Unwise to downplay risks

About two weeks ago, ratings agency Moody’s Investors Service issued what I thought was a timely reminder to investors of the extent of risk the Singapore economy had been exposed to within a short few years.

Moody’s downgraded the outlook for Singapore’s banking system from stable to negative, citing rapid loan growth and rising real estate prices both in the country and the region.

It said domestic household debt in Singapore had risen to 77.2 per cent of gross domestic product as of March, up from 64.4 per cent at the end of 2007. Over the same period, prices of private homes and resale HDB flats jumped 26 per cent and 70 per cent, respectively.

Moody’s highlighted worries that the United States central bank will scale back on its monetary stimulus, a move that could lead to outflows from Asia and potentially trigger a crash in asset values.

One may dispute its findings or the method of assessment, but what is undisputed is that Singapore’s exposure to risk has risen dramatically over the past few years. A lot of this heightened risk has resulted from over-investment in property, with the housing market turning in robust sale numbers and prices each year for the past four out of five years.

But then came the rejoinder from the Monetary Authority of Singapore (MAS). The central bank said local banks are not at risk and regular stress tests have shown that adequate buffers are in place to cope with the inevitable upturn in the interest rate cycle.

The MAS also noted that Moody’s has been revising its ratings outlook downwards over the past two years for a number of highly-rated banking sectors, including those in Hong Kong, Australia and Canada.

Analysts also joined in, downplaying the warning and highlighting the strengths of Singapore banks. In fact, the three banks have Moody’s highest ratings globally, with Aa1 for their long-term bank deposits.

Personally, I did not think it’s necessary to remind investors that Singapore banks are well-capitalised. The nation already has a big reputation in this area, with the three lenders among the top six strongest banks in the world in a Bloomberg ranking.

What concerns me is the unintended message that we may be sending out to investors, especially the less sophisticated ones.

Simply put, Moody’s is warning that a financial tsunami may hit our shores some time in the future. How likely, how soon or how strong the hit will be depends on how successful policymakers in the major economies unwind their loose monetary policies.

Market players are on edge because they know deep down that they are sitting on inflated assets and they want to be the first to pull out should the unwinding threaten to become disorderly. This explains why the markets reacted so strongly in May and June at the first hint that tapering would begin.

By downplaying the warning so forcefully and over-emphasising our strengths, the authorities may be sending the wrong message to investors. They may think that their fears are unfounded because we have erected a 6-metre-high wall to hold back the tsunami, while others have only a 3m wall. And that we can comfortably take on more risks.

But what happens if the “tapering” goes awry and a 9m tsunami hits us? Is this so inconceivable? We know that asset prices have raced well ahead of income growth, fuelled in part by our open policies. Lest we forget, we have one of the world’s most open economies and one of the smallest domestic sectors to fall back on.

About a week after saying the banking system was robust, the MAS voiced its concerns that 5 to 10 per cent of borrowers here have taken on too much debt to buy a home, with their total monthly debt repayments exceeding 60 per cent of their incomes. This proportion of “at-risk” borrowers could hit 10 per cent to 15 per cent if mortgage rates rise by 3 percentage points, the central bank warned.

Again, the message could be misconstrued by some, when taken together with what has been said before: That as long as your monthly debt repayments do not exceed 60 per cent of your income, it is not yet time to worry.

But we all know that, in an economic crisis, almost every sector is affected and many jobs will be lost. If you have no income, you are immediately at high risk unless you have huge cash reserves. Otherwise, you will have to find a replacement job quickly in a harsh environment. And the numbers at risk will most likely be more than 10 to 15 per cent, whether rates rise by 3 percentage points or less.

This is one time when we should let the warning stay well alone and let investors make their own judgments — or produce evidence to show that risk levels have not risen so high and so rapidly as warned by Moody’s.

By Colin Tan – Head of Research and Consultancy at Suntec Real Estate Consultants.

Source : Today – 2 Aug 2013

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