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Is Singapore haunted by the ghost of retail therapy past?

Charles Pertwee | Bloomberg | Getty Images

Singapore's economy has managed fairly slow-and-steady growth despite a mediocre global outlook, but high household debt may come back to haunt the city-state.

"Singapore is experiencing extraordinary low interest rates; the danger is that these are inducing unwise spending or investment decisions. Such decisions may be rued when U.S. interest rates rise," said Edward Teather, senior economist for Southeast Asia and India at UBS, in a note this week. "Resident credit to GDP (gross domestic product) is now higher than it was in the late 1990s," when the Asian Financial Crisis struck.

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Households in the city-state had liabilities of around 286.39 billion Singapore dollars, or around $229.06 billion, at the end of the second quarter, according to government data. That compares with 2013 GDP of 372.81 billion Singapore dollars.

"Singapore's credit expansion in recent years has been noteworthy, not just because of the nominal rise in resident bank credit but also because the expansion has occurred against a backdrop of weak GDP growth," Teather said.

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The city-state's GDP grew 2.4 percent on-year in the third quarter, the same as in the second quarter, after expanding 3.9 percent in 2013. The government expects 2014 GDP growth of around 2.5-3.5 percent.

Teather expects the high household debt will push authorities toward macro-prudential measures, dragging economic growth.

To be sure, not everyone expects rising interest rates will make Singapore's economy pay the piper.

"There's plenty of savings, especially the CPF (Central Provident Fund retirement savings accounts). It provides a pretty good safety net," said Alaistair Chan, an economist at Moody's Analytics. "The gross numbers [for debt] might be high, but there's offsetting assets that minimize the total risk."

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Singapore households have assets of around 1.74 trillion Singapore dollars, with around 264.77 billion Singapore dollars of that in the CPF and around 820.6 billion Singapore dollars in residential property assets, according to government data.

Chan also doesn't expect U.S. interest rates will rise until late 2015 at the earliest and even then only gradually.

But he cited concerns about the housing market.

"The debt itself isn't the biggest worry," Chan said. "Most of the increase in debt seems to be related to housing," he said, adding a housing downturn would hurt the economy more than any interest rate rise.

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UBS' Teather also noted concerns over the effect that housing prices might have on Singapore's households.

"It is true that assets, in particular for households, far outstrip liabilities in the aggregate," Teather said. "But a likely uneven distribution of assets and liabilities may leave some indebted parties exposed to deterioration in (housing) asset prices."

He forecasts Singapore's economic growth will slow to 2.8 percent this year and 2.6 percent next year.

—By CNBC.Com's Leslie Shaffer; Follow her on Twitter @LeslieShaffer1