SINGAPORE – Singapore firms and households are well-placed to weather shocks to their earnings, incomes and financing costs, while financial institutions such as banks have sufficient buffers should they come under stress.
This is based on stress tests done by the Monetary Authority of Singapore (MAS) as part of its annual financial stability review that assesses the resilience of Singapore’s financial system, against global risks and domestic vulnerabilities.
Among households, only a small proportion of borrowers with limited savings buffers could face cash-flow constraints. However, some highly leveraged firms or those with thinner liquidity buffers could come under strain.
“In view of the uncertain macroeconomic outlook, firms and households should manage their finances prudently and maintain adequate liquidity buffers against potential stress,” said MAS on Sept 22.
The review comes as inflation has proven more sticky than expected, with the escalation of the Middle East conflict adding to energy price pressures. A persistently higher cost of capital could test global financial resilience.
Strong artificial intelligence investment demand continues to strain supply capacity, and trade policy uncertainty increases business costs and inflationary pressures. These pressures have led some advanced economies to pivot to monetary policy tightening by raising interest rates.
Higher global interest rates are likely to affect Asian economies unevenly, depending on their growth prospects, financing needs and external positions. Higher yields would also raise sovereign debt-servicing costs, with spillovers to firms and households, while weighing on asset valuations.
Economies benefiting from AI-related investment and exports are better placed to absorb higher borrowing costs, but are more exposed to a pullback in the AI cycle.
Those with weaker AI linkages and larger fiscal or current account deficits could be more affected by tighter global financial conditions, with portfolio outflows and currency depreciation increasing risks.
Companies: Sound balance sheets but AI risks loom
Firms here showed resilience over the past year, buoyed by stable earnings and lower borrowing costs. Listed firms’ ability to repay debt improved over the past year, as lower benchmark interest rates reduced interest expenses.
Although firms drew down some cash balances, they generally maintained healthy liquidity buffers and near-term refinancing needs remained manageable.
Foreign currency risk was contained and corporate credit quality stayed healthy. Firms disclosing foreign currency borrowings in Singapore Exchange (SGX) filings generally reported either natural hedges or the use of derivatives to mitigate their financial exposures.
Corporate balance sheets are generally sound, which cushioned the impact of external shocks, including energy supply disruptions and elevated oil prices that have raised firms’ input costs.
Looking ahead, a key risk factor is a possible reassessment of AI-related asset valuations, which could prompt a retrenchment in related investments, weighing on the revenues and earnings of exposed firms.
To support this risk analysis, MAS conducted a stress test featuring a sharp pullback in AI-related investment and loss of revenue along the AI supply chain, against the backdrop of heightened geopolitical tensions.
SGX-listed corporates were subjected to severe revenue shocks of up to 30 per cent and differentiated interest rate shocks of up to 400 basis points to capture wider credit spreads under stress.
Most firms were able to weather the shock, supported by their earnings and cash reserves. Under this stress scenario, 32 per cent of firms were assessed as at-risk, accounting for 16 per cent of overall corporate debt.
Households: Assets outpace liabilities amid stable income
The household sector remained resilient with strong liquidity buffers as financial assets grew at a faster pace than household liabilities.
Household financial assets, comprising currency and deposits, grew by 9.5 per cent year on year in the second quarter of 2026, outpacing the 8.3 per cent increase in liabilities and contributing to the rise in household net worth.
Strong financial markets and continued savings helped drive growth in financial assets.
Households’ ability to repay debt improved as interest rates, including mortgage rates, fell over the past year, and income growth has been stable.
Meanwhile, household budgets saw some strains as the ongoing energy supply disruptions have kept oil prices high.
Meanwhile, household budgets saw some strains as the ongoing energy supply disruptions have kept oil prices high.
ST PHOTO: LIM YAOHUI
Looking ahead, there are also risks that a sharp retrenchment in AI-related investment could weigh on global growth, business investment and semiconductor demand, adversely impacting household incomes and employment.
MAS’ stress test revealed that a vast majority of borrowers have the capacity to manage income and employment shocks amid higher debt-servicing costs.
But around 1 per cent of them could still face negative cash flows under the stress scenario, with existing savings buffers covering fewer than six months of the resulting income shortfall.
Such borrowers are mostly middle-aged HDB dwellers with relatively lower incomes, alongside a smaller segment of middle-income borrowers with sizeable outstanding private housing loans.
Financial institutions: Well-buffered against global volatility
Singapore banks have increased provisioning coverage to guard against a potential rise in credit costs given the uncertain economic environment. The banking system’s total provisioning coverage rose steadily over the past year to reach 147 per cent in the second quarter of 2026.
Their strong earnings have also supported their capital strength, with capital ratios remaining well above regulatory requirements.
Risks to the banks’ outlook include a potential pullback in AI-related investment that could harm growth prospects and impact corporate profitability; another round of trade tensions; and further energy shocks from the Middle East.
MAS’ stress tests affirm that Singapore banks have sufficient capital reserves to weather an adverse scenario driven by a downturn in the AI-led global growth cycle amid Middle East tensions.
Meanwhile, investment funds here continued to manage liquidity risks effectively amid this same market volatility.
Investment funds met redemption requests in an orderly manner, supported by adequate liquid holdings. Hedge funds were subject to enhanced supervision during periods of heightened volatility, with a focus on robust risk management and sufficient liquidity to meet margin calls.
Insurers have limited exposure to AI-related assets and are less susceptible to volatility associated with AI-driven equity market movements compared with other financial institutions.
Despite rising shipping and energy sector risks from the Middle East conflict, insurers have continued to provide coverage without a broad-based increase in premiums. The only exception is higher war-risk premiums for vessels and cargo transiting affected regions. Moreover, insurers’ direct financial exposures to the region are limited.
Stress tests suggest that investment funds and insurers in Singapore are well-positioned to weather global shocks. However, renewed geopolitical tensions or a reassessment of AI earnings expectations could still trigger a broad repricing of risk assets, leading to increased fund redemptions and capital losses.
