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Wed, Dec 02, 2020 – 5:50 AM
Singapore
COMPANIES are at a higher risk of defaulting on their debt obligations, as the risk of leverage continues to worsen due to lower earnings and increased debt.
Even as companies alleviate short-term refinancing concerns through higher cash holdings, there is greater risk to longer-term debt sustainability amid the looming slow and uneven economic recovery, according to the Review. annual financial stability of the Monetary Authority of Singapore (MAS). on Tuesday.
Debt ratios have risen to 163% in the second quarter of this year, reflecting both a rebound in corporate debt and a drop in gross domestic product.
Deterioration in corporate earnings amid the impact of Covid-19 and rising leverage have weighed on debt service ratios, with the median interest coverage ratio (ICR) of SGX-listed companies dropping from 2.0 in the second quarter of 2019 to 1.1 in the second quarter of 2020.
The sectors most affected by the pandemic, such as construction, hotels and restaurants, multiple industry, commerce and manufacturing, registered an average ICR below one in the second quarter.
That said, MAS believes that companies’ debt service capacity is sufficient for now. The median ICR for Singapore-listed companies remains above one, and cash flows are expected to recover after the second quarter of 2020.
As earnings fall, the banking system’s NPL rate rose to 3.4 percent in the third quarter of 2020, from 2.5 percent in the same period a year earlier.
The higher delinquency rates reflect the prevalence of businesses in sectors negatively affected by the pandemic (wholesale, retail, food and beverage, tourism-related industries) and oil-related industries affected by the collapse in oil prices to beginning of the year.
As the recovery is expected to be gradual and uneven, the quality of credit assets is expected to deteriorate, particularly in sectors with prolonged weak earnings, MAS said.
Efforts by companies to alleviate short-term cash flows through increased cash have also increased short-term debt and maturity risks.
Maturity risk, measured by the ratio of short-term debt to total debt, increased from 40 percent in the second quarter of 2019 to 42 percent in the second quarter of 2020, remaining below the historical average.
The maturity profile of Singapore corporate bonds remains well-rounded, with bonds due in 2021 accounting for approximately 15% of outstanding bonds.
Overall, MAS simulations suggest that Singapore’s corporate sector remains largely resilient to cash flow shocks. The test showed that 57 percent of SGX-listed companies have cash coverage ratios above 1.5 at the end of 2021, suggesting that they have cash to pay off their short-term debt.
In an adverse scenario where 2021 revenues decline 20% below baseline, most SGX-listed companies would continue to have resilient cash reserves. Most of the companies with the most vulnerable cash reserves at the end of 2021 are small with annual revenues of less than S $ 100 million.
MAS said that small and medium-sized enterprises (SMEs) may be less able to weather the impact of the pandemic, with their smaller size and limited access to capital markets.
The proportion of vulnerable SMEs was estimated to be approximately 30 percentage points higher than that of large vulnerable companies.
To add to that, the Singapore Business Federation’s Experian SME index contracted from 50.6 in the third quarter of 2019 to 46.3 in the third quarter of 2020, the lowest reading since the index’s inception in 2009.
While the economy recovered in the third quarter, growth is expected to decelerate in the fourth quarter 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,” MAS said.
Singapore’s banking sector, which has entered the crisis from “a position of strength”, is expected to face short-term downward pressure on profitability amid the low interest rate environment, deteriorating asset quality and the possible need to further increase provisions. possible credit losses.
This occurs even as they continue to ensure strong underwriting standards and healthy capital buffers, MAS said, noting that lenders must also actively monitor and manage their foreign currency risk prudently.
But in the longer term, the results of MAS’s stress tests showed that Singapore’s key banks have the ability to withstand more negative shocks.
The total coverage of provisions in the banking system increased to 103.1 percent in the third quarter, while the coverage of specific provisions grew to 65 percent. These buffers are reinforced by general provisions maintained at the headquarters of foreign bank branches.
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