Singapore Financial Stability Risks Rise As AI Investment, Fiscal Pressures Lift Cost Of Capital
Global financial stability risks have increased as higher sovereign borrowing needs, an investment-intensive artificial intelligence cycle and geopolitical tensions push up the cost of capital, the Monetary Authority of Singapore said in its latest financial stability review.
Long-term nominal and real sovereign yields have risen across major advanced economies as governments face higher borrowing needs and investors demand greater compensation for uncertainty, MAS said in its September 2026 Financial Stability Review.
Inflation has also proved more persistent than expected, while the escalation of conflict in the Middle East has added to energy price pressures.
Strong AI investment is straining semiconductor and electricity capacity, while trade policy uncertainty is raising costs for businesses and disrupting supply chains, MAS said.
The combination of fiscal borrowing and spending on AI infrastructure is intensifying competition for long-term financing. Record bond issuance by large technology companies is adding to demand for institutional investors’ capacity to absorb long-duration debt, while central banks continue to unwind asset purchases, according to the report.
A persistently higher cost of capital could increase debt-servicing and refinancing pressures for households, companies, and governments, while abrupt changes in interest-rate expectations could trigger asset repricing.
Rising leverage, maturity mismatches and concentrated exposures, including in AI-related sectors, could amplify the impact, MAS said.
MAS also highlighted risks from the rapid expansion of AI infrastructure.
Hyperscaler capital expenditure is outpacing internally generated cash flow, increasing reliance on bond markets, private credit funds and special-purpose vehicles to finance data centres and semiconductor investment.
Such financing arrangements broaden access to capital but also increase interconnectedness between banks, private credit, and institutional investors.
Banks can retain indirect exposures through warehouse facilities, syndicated financing and derivatives, making it harder to identify where risks ultimately reside and creating additional channels for funding stress to spread.
Higher interest rates, semiconductor and electricity costs and greater dependence on market financing have raised the hurdle rate for AI investment.
MAS said current equity valuations require sustained revenue growth and sizeable eventual profitability from investments in data centres and advanced semiconductors.
A material shortfall in earnings or expected returns could prompt a broader reassessment of AI-related valuations, with losses spreading across public equities, corporate bonds and private credit markets.
The risks to Asian economies are likely to differ depending on their growth prospects, financing requirements and external positions.
Economies benefiting from AI investment and exports may be better placed to absorb higher borrowing costs if earnings and investment remain strong, but would also be more exposed to a pullback in the AI cycle.
For economies with weaker AI links, lower trend growth and larger fiscal or current-account deficits, higher global real interest rates could trigger portfolio outflows, currency depreciation, and tighter domestic financing conditions.
MAS said elevated rates could also make equity fundraising, IPOs and long-term infrastructure financing more difficult, particularly for capital-intensive projects with longer payback periods.
Despite the external risks, Singapore’s domestic financial conditions remained broadly supportive.
Borrowing costs eased over the past year, credit spreads tightened and bank credit growth picked up.
The Straits Times Index rose 33% year-on-year in the third quarter of 2026, while the three-month compounded Singapore Overnight Rate Average fell to 1.15% from 1.72% a year earlier.
MAS said Singapore’s corporates, households and banks remained resilient, with strong balance sheets and financial buffers.
However, it cautioned that firms and households should maintain adequate liquidity buffers amid macroeconomic uncertainty.
The authority will maintain Singapore’s countercyclical capital buffer at zero for 2027.
Singapore’s banking system also remained well positioned, with strong capital and liquidity buffers and healthy provisioning coverage.
Banks’ total provisioning coverage rose to 147% in the second quarter of 2026, while the special mention ratio remained low at 2.2%.
MAS said banks had sufficient capital buffers to withstand an adverse scenario involving a downturn in the AI-led global growth cycle and heightened Middle East tensions.
