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    Jan 16, 2014

    Chilly reception to S'pore's 'Iceland' tag

    A FORBES article on the state of Singapore's economy which has gone viral has raised a storm, with economists here offering differing views on its credibility.

    American economic analyst Jesse Colombo claimed that the Republic is facing a dangerous credit bubble fuelled by low interest rates and heading towards an "Iceland-style meltdown".

    On Tuesday, the Monetary Authority of Singapore categorically refuted this. "Singapore is not facing a credit bubble that puts the country or its banking system at any risk of crisis," a spokesman said, adding that "serious observers and investors are not in doubt about the country's financial health".

    Among Mr Colombo's claims:

    • Singapore has a credit bubble, which started soon after interest rates fell below 1 per cent. Outstanding private-sector loans have risen 133 per cent since 2010.
    • It also has a property bubble, with prices up 60 per cent since 2009. Mortgage loans have grown at 18 per cent each year for the past three years.
    • Seventy per cent of Singapore's mortgages have floating interest rates.
    • Cheap credit is also fuelling a construction bubble.
    • The financial-services industry grew 163 per cent between 2008 and 2012, which is not sustainable.
    • Singapore's bubble will pop if the bubbles in emerging markets and China, where Singapore has invested heavily, pop, and interest rates rise.

    CIMB economist Song Seng Wun disagrees. "To say the authorities are blind to the risk (of overleveraging) is a bit excessive," he told MyPaper. "This region has gone through the (1997) Asian financial crisis... measures taken by regulators suggest they are much more mindful of the risk of excesses brought about by cheap lending."

    Mr Yeoh Lam Keong, a senior adjunct fellow at the Institute of Policy Studies, called the article "insightful in many ways" and said it "correctly" points out the dangers of real-estate-based asset bubbles in Asia.

    These, together with overinvestment in construction due to depressed global interest rates and debt-fuelled expansions, are "very likely to lead to crashes in these sectors when prices of real estate and construction activity take a deep fall", he said.

    Though the risk of the real-estate bubble popping is high, he said "a recession here is very unlikely and, thus, a banking crisis is also unlikely".

    The article raised doubts about the Government's ability to handle cyclical shocks to the economy, noted Barclays Capital economist Leong Wai Ho. "We are not invulnerable to such shocks," he said. "(But) the key is to stabilise the labour market quickly, which heralds the quick return of confidence...Singapore has (previously) managed to do this."

    In a Facebook post, Lee Kuan Yew School of Public Policy senior fellow Donald Low called the article "far too sweeping".

    Property prices may fall 10 per cent this year, said Mr Low. But even if they fall 20 per cent, the health of the banks and households will not be affected.

    "There will be households that have negative equity, but as long as they have the cash flow to service their mortgages, it will not precipitate a financial crash," he said.

    Still, he mostly agrees with Mr Colombo's point that booms led by real-estate development and the financial sector are "mostly illusory". "They create the impression of economic dynamism without creating any real productive capacity in the economy," said Mr Low.