SINGAPORE'S financial sector will take a beating as the global credit crisis unfolds but the innate strengths of the local financial system will keep it stable.

In the review, MAS said it expects revenue at local banks to decline as bad loans rise - but it is confident the banks are strong enough to make it through.

'The local banks would face these risks from a position of strength ... Our assessment is that the banking and insurance sectors are resilient and should be able to weather the economic downturn and heightened market volatility.'

MAS also expects markets to continue to be volatile but says Singapore's financial system should remain stable.

'Singapore's strong macro-economic fundamentals, sound financial system, and the recent precautionary measures taken...should enable the economy to ride through this financial turmoil.'

The Republic, like most of Asia, began this year in a fairly strong, resilient position, relatively unscathed by the looming financial and credit crisis in the United States and Europe, MAS said.

However, the second half painted a vastly different picture.

It started with the brutal equity market fallout in September after the fall of US investment bank, Lehman Brothers and the near-collapse of US insurance giant AIG. This triggered a global crisis of confidence leading to sharp falls in Asian growth prospects.

Plummeting Asian asset markets over the last quarter resulted in reduced economic growth prospects. This meant cuts in growth forecasts for all Asian countries, including Singapore, despite Asia having projected economic growth rates that were higher than other regions.

Still, the MAS pointed to positive developments on the global front.

It said following a raft of policy measures worldwide 'signs of thaw in money markets have emerged''. It also said that a 'degree of calm has returned to asset markets internationally' though it said further difficulties may emerge.

The MAS said Singapore's small but open economy, driven by export demand, saw its domestic equity market fall along with international declines.

But despite entering a technical recession in the third quarter, Singapore's financial system and its Singapore dollar money market remain stable throughout.

On Oct 16, the Government guaranteed all Singapore dollar and foreign currency deposits of individual and non-bank customers in banks, finance firms and merchant banks licensed by the central bank as a precautionary measure to ensure banks here are not disadvantaged in retaining their deposit base.