Singapore banks' loan growth is expected to grow at half the pace of last year due to the economic headwinds facing the city-state caused by the coronavirus (Covid-19) outbreak, according to a report by Fitch Solutions Macro Research forecast released on Friday.

Fitch Solutions, part of the Fitch Group, expects Singapore bank's loan growth to move down from 3.1 percent last year to 1.5 percent in 2020. Last year, local banks enjoyed a recovery in lending to businesses starting in April 2019, in line with the country's stronger economic performance towards the second half of 2019. However, consumer loans, which make up about 40 percent of total loans, remained in contraction mainly due to slower mortgage growth.

The recovery in business loans is unlikely to be sustained this year as Singapore's open economy is heavily exposed to the Chinese economy, which is facing slower growth arising from the Covid-19 outbreak, said Fitch Solutions. It has revised down China's 2020 real GDP growth by 0.3 percentage points to 5.6 percent. «As a result, our current 2020 real GDP growth forecast of 1.7 percent for Singapore is exposed to heavy downside risks, and we will revisiting this figure over the coming weeks,» said the firm.

Double Impact

Given Singapore's export-oriented manufacturing sector was already weakened by the U.S.-China trade war, the virus outbreak only adds to the sector's headwinds. Singapore's non-oil domestic exports posted 12 straight months of contraction at an average pace of 10.8 percent year on year between December 2018 and November 2019, the firm calculated.

The likelihood of a more pronounced slowdown would probably weigh on overall credit demand, with businesses across a broad range of sectors including retail, tourism and the export-oriented manufacturing sector, likely to encounter tougher conditions as a result of the coronavirus epidemic around the world, said the research firm. In addition, likely monetary easing from the Monetary Authority of Singapore (MAS) would prevent interest rates from falling too far to offset lower credit demand, it said.

Unlike other countries that use interest rates as the policy lever, Singapore uses the exchange rate. 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.