Tighter financial conditions and ongoing trade tensions have increased risks to global financial stability even as Singapore's system remains resilient, the Monetary Authority of Singapore (MAS) said.
Rising interest rates and pressure on currencies could affect governments, corporates and households, particularly those that have borrowed in foreign currencies, making it harder for them to pay off their debts.
But stress tests that MAS has conducted showed that companies, banks and households can withstand external shocks, though they need to guard against weaknesses, said the regulator's Financial Stability Review released yesterday.
For example, companies should exercise financial prudence and watch out for headwinds though corporate balance sheets have remained broadly stable amid a supportive operating environment.
"Downside risks from escalating trade tensions and expected tightening of financial conditions... could weigh on corporate profitability and debt-servicing ability," the MAS said.
Still, most firms are able to withstand the interest-rate and earnings shock, the stress tests showed.
The MAS noted that trade-related sectors, such as manufacturing, have benefited from firm external demand over the past year.
But "against the backdrop of global economic uncertainties, the general outlook for the manufacturing and services sectors turned more cautious in the recent quarter".
In particular, within the manufacturing sector, the electronics and precision engineering sub-sectors had the least optimistic outlook, given rising uncertainties from ongoing trade tensions, it added.
For the financial sector, loan growth has remained healthy over the past year, despite an increasingly uncertain global outlook.
"Overall credit continued to grow at a healthy pace in 2018," said the MAS. Growth was most pronounced in non-resident non-bank loans, which rose by 9.8 per cent in September on a year-on-year basis.
The growth was underpinned by advanced economies' credit intermediation to emerging Asia amid sustained economic momentum in the region, it added.
The MAS, however, warned that foreign currency lending has risen with the pick-up in non-resident lending and "bears close monitoring".
It noted that overall asset quality has improved, and non-performing loans (NPL) in weaker segments, particularly the transport, storage and communications sector, have dropped.
Overall, the NPL ratio fell to 1.9 per cent in the third quarter, down from 2.1 per cent a year ago.
While local banking groups have strong capital and liquidity positions above regulatory requirements, an abrupt tightening in global financial conditions could accentuate foreign currency liquidity risks, the MAS said.
It urged banks to remain vigilant by maintaining sound underwriting standards and adequate provisioning buffers.
They should also continue to actively monitor and mitigate the credit risks that come with increased lending activities.
Household debt indicators, MAS said, are stable but could worsen if property-price momentum and buying activity continue unabated.
While household debt growth has been in line with income growth over the past year, housing loans have risen in tandem with the pick-up in property demand.
As of July, the value of new housing loans was up 30 per cent year on year.
Said MAS deputy managing director Ong Chong Tee: "Corporates and households should be mindful of higher interest rates on their debt obligations while banks should maintain strong underwriting standards and adequate provisioning buffers."
