45

60

75

2007 2008 2009 2010 2011 2012 2013

S$ B

illio

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Nu

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er o

f IP

Os

MainboardCatalistAmount Raised (RHS)

Jan-Sep

0

10

20

30

40

50

2007 2008 2009 2010 2011 2012 2013

S$ B

illio

n

SGD Non-SGD

Q3



68

year. These include the January 2013 implementation

of margining for securities cleared by CDP, and the

publication of SGX-DC’s and CDP’s disclosure

documents detailing their operation, governance and

risk management of post-trade clearing, settlement

and depository activities.

In March 2013, SGX implemented rules to require

market participants to mark all short sale orders. This

is in line with IOSCO Principles on Regulation of Short

Selling that short selling should be subjected to a

reporting regime that provides timely information to

the market and market authorities. The aggregate

value and volume of short sell orders for each security

is published daily, enhancing the level of information

available to market participants.

Regulation of over-the-counter (OTC) derivatives

markets continues to be enhanced

in line with global initiatives

MAS is committed to meet the objectives set by G20

leaders on the regulation of OTC derivatives. Further

details of MAS’ ongoing initiatives are presented in Box

K.



69

Box J

Shadow Banking in Singapore?

Shadow banking entities conduct credit intermediation outside the regular banking system and can pose

risks to financial stability, both on their own and via their connections to the regular banking system and

financial markets. At the G20’s request, the Financial Stability Board (FSB) has developed a monitoring

framework for national authorities to track the shadow banking system. In collaboration with other

international standard setting bodies, it has also recommended measures to strengthen the regulation of

the shadow banking system. MAS participates in these FSB initiatives.

Using the FSB’s methodology, MAS estimates that potential shadow banking in Singapore is small relative

to the regular banking system. Nevertheless, MAS will continue to monitor the size of shadow banking

activities in Singapore and the risks these activities pose.

In measuring shadow banking, MAS has “cast the net wide”, before narrowing down to credit

intermediation activities

In line with the FSB’s recommendation for jurisdictions to “cast the net wide”, our mapping of potential

shadow banking entities in Singapore initially includes the following non-bank financial intermediaries41:

money market funds (MMFs), ETFs, structured finance vehicles (SFVs), hedge funds, private equity (PE)

funds, other investment funds (OIFs)42 and broker-dealers.

We then narrow the focus by concentrating on non-bank financial intermediaries which are involved in

credit intermediation and the systemic risks they may pose. The primary concerns relate to activities that

involve maturity transformation, liquidity transformation, credit risk transfer, or leverage. Maturity

transformation refers to the use of short-term liabilities to finance the purchase of medium to long-term

assets. Liquidity transformation is the issuance of liabilities that are easily redeemable to finance assets

that may not be easily liquidated. Credit risk transfer refers to actions taken by credit originators or

intermediaries to transfer their credit risk to others.43 While leverage is not in itself a measure of shadow

banking risk, it can act as an amplifier in times of distress.

Maturity or liquidity transformation within the shadow banking system, especially if combined with high

leverage, raises systemic concerns for authorities. In particular, short-term deposit-like funding in the

shadow banking system can create “modern bank-runs”, if undertaken on a sufficiently large scale.

Additionally, greater interconnectedness between the shadow banking system and the regular banking

system could lead to wider contagion within the financial system.

Potential shadow banking in Singapore is small, relative to the domestic financial system

The size of the potential shadow banking sector in Singapore is small relative to Singapore’s overall

financial system assets and to the global shadow banking system. Using the assets of non-bank financial

intermediaries as a proxy, the size of Singapore’s potential shadow banking system is $923.7 billion,

compared with $3.5 trillion for the overall financial system in Singapore (Chart J1), and $86.8 trillion for

41

We have excluded pawn brokers and licensed money lenders because their total assets are very small, at about 0.07% of total financial system assets. 42

OIFs in Singapore are mostly traditional long-only funds. 43

When entities attempt to transfer credit risk, they may take on other risks (such as counterparty credit risk, operational risk or liquidity risk) or, on closer analysis, not have fully transferred the credit risk.



70

the global shadow banking system.44

Chart J1

Assets Held by FIs in Singapore

Source: MAS

*Finance companies are not considered shadow banking entities as they are subject to bank-like regulations, including

capital requirements and prudential limits.

