Neither Singapore nor Hong Kong is an Iceland waiting to happen

Despite predictions of disaster befalling the two Asian cities, they are far healthier financially than Nordic island before its economic crisis

PUBLISHED : Friday, 14 February, 2014, 12:42am
UPDATED : Friday, 14 February, 2014, 5:31pm

Thank you to the reader who pointed me towards the recent Forbes article warning that "Singapore's economy is heading for an Iceland-style meltdown".

It's a scary thought. In the mid-2000s Iceland's banks leveraged up aggressively, effectively turning their barren mid-Atlantic island into a giant US$150 billion hedge fund.

Things went well for a while. But when the crisis hit, the wheels came off Iceland's banking bandwagon. In three years the island's economy contracted by 40 per cent.

Now Forbes warns that Singapore is heading for a similar smash. But it gets worse. "Everything Forbes said about Singapore, you could just as well say about Hong Kong," says our reader, a financier who has lived and worked in both cities.

Forbes' argument is that Beijing's 2009 stimulus efforts combined with the US Federal Reserve's quantitative easing programme to trigger a twin economic and monetary boom across much of Asia.

In just five years from 2002 to 2007, Iceland’s bank assets ballooned more than tenfold

In Singapore interest rates fell to within a whisker of zero, inflating a property bubble which pushed home prices up by a third. Bank lending to domestic and overseas borrowers ballooned, with the assets of Singapore's banks rising to S$2.1 trillion (HK$12.8 trillion) at the end of last year.

That's roughly six times Singapore's gross domestic product, approaching Iceland's ratio of 7.5 times GDP in 2007, just before the meltdown. Clearly Forbes believes something similarly catastrophic may now be about to happen in Singapore.

Yet if Singapore has reason to be concerned, Hong Kong should be really worried.

Where Singapore's home prices have climbed 33 per cent, Hong Kong's have shot up 133 per cent. And where by Monitor's calculation Singapore's banking assets have actually declined moderately relative to local economic output since 2008, Hong Kong's have rocketed to nearly eight times GDP; higher even than Iceland's at the height of its financial bubble.

People are fretting. The government has imposed a series of administrative restrictions aimed at cooling the property market, while the Hong Kong Monetary Authority has sounded the alarm about rising levels of consumer debt and introduced its own "macro-prudential" measures to limit the banking system's exposure to the local property market.

The HKMA and international credit rating agencies have also warned about the risks of local banks' rising exposure to China. According to Fitch Ratings, mainland-related exposures have almost tripled since the financial crisis, reaching roughly 30 per cent of total bank assets by the middle of last year.

Bankers insist that their mainland loans are low risk, and plentifully collateralised. Sceptics respond that the rule of law is sketchy on the mainland, and that in case of a default local banks may find it impossible ever to recover their collateral.

For all that, however, Hong Kong is not another Iceland. Consumer leverage is relatively low, and even in the depths of the last property crash, when prices fell by two-thirds, home loan delinquency rates never exceeded 1.5 per cent.

Yes, the increase in local banks' exposure to China is potentially troubling, and any deleveraging on the mainland will hurt their business.

But it's the speed of growth that tends to lead to banking crises rather than the relative size of bank assets. And the growth of Hong Kong banks' assets has been gradual compared with the speed Icelandic banks blew out their balance sheets.

In just five years from 2002 to 2007, Iceland's bank assets ballooned more than tenfold. In contrast, in the five years since the financial crisis, Hong Kong bank assets have expanded just 60 per cent.

So unlike the Icelanders, Hongkongers aren't likely to be forced by a banking crisis to go back to being fishermen for a living - or at least not just yet.