S'pore not headed for debt disaster

Contrary to sensational headlines on the matter, debt in Singapore is in fact low and manageable
By Siriwan Chutikamoltham, Published The Straits Times, 25 Nov 2014

IN RECENT years, there have been many concerns expressed in the media about the level of debt in Singapore, especially for mortgage and credit card borrowings.

These critiques have relied on a few different ways to measure debt, but most have arrived at the same conclusion that Singapore's households have a debt problem or are on the way to one.

Some have taken Singapore's gross debt to gross domestic product (GDP) ratio and compared it to that of other countries. For example, if the United States had a gross household debt to GDP of about 100 per cent in 2007 when the sub-prime debt crisis broke, then Singapore - where the ratio is 75 per cent and rising - must also have a debt crisis brewing, they say.

Others have raised the alarm based on concerns that Singaporeans' personal debts are growing faster than the overall economy, while personal bankruptcy filings and the loan default rate are also rising.

Such reports have brought about a sense of impending economic disaster. Some analyses went so far as to predict a credit meltdown for Singapore, similar to the sub-prime crisis in the US.

The widespread concern about debt in Singapore has triggered several government measures since 2012 to curb borrowings. These include property loan curbs and a cap on an individual's total debt repayments relative to his income.

Such measures were taken at the macro level - in other words, applied across the board for all borrowers.

But contrary to the sensational headlines on this subject, on an aggregate level, debt in Singapore is in fact low and manageable, considering most households' rock-solid balance sheets and the robust job market.

How much is too much?

LET'S start with the question of how much debt is considered too much to lead a person or a nation into financial trouble.

The answer to this question does not depend on the ratio of debt to GDP, nor how rapidly the debt has grown.

What matters is the ability to service the debt. A debt amount is too much if the borrower cannot make debt repayments in a timely manner.

The ability to make debt repayments depends on two factors. Firstly, the borrower's assets: if they are worth more than his liabilities, he can cover his debt.

Secondly, to meet debt obligations in a timely manner, the liquidity of the assets also matters. If the borrower can raise enough cash quickly to pay for his liabilities, he has no debt problem.

An analysis of household balance sheets shows that the assets of Singaporean households were worth over six times their liabilities in each of the past five years. In short, for every dollar that the household sector has in debt, it has over $6 in assets for repayment.

Better yet, the household sector here has a large amount of liquid assets in the form of cash and bank deposits. At the end of March, it had in aggregate $329.4 billion in cash and bank deposits, which exceeded the total liabilities of $282 billion.

In simple terms, Singaporean households as a whole can easily pay off all their loans with cash, without having to sell off any other assets. The balance sheet also shows that households' debt levels have been steady at about 15 to 16 per cent of total assets in each of the past five years. So the fear that Singaporeans have piled up debt too fast is simply not supported by the data.

About 75 per cent of household debts are mortgage loans - not surprising, given that Singapore has one of the highest home ownership rates in the world.

This may cause nervousness about whether Singapore will suffer a banking crisis like in the US if property prices drop, since Singaporean banks have a high proportion of mortgage loans in their lending portfolio.

But the US sub-prime crisis happened because of overly lenient conditions for mortgage lending, and the emergence of mortgage-backed securities that were not transparent to investors and not properly priced for the risks.

In Singapore, lending conditions are generally strict, with the maximum home loan capped at 80 per cent of a property's price. And in practice, mortgage loans have been lower than the bank mortgage limits. The Monetary Authority of Singapore (MAS) estimated that the average loan-to-home value was 47.5 per cent as of the first quarter this year.

Personal loans such as credit card debt have attracted special attention of late. There were worries that personal loans have been growing at a double-digit rate, far outpacing income growth. Personal bankruptcy cases also rose from 1,748 in 2012 to 1,992 last year, a 14 per cent increase in one year.

However, in aggregate, personal loans have remained at 26 per cent of total liabilities, and credit card loans at 3 per cent, throughout the last five years. There is no sign of a significant change in consumer spending or borrowing habits.

Servicing the debt

WHAT is important is not how much one has in credit card balances at the end of the month, but rather if one can pay it off. Thus far, Singaporean households have shown an excellent ability to service their debts, mainly thanks to the robust job market and their ownership of liquid assets.

Singaporeans can also pay for their mortgages with their Central Provident Fund savings. Mortgage lending in fact can be considered quite safe for banks here, with real properties as collateral and the sound ability of the borrowers to make monthly payments.

The size of bad loans for the banking sector in Singapore averaged only 1 per cent of their lending portfolio as at the end of last year. Bankruptcy cases, while on the rise from 1,748 in 2012 to 1,992 last year, represented only 0.14 per cent of total credit-card users over the same period, an insignificant number at the macro level.

In addition, the unemployment rate is very low at about 2 per cent, and job market prospects still look healthy, barring unforeseeable economic calamities.

One special characteristic of the labour market in Singapore is the high proportion of foreign workers: about 35 per cent of the workforce.

Should unemployment rise, the Government can activate pro-Singaporean worker schemes to promote employment among the resident population. This makes it unlikely that a prolonged high level of unemployment will threaten Singaporeans' financial stability.

In conclusion, the data does not support the worry that Singaporean households have too much debt or have consumed beyond their means. At the macro level, the contrary is true.

This is not to deny that pockets of the population here may have debt problems. However, it is important to properly identify the extent of the problem and whether it is a nationwide issue or specific to a portion of the population.

A national problem requires macro policy to safeguard the society, but a problem specific to a certain group requires tailor-made actions to help them.

It is not effective to implement a macro policy to solve the problem of a small specific group because it can be ineffective and costly to the society. Instead, it is better to identify people who are susceptible to debt problems and the reasons for their troubles, and design measures that directly address them.

The writer is senior lecturer and director of banking and finance at Nanyang Business School, Nanyang Technological University.