Non-bank financial intermediaries in Singapore perform neither significant maturity and liquidity

transformation, nor credit risk transfer, and are not highly leveraged

More than 80% of the assets held by Singapore’s non-bank financial intermediaries are in OIFs managed

by Singapore fund managers (Chart J1). These are predominantly traditional long-only funds invested in

equities, and hence do not involve credit intermediation.

MAS’ survey of selected OIFs that had the largest exposures to credit intermediation instruments as at

end-2012 showed that their short-term assets far exceeded long-term liabilities45 (Chart J2). Their assets

were also generally more liquid than their redemption obligations – about 80% of OIFs’ assets could be

liquidated within a week while only about 70% of their net asset values (NAVs) could be redeemed by

investors within the same period (Chart J3). Maturity and liquidity transformation for other entities is

insignificant as well (Table J1).

Funds managed in Singapore generally take on little leverage, investing using mainly the monies raised

from investors. For example, based on the abovementioned survey, the leverage ratio46 of OIFs was only

1.5% as at end-2012 (Table J1).

Credit risk transfer in the financial system is low. Credit risk transfer takes place during the process of

securitisation. The assets of SFVs – a proxy for the amount of securitisation outstanding47 in the

44

The size of the global shadow banking system is based on the Global Shadow Banking Monitoring Report 2013 published by the FSB on 14 Nov 2013. (http://www.financialstabilityboard.org/publications/r_131114.pdf) 45

In this survey, funds contributed by investors are considered as equity on the fund balance sheet. 46

Leverage ratio is calculated as debt/NAV, expressed in percentage terms. 47

Securitisation has been used as a proxy because it has been extensively used over the last decade to transfer credit risk.

Banks (incl. MAS)$2,373.4 bn

68.2%

Finance Companies*$15.0 bn

0.4%

Insurance Companies

$165.6 bn4.8%

MMFs$1.6 bn

0.0%

ETFs$2.2 bn

0.1%

Struc. Fin. Veh.$5.4 bn

0.2%

Hedge Funds & PE Funds

$111.4 bn3.2%

Other Investment Funds

$768.6 bn22.1%

Assets of Broker-Dealers

$34.5 bn1.0%

Other$923.7 bn

26.6%

Entire Financial System Non-bank Financial Intermediaries

http://www.financialstabilityboard.org/publications/r_131114.pdf



71

Singapore financial system – represent only 0.6% of outstanding non-bank loans granted by banks in

Singapore (Chart J4).

Chart J2 Other Investment Funds: Maturity Transformation

Source: MAS

Chart J3 Other Investment Funds: Liquidity Transformation

Source: MAS

*Calendar Day

Table J1 Risk Factors by Entity Type

Entity Type % of Non-bank Financial Intermediary

Assets

Credit Intermediation

(% assets in credit instruments)

Maturity & Liquidity Transformation

Leverage (debt / net assets)

OIFs 83% 25% Insignificant 1.5% Hedge Funds and PE Funds

12% 8.6% Insignificant 13%

SFVs 0.6% 91%48 Insignificant 99%49 MMFs 0.2% 38% Insignificant 0.0% ETFs 0.2% 29% Insignificant 0.4% Broker-dealers 3.7% 2.0% Insignificant 8.1%

Source: MAS

Chart J4 Total Assets of SFVs vs. Total Non-Bank Loans

Source: MAS

48

None of these assets is collateral originated by banks. 49

Leverage for SFVs is high as assets purchased are financed by the issuance of collateralised notes.

0

5

10

15

20

< 1

year

1-3

years

3-5

years

5-1

0

years

>10

years

No

m

atu

rity

date

S$ B

illio

n

Assets Liabilities

20

40

60

80

100

<1

CD

*

1-7

CD

8-3

0C

D

31-9

0C

D

91-1

80

CD

181-3

65

CD >365

CD

Per C

en

t

Asset Liquidity Redemption Liquidity

0.0

0.3

0.6

0.9

1.2

1.5

0

200

400

600

800

1000

20052006200720082009201020112012

Per cen

t

S$ B

illio

n

Total Non-Bank Loans

Assets of SFVs

Total Assets of SFVs to Total Non-Bank Loans (RHS)



72

Limited linkages between the potential shadow banking sector and the banking system…

MAS’ survey also indicates that linkages between non-bank financial intermediaries and Singapore’s

banking system are insignificant, at 2.4% of banks’ total non-bank deposits, and 1.7% of their non-bank

loans (Table J2). Non-bank financial intermediaries account for only 1.2% of banks’ total derivative

transactions. Banks’ guarantees to and investments in non-bank financial intermediaries are also

insignificant.

