Measures to Deal with US Federal Reserve Rate Hike

Mr Mohd Ismail Hussein asked the Prime Minister (a) what will be the impact of the US Federal Reserve rate hikes to Singapore SMEs and households; (b) whether there are any specific segments that are particularly vulnerable; and (c) what are the safeguards to lessen the impact of a steeper than expected rate hike on these vulnerable segments.

Madam, I am taking this question on behalf of the Deputy Prime Minister and Chairman of the Monetary Authority of Singapore (MAS).

Madam, market participants are expecting the US Federal Reserve to start raising interest rates at some stage next year. We can also expect some bumpiness in global financial markets in view of uncertainties over the pace of interest rate normalisation.

Singapore has coped well thus far, given our strong economic fundamentals and our healthy reserves. Further, our financial markets are resilient, with the foreign exchange and money markets continuing to function well and our banks' balance sheets being sound.

The normalising of interest rates in the US, when it occurs, should be viewed positively as it signals a sustained recovery in the US economy, which should, in turn, benefit Singapore's exports. The rise in interest rates in the US and in the region should also enable more efficient and appropriate pricing of risks. The alternative of a continued prolonged period of low interest rates will likely lead to borrowing excesses and asset market instability.

Higher interest rates will impact some existing groups of borrowers in Singapore, as elsewhere. Companies and households that have borrowed heavily when interest rates were low will be vulnerable. Highly leveraged companies, especially those with low net profit margins, may find the increase in borrowing costs eroding their cash flows.

The Government will continue to monitor financing conditions and ensure that viable businesses have continued access to affordable loan financing. SPRING administers a range of financing schemes to help ensure that credit remains accessible to SMEs.

The overall financial position of the household sector remains healthy. However, as MAS has indicated before, a small segment of highly leveraged households could be vulnerable should interest rates rise more quickly than expected.

We have, therefore, taken a series of measures to encourage financial prudence. These measures have prevented borrowers from taking on excessive leverage for their property

Page: 34

purchases and they have helped to reduce the impact of eventual interest rate hikes. MAS has also introduced new regulations on credit card and unsecured credit. This is with the view to helping those individuals with credit problems avoid accumulating further debt.

Taken together, the measures have tempered the growth of household debt, from a peak of nearly 13% year-on-year in Q3 2011 to 5.6% in Q2 this year. New housing loans have lower loan-to-value ratios and shorter loan tenures. The proportion of borrowers taking multiple housing loans has also declined. MAS will continue to encourage financial prudence to keep household debt at a manageable level.

I thank the Minister for that comprehensive reply. Before the implementation of the cooling measures for the property market, many Singaporeans had taken the opportunity to upgrade their properties, particularly to private properties. Many of them had actually taken floating rate packages. I believe, even from my personal experience, that many have actually over-extended themselves, in terms of taking the property loans.

I believe that they are one of the groups vulnerable to a steep increase in interest rate. Given the ongoing global economic environment volatility, there is also this risk of heightened job insecurity. I would just like to highlight that these are some of the vulnerable groups. I am just wondering whether there are any safeguard measures that we can put in place for this group.

Madam, we understand the concerns that the Member has highlighted with the people who may have over-stretched in terms of taking on property loans. We should look at this in two parts. First of all, the cooling measures or the property-related measures which have been implemented not just recently but, in fact, since 2009, and these include tighter Loan-to-Value Ratios, cap on loan tenures or Total Debt Servicing Ratio (TDSR) framework, more recently.

As I have said, at the macro level, I think these measures have worked well in stabilising our household debt situation. They have helped to strengthen household balance sheets. As I have mentioned earlier, they have, firstly, tempered the growth of household debt; and secondly, if you look at the risk profile of new borrowers, the risk profile has improved as well. For existing borrowers, as the Member has highlighted, there may be a small group who are vulnerable. That is a separate matter. Then, it is not so much in terms of taking the pre-emptive measures which we have done, but looking at help measures which we continue to do. The Government has a range of assistance measures which are focused and targeted, and these continue to be reviewed to make sure that they are effective.

Page: 35