As developed economies recover and withdraw their easy monetary policies, the tide of cheap money will abate, which could lead to considerable risks for Singapore, regulators warned on Tuesday.
Of particular concern is the build-up of private and public sector debt in recent years, said the Monetary Authority of Singapore (MAS) in its latest financial stability review.
Corporate debt has increased across almost all sectors and household debt has also climbed over the past few years in tandem with rising assets and wealth.
If the scaling back of stimulus measures by developed economies triggers an abrupt tightening of financial conditions, debt servicing burdens in Asia could rise sharply.
"A dip in confidence can lead to currency depreciation, which can add to debt repayment costs for those who had borrowed in foreign currencies," the MAS said.
"With volatile capital flows, banks may come under foreign-currency funding pressure. They may also tighten credit supply as defaults rise, leading to a vicious cycle of falling asset quality, tightening credit and slowing growth."
The MAS noted that corporate and household balance sheets are healthy in aggregate and the banking system has held up well under stress tests.
Nonetheless, the banking sector has to guard against liquidity and a potential rise in bad credit, it added.
In particular, as banks expand their cross-border lending to the region, they have to monitor these exposures carefully.
The property market also continues to warrant close monitoring, the MAS said.
The total debt servicing ratio framework and earlier rounds of property cooling measures have moderated transaction activity and housing loan growth, but developer bids for land parcels remain firm, it noted.