Sub-Prime Crisis Will Hit Singapore In Indirect Way

Source : The Straits Times, Jan 25, 2008

I REFER to the article, ‘China bank may incur loss on US sub-prime write-offs’ (ST, Jan 22).

Last August, Minister of State for Trade and Industry S. Iswaran told Parliament that the exposure of Singapore financial institutions to the troubled US sub-prime mortgage market is small and problems from it have been contained.

A key fact for this optimism is that Singapore banks held S$2.6 billion worth of collateralised debt obligations (CDOs), of which only 25 per cent may contain some exposure to US sub-prime mortgages.

In the same month Nobel laureate Joseph Stiglitz, speaking in Kuala Lumpur, said that the US sub-prime mortgage crisis will probably ‘get worse’ as banks tighten lending rules and borrowing rates increase. ‘The countries which are most adversely affected are the countries like Indonesia,’ he said.

Last month, the Monetary Authority of Singapore revealed that three local banks had set aside S$434 million in extra provisioning for losses on collateralised debt.

In the same month, the Swiss bank UBS announced losses of 6.8 billion euros due to exposure to the US sub-prime mortgage crisis. The bank, which is the biggest in Europe in terms of assets, obtained emergency funds from the Government of Singapore and an unnamed Middle East investor.?

This week, we hear that the Bank of China is likely to suffer a 2007 loss because of a big write-down on billions of dollars of US sub-prime related investments. Two other state banks will also make provisions for assets hit by US mortgage defaults.

The direct effects of the sub-prime crisis may seem harmless to Singapore’s economy due to the very low exposure of assets, including CDOs, that are subject to its adverse effects.

However, it may be worthwhile to consider the systemic and indirect effects of the sub-prime crisis. For example, if China’s economy and the economies of other regional countries are affected then Singapore may not be able to escape its adverse effects. Its open economy is closely integrated with the world’s economy. The effects of the sub-prime crisis will therefore more likely impact Singapore’s economy in an indirect way.

We urge the Government to consider the indirect and systemic effects of the sub-prime crisis on Singapore’s economy in order to fully address all the risks associated with this deepening crisis.

Penelope Phoon (Ms) Country Head, Singapore ACCA Singapore