Singapore to record anaemic loan growth of 1.5% in 2020

The COVID-19 and the expected monetary easing will weigh on banks.

Singapore’s loan growth is expected to slow to 1.5% in 2020 after rallying 3.1% the previous year, according to a report by Fitch Solutions. An expected further monetary easing as well as tougher operating conditions for businesses as a result of COVID-19 are expected to weigh on credit demand.

Any monetary easing from the Monetary Authority of Singapore (MAS) would prevent interest rates from falling too far to offset lower credit demand.

Also read: Coronavirus outbreak to drag on Singapore banks' loan growth, earnings

Loan growth came in at 3.1% in 2019, bucking our expectations for a further slowdown to 0.5% due to a recovery in loans to businesses that began in April 2019.

However, the recovery in business loans, which comprise around 60% of all loans, is unlikely to be sustainable in 2020 given the major challenges facing the economy as a result of the COVID-19 outbreak in China, Fitch noted.

Further, the GDP growth forecast--currently at 1.7% for Fitch--may be revised downwards in the coming weeks, given that the economy’s exposure to the deeper slowdown in China’s economy.

“We have revised down China’s 2020 real GDP growth to 5.6% from 5.9% previously in light of these risks and expect spillover effects on Singapore. As a result our current 2020 real GDP growth forecast of 1.7% for Singapore is exposed to heavy downside risks, and we will revisit this figure over the coming weeks,” stated Fitch Solutions Macro Research in a note.

Also read: Singapore's economy likely to be amongst the worst-hit by Wuhan virus

Meanwhile, tourism and its related hospitality and retail sectors are expected to take a hit from the dip in arrivals as a result of the COVID-19 outbreak.

Along with the lack of Chinese visitors due to the travel ban, the climbing infection toll in Singapore as well as the declaration of Disease Outbreak Response System Condition (DORSCON) orange is likely to deter visitors from other countries as well. This will likely hit businesses most exposed to the retail and tourism sector.

Also read: 60% of F&B businesses are not prepared for COVID-19

Singapore is also expected to undergo monetary easing in 2020 in a bid to support the economy, especially the exporting sectors, limiting the extent to which this is possible. But this would also hit banks' loan growth.

“Unlike other monetary systems which use interest rates as the policy lever, Singapore uses the exchange rate instead. Easing monetary policy under such a system tends instead to have an upward effect on interest rates as they would adjust to maintain the attractiveness of assets denominated in the Singapore dollar, all other things equal,” explained Fitch.

“Therefore, as the Singapore Interbank Offered Rate (SIBOR) rises in tandem with a weaker Singapore dollar, banks will find it hard to lower their rates significantly to bolster credit demand, further weighing on loan growth,” the report concluded.