... and with financial markets in Singapore

In addition, non-bank financial entities do not pose significant systemic risks to the financial markets.

Take, for example, Singapore’s fund management industry – approximately 80% of the funds managed in

Singapore are sourced from outside Singapore, while 86% are invested outside Singapore. These funds’

investments in Singapore represent only about 5% and 12% of Singapore’s equity and bond markets

respectively.

Table J2 Linkages with Banks by Entity Type

Entity Type Deposits with

Banks50

Loans from Banks51

Derivatives Exposure

with Banks52

Guarantees by Banks

Investments by Banks

OIFs 1.3% 0.6% 0.3% Insignificant Insignificant Hedge Funds and PE Funds

0.2% 0.0% 0.0%

Insignificant Insignificant

SFVs 0.0% 0.0% 0.0% Insignificant Insignificant MMFs 0.1% 0.0% 0.0% Insignificant Insignificant ETFs 0.0% 0.0% 0.0% Insignificant Insignificant Dealer-brokers 0.9% 1.1% 0.9% Insignificant Insignificant Total 2.4% 1.7% 1.2% Insignificant Insignificant

Source: MAS

Securities borrowing/lending (SBL) and repo markets in Singapore are nascent

Based on a preliminary survey conducted on banks, brokers, insurers and central depositories, SBL and

repo activities in Singapore are nascent. Banks are the main players in this market, but SBL and repo

activities account for only a small proportion of banks’ overall business activities. In addition, prime

broking activities in Singapore are generally limited to client-servicing and marketing services, with

transactions conducted mainly with entities outside of Singapore.

Funds managed in Singapore generally do not undertake SBL or repo transactions. Some hedge funds

engage in SBL for their trading strategies, though these transactions make up only a small share of their

assets under management. Rehypothecation of collateral is also uncommon. Overall, the level of SBL,

repo and prime broking activities in Singapore is unlikely to pose systemic risk to the financial system.

Conclusion

Non-bank financial intermediaries in Singapore do not appear to pose significant shadow banking risks

because (i) most of their assets are not credit instruments; (ii) there is insignificant maturity and liquidity

transformation; (iii) leverage and credit risk transfer are generally low; and (iv) they have limited linkages

with the banking system and financial markets. In addition, SBL and repo activities in Singapore are

nascent, and rehypothecation is uncommon. Nonetheless, MAS will continue to watch out for potential

shadow banking risks in Singapore while contributing towards ongoing FSB initiatives in this area.

50

As a share of total non-bank deposits held by banks 51

As a share of total non-bank loans extended by banks 52

As a share of total (gross) value of derivative transactions by banks



73

Box K

Over-the-Counter (OTC) Derivatives Reforms: Still A Ways to Go

In 2009, G-20 leaders agreed to enhance regulation of the OTC derivatives market by end-2012, to address risks

arising from weaknesses identified during the GFC. The FSB subsequently made 21 recommendations, covering the

following areas: (i) standardising OTC derivatives; (ii) requiring all standardised OTC derivatives to be cleared

through central counterparties (CCPs); (iii) reporting all OTC derivatives transactions to trade repositories (TRs); and

(iv) encouraging the trading of standardised OTC derivatives contracts on exchanges or electronic trading

platforms, where appropriate.

Good progress has been made….

Since then, good progress has been made on OTC derivatives reform.

According to the Sixth Progress Report by the FSB, progress on implementing trade reporting is most advanced,

with most jurisdictions expected to have adopted legislation and regulations for mandatory reporting by end-2014.

Implementation in other areas of OTC derivatives reforms, such as central clearing and trading on electronic

platforms where appropriate, is taking place more slowly.

Development of international standards for a number of areas in the OTC derivatives reform has also been

completed. The Basel Committee on Banking Supervision (BCBS) and IOSCO released a finalised framework for

margin requirements for non-centrally cleared derivatives in September 2013. Jurisdictions will begin phasing in

the margin requirements from December 2015, incorporating the recommendations into their regulatory regimes.

In addition, CPSS and IOSCO also published their final report on Authorities’ Access to Trade Repository Data in

August 2013.

