Heed warnings against imprudence

Heed warnings against imprudence

SINGAPORE - Among many recent cautions against mounting household indebtedness comes Moody's observation that the Singapore banking system outlook has deteriorated from stable to negative.

To be sure, well-buffered local banks are not at risk, as underscored by the Monetary Authority of Singapore (MAS), but some borrowers are. So, if the downgrade by the credit ratings and risk analysis provider has not reverberated much beyond immediate financial and business circles, it should.

Consumers and property buyers certainly need to exercise prudence in the face of rising interest rates.

Household debt has risen to 279 per cent of gross domestic product (GDP) in the first quarter of the year from 177 per cent in 2007 - too quickly and too sharply for warning bells to remain silent. Such indebtedness is among the highest in the region.

Borrowers have all too readily leveraged on abnormally low interest rates resulting largely from a high tide of easy money. This has flowed globally from quantitative easing in several major developed economies in recent years.

However, consumers have to beware the ebb does not leave them high and dry. They should not soon forget how the 1997 Asian financial crisis caught many over-extended on credit card debts that forced some into bankruptcy and took others as long as 15 years to repay. This would be a lesson too bitter to relearn.

The MAS tightened consumer credit rules last year to discourage overspending and debt delinquency, especially among the young, and to encourage banks to take a closer look at prospective customers' creditworthiness.

Those who have leveraged to the hilt in property investment should be most concerned. Despite high savings rates, property obsession has propelled liabilities to 80 per cent of household debt. This poses considerable danger as interest rates might rise so fast and high as to dry up their cash flow.

Though many hope the United States Federal Reserve Board is prepared to delay an exit from its stimulative bond buying, it will have to taper off at some point when the US economic recovery gathers strength and unemployment continues to decline.

Borrowers should not think they can second-guess the Fed on the timing, when many American economic analysts shy away from making confident forecasts.

Some property investors might find interest payments starting to outstrip rental yields, which might decline with over-supply. Rising interest rates, declining yields and softening prices could well combine in a perfect storm.

Thus, borrowers should ensure mortgage repayments are within a total debt servicing ratio of 60 per cent of monthly income.

Experience has shown that such prudence pays.

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