Wed, Dec 02, 2020 - 5:50 AM
Singapore
FIRMS are at a greater risk of failing to meet their debt obligations as leverage risk continues to worsen on weaker earnings and rising debt.
Even as firms ease short-term refinancing concerns through higher cash holdings, there is increased risk on debt sustainability in the longer term amid the slow and uneven economic recovery ahead, according to the annual Financial Stability Review by the Monetary Authority of Singapore (MAS) on Tuesday.
Debt ratios have risen and reached 163 per cent in Q2 this year, reflecting both a pick up in corporate debt and a fall in gross domestic product.
Deteriorating corporate profits amid the Covid-19 shock and increasing leverage have weighed on debt servicing ratios, with the median interest coverage ratio (ICR) of SGX-listed firms falling from 2.0 in Q2 2019 to 1.1 in Q2 2020.
Sectors hard hit by the pandemic - such as construction, hotels and restaurants, multi-industry, commerce, and manufacturing - saw median ICRs of below one in Q2.
That said, MAS is of the view that firms' debt servicing ability is sufficient for now. The median ICR of Singapore-listed firms remains above one, and cashflows are expected to recover after Q2 2020.
As earnings tumble, the banking system's corporate non-performing loan (NPL) ratio rose to 3.4 per cent in Q3 2020, from 2.5 per cent in the year-ago period.
Higher NPL ratios reflect the prevalence of firms in sectors adversely affected by the pandemic - wholesale trade, retail, food and beverage, tourism-related industries - and oil-related industries impacted by the collapse of oil prices earlier in the year.
With recovery expected to be gradual and uneven, loan asset quality is expected to deteriorate, particularly in sectors with prolonged earnings weakness, said MAS.
Firms' efforts to ease short-term cashflows through higher cash holdings have also increased short-term debt and maturity risks.
Maturity risk, measured by the proportion of short-term debt to total debt, rose from 40 per cent in Q2 2019 to 42 per cent in Q2 2020, remaining below the historical average.
Bond maturity profile of Singapore firms remain well termed out, with bonds due by 2021 making up about 15 per cent of outstanding bonds.
Overall, MAS's simulations suggest that Singapore's corporate sector remains largely resilient to cashflow shocks. The test showed 57 per cent of SGX-listed firms having cash coverage ratios above 1.5 at end-2021, suggesting they have cash to repay their short-term debt.
Under an adverse scenario where 2021 revenues decline by 20 per cent below baseline, the majority of SGX-listed firms would still have resilient cash buffers. Most firms with more vulnerable cash buffers at end-2021 are small with annual revenues below S$100 million.
MAS said small and medium-sized enterprises (SMEs) could be less able to weather the pandemic's impact, with their smaller size and limited access to capital markets.
The proportion of vulnerable SMEs was estimated to be about 30 percentage points higher than that of vulnerable large firms.
To add, the Singapore Business Federation-Experian SME Index contracted from 50.6 in Q3 2019 to 46.3 in Q3 2020, the lowest reading since the inception of the index in 2009.
While the economy rebounded in Q3, growth is expected to slow in Q4 and remain modest in 2021.
"Growth is expected to be uneven, and some pockets of the economy are not expected to recover to pre-Covid-19 levels even by the end of 2021," said MAS.
Singapore's banking sector - having entered the crisis from "a position of strength" - is expected to face near-term downside pressure on profitability amid the low-interest rate environment, deterioration of asset quality, and the possible need to further increase provisions in view of potential credit losses.
This comes even as they continue to ensure strong underwriting standards and healthy capital buffers, said MAS, noting that lenders should also actively monitor and manage their foreign currency risk prudently.
But over the longer term, MAS's stress test results showed that key banks in Singapore have the capacity to withstand further negative shocks.
Total provisioning coverage in the banking system rose to 103.1 per cent in Q3 while specific provisioning coverage grew to 65 per cent. These buffers are further augmented by general provisions held at the head offices of foreign bank branches.
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