Singapore's banking system is sound, but the buildup in household debt is worrying, the city state's central bank said Tuesday.
"The combination of low interest rates, growing leverage and surging property prices poses significant risks to financial stability," Ravi Menon, managing director of the Monetary Authority of Singapore, told a briefing on its annual report.
It is important to "act now to limit build-up of leverage," he added.
Menon said that the low interest environment globally spurred the strong demand for credit in Asia.
He highlighted the substantial flow of credit to asset markets, especially in real estate. Housing loans by banks in Singapore grew 18 percent each year over the last three years, and housing loans as a percentage of gross domestic product has increased accordingly to 46 percent from 35 percent.
The central bank chief said that "a return to normal monetary conditions is not far off" as the financial markets are already reacting to the anticipated tapering and unwinding of quantitative easing in the United States.
Menon said that 5 to 10 percent of the households in Singapore "have probably over-leveraged their property purchases."
"Many households could have over-extended themselves, fueled by low interest rates and stretched loan tenures. The vast majority of mortgage loans in Singapore are on floating rate packages, which means households will face higher monthly repayments when interest rates normalizes," he said.
If the mortgage rates rise by 3 percentage points, the proportion of borrowers at risk may reach 10 to 15 percent, he said.
Singapore has recently moved to further tighten the loan rules, saying that home loans should not exceed a total debt servicing ratio of 60 percent.
Authorities has put in place several rounds of cooling measures for the real estate sector since the economy rebounded in 2009. There were also restrictions on the tenure of home loans.
The central bank said that it has been monitoring the credit growth closely, but that this in itself "is not a cause for major concern."
The growth in total credit reflects Singapore's growing role as a regional financial center, and the banks have put in place surplus funds to meet credit demand throughout Asia, particularly productive economic activities like trade financing.
The increase in resident credit-to-GDP ratio is also less sharp, from 125 percent to 155 percent over the last three years.
The domestic credit growth is broad-based across both households and corporates, it said.
MORE UPBEAT ON ECONOMY
Menon sounded a more upbeat note on the economy, saying that Singapore could "comfortably meet" the official growth forecast of 1 to 3 percent this year.
Growth was estimated to be at 2 percent in the first half of 2013, the central bank said, adding that the growth "should pick up over the course of the year amid an improving external environment."
There are also signs that the global information technology industries will be doing better this year, which is good news for Singapore.
The tail risks are seen to have receded, with less likelihood of a eurozone breakup or a fiscal cliff in the United States.
The growth in the United States, the world's largest economy and most important driver, is gaining momentum, and corporate profitability is also rising.
The expansionary macroeconomic policies in Japan is expected to lift private consumption and net exports, too, it said.
In Asia, there has been some consolidation in the domestic demand but the export sector will gradually improve, with the slowdown in China so far being "measured."
With strong job creation and a tight labor market, China's growth is "unlikely to fall below 7 percent," it said.
INFLATION FORECAST LOWER
The central bank also said that the headline inflation forecast will be revised downward by 1 percentage point to 2-3 percent, largely thanks to sharp fall in car prices as well as slower growth in accommodation costs.
This is the first time in three years that the consumer price index (CPI) inflation has come down closer to historical trends and within the comfort range of the Monetary Authority.
However, the forecast for core inflation, which excludes accommodation and private transport, remained unchanged at 1.5-2.5 percent.
The headline inflation for Singapore averaged 4.6 percent last year, mainly due to higher residential property rentals and car prices, while core inflation was 2.5 percent.
The authority said that its monetary policy stance since 2010 has underpinned the gradual improvement seen in Singapore's inflation-growth trade-off.
The Monetary Authority said that it is "committed to ensuring the recent improvements in inflation are sustained."
"The current policy stance of modest appreciation of the Singapore dollar is appropriate in containing the re-emergence of strong cost and price pressures in a restructuring economy," it said.
The Monetary Authority made a net loss of 10.61 billion Singapore dollars in the fiscal year, reversing from the gain of 2. 77 billion Singapore dollars in the previous financial year.
Menon said the loss was mainly because of the effect of a strong Singapore dollar. It would be a healthy profit if the reporting currency has been an international currency.
Total assets managed by Singapore-based asset managers were 1. 63 trillion Singapore dollars (1.29 trillion U.S. dollars) at the end of last year, up 21.5 percent year on year, thanks to strong inflows and higher market valuation.