…but cross-border regulation of OTC derivatives transactions remains to be addressed

To-date, cross-border regulation of OTC derivatives has proven to be one of the most contentious areas for

national regulators and the financial industry. The FSB has tasked the OTC Derivatives Regulators Group (ODRG), of

which MAS is a member, to identify and resolve cross-border issues relating to potential overlaps, conflicts and

inconsistencies in the regulation of OTC derivatives transactions across jurisdictions.

The US Dodd-Frank Act and the European Markets Infrastructure Regulation (EMIR) are key pieces of regulation

with cross-border implications for entities and OTC derivatives transactions outside the US and EU (e.g. US and EU

bank branches and subsidiaries operating in Singapore). Without a coordinated approach by regulators, market

participants could be subject to multiple sets of regulations with the potential for conflicting requirements, giving

rise to legal and operational risks. If there are such conflicts, or if the burden of complying with multiple sets of

rules is significant, this may prevent the execution of cross-border trades. This, in turn, could lead to fragmented

markets and the disappearance of valuable hedging mechanisms. The ODRG recognises this and seeks to reach

common ground among international regulators to avoid conflicting rules and eliminate inconsistent and

duplicative requirements.

In this regard, the US Commodity Futures Trading Commission (CFTC) and the European Commission (EC) have

adopted a substituted compliance and equivalence assessment approach respectively, so that entities have the

latitude to comply with just one set of rules. MAS is participating in the substituted compliance and equivalence

assessments with the US CFTC and EC, and is putting in place the regulatory regime to support cross-border



74

transactions. This will help reduce uncertainty and allay concerns over regulatory burden. MAS continues to

engage the US CFTC and EC, and will work with them on the substituted compliance and equivalence assessments,

even as implementation of our OTC derivatives regulatory regime progresses.

The systemic implications of cross-border requirements would also need to be considered. For instance, national

regulators in the US and EU require cross-border trades to be centrally cleared with CCPs recognised within their

jurisdictions. To facilitate the trading activities of their clearing clients, CCPs would need to be recognised by

multiple jurisdictions. This may, however, lead to the concentration of risks in a few large global CCPs, and

ironically result in a “too-big-to-fail” situation. Regulatory authorities should work together to mitigate the risk of

this occurring.

Reforms to domestic OTC derivatives market underway…

MAS remains committed to implementing OTC derivatives reform in a timely manner. In line with the G20 and FSB

recommendations, MAS has been steadily making progress in developing our OTC derivatives regulatory regime

over the past two years. We consulted on the overarching framework for OTC derivatives reform in February 2012.

This set out our proposed approach for the reporting, clearing and trading mandates, as well as our proposed

regulation of TRs, clearing houses, markets, and intermediaries. The legislative amendments to the Securities and

Futures Act (SFA) to provide for mandatory reporting and clearing, as well as the licensing regimes for TRs and

clearing houses, were passed into law in November 2012. The regulatory regimes for TRs and clearing houses have

since commenced in August 2013.

With regard to mandatory reporting of OTC derivatives, the regulations were finalised end-October 2013, with the

reporting framework starting with interest rate and credit derivatives contracts. All banks will begin reporting

these two types of derivatives contracts by 1 April 2014; all non-bank financial entities by 1 July 2014; and all

significant derivatives holders by 1 October 2014. Reporting of other classes of OTC derivatives contracts (including

foreign exchange, equity and commodity derivatives contracts) will be mandated at a later stage. As part of an

industry initiative53, a number of banks committed to commence reporting ahead of the mandatory reporting

timeline. This is a positive move which supports MAS’ efforts to meet the G20 objective of strengthening

regulatory oversight of OTC derivatives through trade reporting.

For mandatory central clearing, work on draft regulations is currently underway and the regime is expected to

commence in H2 2014. In deciding whether to introduce a trading mandate, MAS will take into consideration

feedback received on the feasibility of a trading mandate as well as possible unintended consequences highlighted

by IOSCO, such as a withdrawal of liquidity by some market participants that will make it costly for others to hedge

their risks. The implementation of the reporting mandate will provide MAS with market data that will enable us to

better assess the characteristics of the Singapore market, and the incremental benefits of having a trading

mandate.

MAS continues to review other aspects of our OTC derivatives regulatory regime, including the regulation of

intermediaries dealing in OTC derivatives and of OTC derivatives market operators, and is committed to implement

a sound and effective regulatory framework.

