The Monetary Authority of Singapore’s Financial Stability Review (FSR) has positive messages for Singapore corporates and households, but cautions on geopolitical and economic risks emanating from abroad.
Corporates, households and banks in Singapore have remained resilient over the past year, the FSR says. Interest rates have declined, causing borrowing costs to fall amid expansions in the money supply and credit.
“Overall bank credit quality was strong as most corporates benefitted from the firmer-than-expected domestic growth momentum, while households were supported by stable income growth,” the FSR says.
The financial positions of corporates in Singapore have strengthened over the past year despite a surge in uncertainty and market volatility in April (post-Liberation Day), which has since receded. Firms’ debt-servicing capacity has improved alongside resilient corporate earnings and a more accommodative financing environment. Strong earnings have also enabled firms to continue accumulating cash buffers.
The banking sector has maintained strong capital and liquidity positions. For the non-bank sector, insurers remained well-capitalised and investment funds managed liquidity risks well.
The results of the Industry-wide Stress Test (IWST) 2025 exercise affirmed that banks and insurers are in a strong position to withstand severe macrofinancial shocks. “Nevertheless, banks should continue to maintain sound credit risk management practices and adequate provisioning buffers amid the uncertain macroeconomic environment,” the FSR cautions.
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Risks could emerge with repricing shocks which could lead to fund redemptions and lead to capital losses for insurers.
Shocks, if any, could emanate from advanced economies. Notably, the Trump administration has pressured the Federal Reserve to lower interest rates at a time when it may not be ready to do so.
“To manage borrowing costs, some governments have shifted bond issuance towards shorter maturities, reducing financing costs over the short term but then incurring more frequent refinancing cycles and greater rollover risks. These dynamics also raise concerns of fiscal dominance, as there could be greater pressure from governments for monetary easing, tolerance of stealth inflation or currency depreciation,” the FSR warns.
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Increased interdependency between monetary and fiscal policies could undermine central bank credibility and de-anchor inflation expectations. This could set off a destabilising spiral of higher inflation expectations and rising long-term yields, offsetting any relief from lower short-term borrowing costs, the FSR adds
These risks raise the prospect of a disorderly adjustment in sovereign bond markets. Potential triggers could include episodes of political uncertainty, adverse growth or inflation surprises, or escalating geopolitical and trade tensions that drive reassessments of sovereign creditworthiness and risk premia.
Sudden increases in government bond yields can also result in significant mark-to-market losses in bank and non-bank financial institution (NBFI) balance sheets. A major repricing of sovereign credit, which typically serves as a benchmark for key lending rates, could spill over to the private sector, creating a feedback loop of higher borrowing costs and debt servicing. This materialised in 2023 and adversely impacted the balance sheets of the regional mid-sized US banks.
An added risk could be transmitted from stablecoins and decentralised finance. Although stablecoins may offer innovation and efficiency gains, they have the potential to impact the cost and composition of bank funding. Stablecoins may also be a channel for the transmission of stresses from cryptoasset trading and decentralised finance activities to the rest of the financial system, more so if such activities are intermediated by lightly regulated or unregulated entities.
“Several jurisdictions are examining the monetary and financial stability implications of stablecoins and putting in place appropriate regulatory frameworks to address potential risks,” the FSR confirms.
