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London will retain strengths post-Brexit

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Brexit will pose challenges, but there are still benefits for the capital

While uncertainties over the terms of Britain's withdrawal from the European Union will pose challenges to financial institutions, post-Brexit London will retain many of its strengths.

The city will still benefit from the free movement of capital, sound and predictable regulation, strong rule of law and international connectivity.

Singapore will also offer the same benefits to the financial industry as a global Asian hub.

Many institutions maintain a presence in both London and Singapore to serve cross-border flows in the European and Asian markets respectively.

The latter has strengths in offshore banking, reinsurance, asset management, foreign exchange and fintech.

But the scale is different: London is much bigger. I do not expect its position to weaken significantly.

Growth in the euro area will continue to be supported by accommodative monetary policy.

But fading support from low energy prices and the European Central Bank stimulus, uncertainty surrounding Brexit and weak external demand will weigh in the opposite direction.

Likewise, the outcome of elections in key EU members states could dampen business sentiment.

In the US, it is expected that the Federal Reserve will continue to raise interest rates.

This would be in line with stronger economic growth and waning deflation risks.

Faster growth in advanced economies will provide a lift to others, including those in Asia.

A rise in interest rates will restore room for manoeuvrability, stem the accumulation of debt and reduce financial stability risks relating to inflated asset prices.

But interest rate normalisation is not without its challenges. It will weigh on the debt servicing capacities of corporates and households in Asia.

Faster than expected rate rises could result in currency volatility amid high capital outflows. For overextended borrowers, stress points could emerge as a result of an increase in interest servicing costs and a rise in the foreign currency risks of unhedged debt.


These could have implications on the asset quality of banks with Asia exposures.

That said, the region is on a stronger footing to cope with these risks.

Asia has been proactive in implementing macroprudential measures to limit the build-up of financial imbalances.

The Monetary Authority of Singapore's top-down reverse stress tests show that the Asian corporate sector would require shocks far greater than those seen in the 1997 Asian financial crisis or 2008 global crisis to come under significant stress.

Our tests also showed that banks here can withstand a stress scenario of steep regional currency depreciation and sharp increases in interest rates.

Anxiety over China's near-term growth prospects ebbed significantly over the course of last year and with good reason.

The Chinese authorities have carefully managed the country's growth while trying to address the structural vulnerabilities in the economy.

However, debt levels in China remain substantial. Recent measures have been steps in the right direction, but they must be more pronounced this year.

The structural reform process appears to have slowed somewhat. But there has been some progress on the fiscal and financial fronts, including implementation of value added tax.

Plans were announced to allow more foreign investment in banking, insurance and securities firms, as well as in telecommunications and education.

It is important that China presses on with structural reforms, which will provide the basis to lift productivity and put the country on a sustainable medium-term growth trajectory.

The writer is managing director of the Monetary Authority of Singapore. This is an abridged version of an Official Monetary and Financial Institutions Forum (OMFIF) interview with Mr Menon, which will be published in this month's edition of The Bulletin, OMFIF's monthly publication. This article was published in The Business Times yesterday.

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