53

Please refer to the ISDA letter on OTC derivatives trade reporting in Singapore submitted to MAS on 5 November 2013. http://www2.isda.org/attachment/NjA5NQ==/MAS%20Commitment%20Letter_Public.pdf



75

STATISTICAL APPENDIX SINGAPORE NON-FINANCIAL SECTOR Table A.1: Corporate Sector’s Financial Ratios and Number of Companies Wound Up Table A.2: Household Sector’s Financial Indicators

SINGAPORE FINANCIAL SECTOR Table B.1: Banking Sector’s Selected Financial Indicators Table B.2: Local Banks’ Selected Financial Indicators Table B.3: Direct Life Insurers: Total New Business Gross Premiums Table B.4: Direct Life Insurers: Asset Distribution of Singapore Insurance Fund (Non-

Linked Assets) Table B.5: General Direct Insurers: Gross Premiums Table B.6: General Direct Insurers: Composition of Net Premiums of Singapore

Insurance Fund Table B.7: General Direct Insurers: Incurred Loss Ratio of Singapore Insurance Fund



76

SINGAPORE NON-FINANCIAL SECTOR

Table A.1: Corporate Sector’s Financial Ratios and Number of Companies Wound up

H2 H1 H2 H1 H2 H1 H2 H1

2009 2010 2010 2011 2011 2012 2012 2013

Median Return on Assets (Per Cent)

Transport, Storage & Communication 7.2 5.9 6.3 6.1 5.1 5.2 5.7 5.8

Property 3.7 5.0 6.3 6.7 5.5 5.9 6.3 6.4

Multi-Industry 4.0 4.7 5.5 5.7 3.8 4.3 4.2 3.7

Manufacturing 3.1 4.7 5.9 5.3 4.3 3.7 3.0 2.3

Hotels & Restaurants 4.2 3.5 4.9 5.3 6.7 4.3 3.2 3.4

Construction 8.5 8.1 7.5 6.1 5.1 4.0 4.8 6.8

Commerce 5.1 5.1 5.2 6.1 5.1 3.8 3.8 4.3

Median Current Ratio (Ratio)


Property 2.0 2.1 2.1 2.0 1.9 2.0 1.9 1.8

Multi-Industry 1.9 1.9 2.0 2.0 2.3 2.1 1.7 1.8

Manufacturing 1.9 2.0 1.9 1.8 1.8 1.8 1.7 1.7


Construction 1.7 1.7 1.8 2.1 1.7 1.9 1.7 1.8

Commerce 1.7 1.8 1.7 1.7 1.6 1.8 1.7 1.8

Median Total Debt/Equity (Per Cent)


Property 51.7 51.6 51.8 51.2 48.3 49.0 50.6 52.1

Multi-Industry 32.3 35.5 34.5 42.4 41.1 43.7 51.5 34.1

Manufacturing 21.3 16.2 19.4 19.9 22.0 25.0 25.0 26.4


Construction 42.7 34.1 28.2 34.1 35.3 48.4 41.1 49.1

Commerce 31.1 30.9 25.4 29.4 33.1 34.7 34.5 27.6

Median Interest Coverage Ratio* (Ratio)


Property 2.7 4.2 14.4 7.1 19.1 7.7 12.8 7.0

Multi-Industry 2.9 10.4 15.8 12.7 5.9 9.4 12.0 8.5

Manufacturing 4.0 9.0 13.1 8.8 6.9 5.3 2.6 3.3


Construction 6.0 10.1 9.7 13.2 4.9 12.6 11.0 13.3

Commerce 4.7 4.9 5.7 9.0 6.4 5.1 4.4 7.2

Number of Companies Wound Up

All Sectors 75 74 68 40 73 78 73 54

Source: Thomson Financial, Ministry of Law * Earnings before interest and tax divided by interest expense. Note: A revised list of firms (all SGX-listed firms as of October 2013) was included in the computation of ratios for H2 2012 and H1 2013 in the table above.



77

Table A.2: Household Sector’s Financial Indicators

Source: DOS, MAS and Ministry of Law. * Charge-off rate for the quarter is calculated by annualising the ratio obtained from dividing bad debts written off for the quarter by the average rollover balance for the same quarter.

Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2011 2011 2011 2012 2012 2012 2012 2013 2013 2013

Per Cent (unless otherwise stated)

Household Assets (S$ Billion)

1466.2 1487.1 1511.7 1552.8 1568.3 1604.2 1642.6 1684.7 1694.4 1712.5

Residential Property Assets as % of Total Assets

49.5 50.3 50.3 49.5 49.7 49.4 49.5 49.1 49.4 48.9

Household Liabilities (S$ Billion)

224.6 231.7 237.0 242.0 248.0 255.2 262.9 267.5 271.4 275.2

Household Liabilities to Assets Ratio (%)

15.3 15.6 15.7 15.6 15.8 15.9 16.0 15.9 16.0 16.1

Household Liabilities as % of GDP

69.3 70.3 70.9 71.9 72.8 74.5 76.1 77.1 77.4 77.5

Per Cent (unless otherwise stated)

Credit Card Charge-Off Rate*

4.7 4.4 4.3 4.7 4.8 5.1 4.8 4.6 5.1 4.7

Housing & Bridging Loan NPL Ratio

0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3

Professional & Private Individuals Loan NPL Ratio

0.9 0.8 0.8 0.8 0.7 0.6 0.6 0.6 0.6 0.5

Number of Individual Bankruptcy Orders

426 402 382 416 446 425 461 485 576 475



78

SINGAPORE FINANCIAL SECTOR Table B.1: Banking Sector’s* Selected Financial Indicators

2010** 2011** 2012** Q1

2012 Q2

2012 Q3

2012 Q4

2012 Q1

2013 Q2

2013 Q3

2013

Loan Concentrations (% of Total Commercial Bank Loans)

Interbank Loans 51.4 46.0 42.5 45.1 44.5 43.3 42.5 40.5 40.3 39.8

Non-Bank Loans 48.6 54.0 57.5 54.9 55.5 56.7 57.5 59.5 59.7 60.2

Loans through the Asian Dollar Market (% of Total Commercial Bank Loans)

Total ADM Loans 62.7 60.9 58.6 60.4 60.0 59.2 58.6 58.2 58.9 59.5

Of which to (% of Total Asian Dollar Market Loans):

USA 5.2 4.9 3.3 3.6 3.3 3.4 3.3 3.4 2.9 3.0

United Kingdom 6.9 6.9 6.6 6.7 7.3 7.0 6.6 6.4 6.5 5.8

Switzerland 3.9 4.0 3.8 3.8 3.8 4.1 3.8 3.3 3.2 3.7

Japan 10.3 6.6 8.7 6.5 7.4 8.5 8.7 8.0 6.8 7.5

Hong Kong 8.9 10.2 8.9 10.0 9.7 8.9 8.9 9.2 9.8 10.3

Interbank 61.5 58.1 56.7 57.7 57.5 57.3 56.7 54.5 54.7 54.5

Non-Bank 38.5 41.9 43.3 42.3 42.5 42.7 43.3 45.5 45.3 45.5

Loans through Domestic Banking Units (% of Total Commercial Bank Loans)

Total DBU Loans 37.3 39.1 41.4 39.6 40.0 40.8 41.4 41.8 41.1 40.5

Of which to (% of Total DBU Loans):

Manufacturing 2.2 3.3 4.3 3.6 3.9 4.5 4.3 5.3 5.2 4.7

Building & Construction 10.9 11.7 12.4 12.0 11.9 12.1 12.4 12.7 13.0 13.3

Housing 22.9 22.8 24.0 23.1 23.2 23.6 24.0 23.8 24.1 24.5

Professional & Private Individuals

8.6 9.1 9.6 9.3 9.3 9.6 9.6 9.4 9.5 9.5

Non-Bank Financial Institutions 7.7 9.6 10.3 9.6 9.8 10.2 10.3 10.0 10.3 10.5

Banks 34.3 27.0 22.5 25.9 25.0 23.2 22.5 21.2 19.7 18.2

Per Cent

DBU Net Interest Income to Total DBU Loans

1.6 1.5 1.5 1.5 1.5 1.5 1.5 1.4 1.4 1.4

Per Cent

Liquid DBU Assets to Total DBU Assets

9.3 9.9 9.7 9.6 9.3 9.9 9.7 9.9 9.9 9.5

Liquid DBU Assets to Total DBU Liabilities

10.1 10.7 10.5 10.4 10.1 10.6 10.5 10.7 10.7 10.2

All DBU Loans to All DBU Deposits

97.7 102.5 105.3 102.2 105.6 105.8 105.3 104.5 105.6 107.7

DBU Non-Bank Loans to DBU Non-Bank Deposits

74.4 87.0 94.6 87.8 91.9 93.7 94.6 96.5 99.5 101.8

DBU Non-Bank Loan Growth (y-o-y)

14.7 30.3 16.7 26.0 20.9 16.5 16.7 19.7 17.7 15.7

DBU Non-Bank Deposit Growth (y-o-y)

10.8 11.4 7.4 10.8 8.2 6.5 7.4 8.9 8.6 6.5

Source: MAS * Data relates to all commercial banks, Singapore operations only. ** Annual figures are as at Q4.



