SINGAPORE - Singapore banks could see loan quality fall sharply should interest rates rise or if the economy worsens as corporate debt levels are high by historical standards, the city-state's central bank warned on Wednesday.
"Corporates are more leveraged today than they were a year ago as low borrowing costs may have prompted some corporates to borrow more than they would have otherwise," the Monetary Authority of Singapore (MAS) said in its annual Financial Stability Review.
Large firms have issued twice the amount of debt in the first nine months of this year compared with the same period last year, while loans to small- and medium-sized enterprises have continued to expand robustly, MAS added.
"If economic conditions worsen or interest rates rise from current low levels, bank loan quality could deteriorate substantially," the central bank said, although it added companies in the city-state appear well-positioned to cover their interest expenses.
Singapore interest rates are hovering near all-time lows amid a surge in inflows resulting from quantitative easing by Western central banks.
The yield on the 10-year government bond is around 1.36 per cent while bank deposits earn as little as 0.1 per cent per annum, well below inflation that has averaged 4.7 per cent so far this year.
MAS had a more benign view on household debt levels, noting Singapore's household net wealth stood at four times gross domestic product, an increase of 7.3 per cent from a year ago.
Total cash and deposits belonging to households have also continued to exceed aggregate debt, it added.
MAS said government measures since 2009 to pre-empt the formation of a bubble in Singapore's residential market has led to a "noticeable slowdown in the pace of housing loan growth".