Are financial risks in Singapore rising?

Singapore, resilient so far to the turmoil that has swept emerging markets, appears to be one of the most financially vulnerable countries in Asia, Bank of America Merrill Lynch (BofAML) said in a note on Monday. Singapore, India and Malaysia have the poorest scores among major Asian markets excluding Japan, based on 10 factors used to measure financial vulnerability, the report said. Those factors include excessive real credit growth, the gap between credit and economic growth, the returns on financial stocks and the state of the current account.

According to BofAML, a number of major Asian markets have their financial vulnerability scores close to levels seen in mid-1997, just before the Asian financial crisis.

"Elevated financial vulnerability is often, but not always associated with currency and/or banking crises. Singapore (surprisingly), India and Malaysia score poorly on our measure," they said.

The report added: "China, Hong Kong and Indonesia are also concerning. Korea and Taiwan look less vulnerable, while Thailand is in the middle."

Huge current account deficits and a lack of confidence in policy makers' ability to deliver structural reforms have put India and Indonesia at the heart of the sell-off in Asian emerging-market assets.

And amid nagging worries about a possible unwinding of U.S. monetary stimulus, the trigger for the rout in emerging markets that began in May, focus has also turned to which emerging-market countries should weather the storm and which might be the next to bear the brunt of selling.

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Singapore, which has a current account surplus and relatively robust economy, has generally been viewed as one of the more resilient countries in the region to the emerging-market strife.

Still, according to BofAML there are reasons to be concerned. The city state scores poorly on some factors the bank uses to define whether a country's financial system is vulnerable.

These include real loan growth, and, loan growth minus industrial production. On both these measures, Singapore scored the highest in the region, flashing red on BofAML's financial vulnerability heat map to reflect the most unfavorable situation since 1990.

"In our view there is unlikely to be a currency or financial crisis, given the 20 percent of GDP/current account surplus, no short-term external debt, and strong capital buffers in the banking system," BofAML said, referring to Singapore.

"The issue is the substantial rise in three-year cumulative real lending growth (at 69 percent, close to Russia and China's numbers), and the gap between three-year cumulative loan growth and economic growth," they said.

The BofAML analysts added that while it is possible to postpone a credit bust following a credit boom, the cycle is difficult to avoid.

"Singapore is in a neighborhood where financial vulnerability is rising. We are neutral," they added.

—By CNBC.Com's Dhara Ranasinghe

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