79

Table B.2: Local Banks’* Selected Financial Indicators

2010** 2011** 2012** Q1

2012 Q2

2012 Q3

2012 Q4

2012 Q1

2013 Q2

2013 Q3

2013

Capital Adequacy (Per Cent)

Regulatory Capital to Risk-Weighted Assets (RWA)

18.6 16.0 18.1 16.5 15.8 17.4 18.1 16.9 16.3 16.1

Regulatory Tier I Capital to Risk-Weighted Assets (RWA)

15.5 13.5 14.9 13.6 13.4 14.3 14.9 14.2 13.6 13.5

Shareholders’ Funds to Total Assets^

9.5 8.7 9.2 8.9 8.8 8.9 9.2 8.9 8.6 8.3

Asset Quality (Per Cent)

Non-Bank NPLs to Non-Bank Loans

1.6 1.2 1.2 1.3 1.2 1.3 1.2 1.1 1.1 1.1

Total Provisions to Non-Bank NPLs

110.9 125.5 128.3 123.1 127.1 122.5 128.3 133.7 134.3 131.2

Specific Provisions to Non-Bank NPLs

40.5 39.3 41.8 38.9 40.7 38.5 41.8 39.9 38.7 35.7

Loan Concentration (% of Total Loans)

Interbank Loans 12.2 13.3 12.7 14.8 14.8 15.1 12.7 13.6 13.3 14.4

Non-Bank loans 87.8 86.7 87.3 85.2 85.2 84.9 87.3 86.4 86.7 85.6

Of which to (% of Total Loans):

Manufacturing 8.1 8.1 7.9 8.1 8.1 7.9 7.9 8.9 8.8 8.1

Building & Construction 12.0 12.1 12.6 11.9 12.0 12.1 12.6 12.9 13.0 13.0

Housing 23.2 20.7 22.0 20.7 20.8 21.3 22.0 21.3 20.8 20.4

Professional & Private Individuals

8.6 8.3 8.8 8.2 8.3 8.5 8.8 8.6 8.7 8.6

Non-Bank Financial Institutions

11.7 10.7 10.7 10.9 10.6 10.6 10.7 8.9 8.9 8.8

Profitability (Per Cent)

ROA (Simple Average) 1.2 1.0 1.1 1.2 1.1 1.1 1.1 1.1 1.0 1.0

ROE (Simple Average) 12.2 11.1 12.0 13.2 11.9 12.0 12.0 11.8 11.3 11.6

Net Interest Margin (Simple Average)

2.0 1.9 1.8 1.9 1.8 1.8 1.8 1.7 1.7 1.6

Non-Interest Income to Total Income

40.6 37.3 43.6 41.1 38.8 39.1 43.6 42.6 40.9 40.1

Source: Local banks’ financial statements, MAS calculations * Local banks' consolidated operations. ** Annual figures are as at Q4. ^ Figures include assets of Great Eastern Holdings.



80

Table B.3: Direct Life Insurers: Total New Business Gross Premiums

2010 2011 2012

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Year-on-Year % Change

Policies 0.6 5.9 -0.6 -0.1 0.5 -1.6 -1.3 -17.6 3.0 5.9

Annual Premiums 26.0 23.0 19.6 27.9 8.9 14.1 23.0 20.4 39.8 26.5

Single Premiums 7.4 16.4 -10.0 -4.8 -11.0 -12.5 -13.7 -18.0 27.7 31.9

Sum Insured 10.8 27.0 15.3 16.6 3.0 18.9 37.2 -7.5 -6.4 3.4

Source: MAS

Table B.4: Direct Life Insurers: Asset Distribution of Singapore Insurance Fund (Non-Linked Assets)

2010 2011 2012

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

S$ Million (% of Total Assets)

Debt Securities

56,988 61,041 71,347 62,533 64,317 69,188 71,347 71,770 69,997 71,365

(61.4) (63.2) (66.1) (61.9) (63.4) (65.5) (66.1) (65.5) (65.2) (65.3)

