SINGAPORE'S financial sector will take a beating as the global credit crisis unfolds but the innate strengths of the local system will keep it stable.
That was the assessment of the Monetary Authority of Singapore (MAS) yesterday when it released its annual Financial Stability Review.
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 said Singapore's financial system should remain stable.
'Singapore's strong macro-economic fundamentals, sound financial system and the recent precautionary measures taken...should en- able 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, the 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 American International Group (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 that 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 further difficulties may emerge.
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. This is a precautionary measure to ensure banks here are not disadvantaged in retaining their deposit base.
In its review, MAS said it expects revenues at local banks to decline and their non-performing loans (NPL) ratios to rise on the back of the slowdown in the domestic economy and other markets where they have regional operations.
But MAS also pointed to the fact that all local banks have strong Tier 1 capital adequacy ratios - a financial buffer to protect financial institutions against unexpected events - averaging 11.3 per cent.
The central bank's minimum ratio is 6 per cent for Tier 1 and the Bank of International Settlements' recommendation is just 4 per cent.
MAS also said that despite NPL ratios at an all-time low of 1.4 per cent - some 10 percentage points below levels seen during the Asian financial crisis - local banks are all well-capitalised, with loan deposit ratios averaging 86 per cent.
Similarly, the local insurance sector is also well-capitalised and remains sound amid the financial turmoil.
The capital adequacy ratio of life insurers here averaged 240 per cent from the first to third quarters of 2008, while direct insurers' ratio averaged 289 per cent, both well above the minimum regulatory requirement of 100 per cent.
However, the insurance industry was also affected by the ongoing crisis, generally due to concerns over AIG group's exposure to other credit derivatives and sell-offs which affected its investment portfolios, and negative sentiments over investment-linked insurance products on the whole.
The economic downturn will also moderate demand for insurance policies but MAS said: 'The strong solvency position of insurers will enable them to weather these headwinds.'