Equity Shares

21,683 19,218 21,931 21,495 20,811 21,003 21,938 23,343 23,091 24,221

(23.4) (19.9) (20.3) (21.3) (20.5) (19.9) (20.3) (21.3) (21.5) (22.2)

Cash & Deposits

4,491 7,172 5,695 7,327 6,945 5,989 5,696 5,409 5,706 5,047

(4.8) (7.4) (5.3) (7.3) (6.8) (5.7) (5.3) (4.9) (5.3) (4.6)

Loans 4,040 3,885 3,320 3,785 3,603 3,466 3,320 3,369 3,370 3,278

(4.4) (4.0) (3.1) (3.7) (3.6) (3.3) (3.1) (3.1) (3.1) (3.0)

Land & Buildings

2,889 3,056 3,109 2,963 2,963 2,938 3,104 3,111 3,067 3,073

(3.1) (3.2) (2.9) (2.9) (2.9) (2.8) (2.9) (2.8) (2.9) (2.8)

Other Assets

2,721 2,164 2,512 2,952 2,831 3,018 2,488 2,601 2,109 2,308

(2.9) (2.2) (2.3) (2.9) (2.8) (2.9) (2.3) (2.4) (2.0) (2.1)

Total Assets

92,812 96,537 107,914 101,055 101,470 105,602 107,893 109,604 107,341 109,292

(100) (100) (100) (100) (100) (100.0) (100) (100) (100) (100.0)

Source: MAS

Table B.5: General Direct Insurers: Gross Premiums

2010 2011 2012

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

S$ Million

Total Operations

4,572.6 5,056.5 5,524.6 1,489.5 1,325.3 1,292.2 1,240.8 1,545.6 1,485.0 1,428.2

SIF 3,230.6 3,423.6 3,626.7 1,028.6 860.2 834.9 799.0 1,048.9 908.5 884.2

OIF 1,342.0 1,632.9 1,897.9 460.9 465.1 457.3 441.8 496.7 576.5 544.0

Source: MAS



81

Table B.6: General Direct Insurers: Composition of Net Premiums of Singapore Insurance Fund

2010 2011 2012

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

S$ Million

Marine & Aviation

- Cargo 79.7 84.9 80.7 20.6 21.4 20.6 17.8 19.6 20.3 19.6

- Hull & Liability 112.5 113.3 122.3 20.4 21.7 26.2 24.1 18.9 20.1 27.0

Fire 143.1 155.7 161.5 46.7 43.6 38.1 33.3 53.5 46.2 39.5

Motor 1,071.8 1,103.1 1,150.1 321.6 272.6 266.4 285.1 318.9 278.5 264.7

Work Injury Compensation

237.2 258.4 297.7 90.4 73.7 73.2 59.3 103.3 84.3 80.6

Personal Accident 187.3 207.4 225.5 57.9 59.1 53.8 55.6 62.7 63.8 60.3

Health 141.9 164.4 213.0 71.6 52.8 47.5 40.1 84.5 57.6 46.2

Miscellaneous 318.8 326.1 354.9 97.3 93.7 87.2 77.6 91.9 105.2 92.6

Total 2,292.3 2,413.3 2,605.7 726.5 638.6 613.0 592.9 753.3 676.0 630.5

Source: MAS

Table B.7: General Direct Insurers: Incurred Loss Ratio of Singapore Insurance Fund

2010 2011 2012

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Per Cent

Marine & Aviation

- Cargo 11.4 28.2 22.0 13.8 15.1 25.7 29.6 22.4 31.5 25.3

- Hull & Liability 61.5 71.8 54.5 51.5 50.2 57.5 51.5 76.4 56.5 66.0

Fire 22.9 27.2 44.6 89.1 41.6 32.0 12.3 24.0 34.9 41.4

Motor 74.3 68.5 66.2 65.0 65.5 67.6 67.8 67.1 63.3 65.5

Work Injury Compensation

67.8 66.8 64.8 65.7 64.1 69.4 71.7 57.8 65.1 72.1

Personal Accident 27.1 28.3 34.9 31.4 31.6 31.6 39.6 28.4 32.2 31.8

Health 64.3 63.1 62.8 58.9 66.0 70.9 58.9 68.8 70.3 62.2

Miscellaneous 33.5 33.7 20.8 26.8 28.3 39.0 9.0 35.3 14.7 31.7

Total 57.0 56.0 53.7 55.8 53.4 57.1 52.1 54.7 51.5 55.5

Source: MAS