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SINGAPORE: Singaporean businesses, households and banks must remain vigilant and cautious in the face of an uncertain outlook for the economy, the Monetary Authority of Singapore (MAS) said on Tuesday (December 1).
While the system has been resilient amid the COVID-19 crisis so far, a prolonged economic recovery carries the risk of financial stress, the central bank warned in its annual financial stability review.
The COVID-19 pandemic has dealt a severe blow to Singapore’s economy, which is expected to experience its worst recession in history this year with a contraction of 6 to 6.5 percent.
The Ministry of Commerce and Industry said last week that it expects a rebound in 2021, with growth of 4 to 6 percent.
READ: MAS urges households to be prudent when contracting debt or buying a new property
But even then, MAS warned of an “uneven track record” that “will affect jobs and corporate profits.”
“The risk of financial stress remains during this prolonged recovery period. Therefore, continued vigilance and prudence remain justified,” he wrote.
RISKS FOR SMALLER AND FINANCIALLY WEAKER COMPANIES
In its assessment of the business sector, MAS said Singapore companies have weathered the initial shock of pandemic gains “relatively well.”
Singapore’s corporate balance sheets were “relatively resilient” at the beginning of the year. The companies also took proactive steps to retain liquidity and were supported by government initiatives that helped facilitate cash flow and provide ongoing access to finance.
However, a drop in corporate profitability and a further increase in debt have exacerbated the risk of leverage.
For example, corporate debt as a percentage of gross domestic product (GDP) rose to 163 percent in the second quarter due to higher corporate debt and a drop in GDP, the report showed. This compared to around 150 percent in 2019.
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Most companies should be able to withstand short-term pressures on their financial positions, although the central bank noted that companies that are highly leveraged and smaller companies with weaker cash reserves remain vulnerable and could suffer further stress. severe.
“While the economy is expected to recover next year, its uneven track record will affect corporate earnings,” he wrote in the 112-page report.
“Within the corporate sector, smaller firms that tend to be financially weaker, and those in country-oriented and travel-related services affected by COVID-19 remain vulnerable.”
BANKS TO SEE HARD CONDITIONS
Regarding the financial sector, MAS said that banks will likely face challenging operating conditions in the short term.
READ: Singapore’s economy ‘turns the corner’, but recovery still a long way to go: Chan Chun Sing
Although banks continue to maintain strong underwriting standards and healthy capital buffers, a prolonged environment of low interest rates and deteriorating asset quality amid continued uncertainty in the global outlook will put pressure on their profitability. .
MAS also urged lenders to continue to protect themselves against a further tightening of global financing conditions by actively monitoring and prudent management of their currency risks.
Likewise, low interest rates will have an impact on insurers who must closely monitor their solvency positions, while taking a prudent and forward-looking perspective for capital management, MAS said.
HOUSEHOLDS TO EXERCISE PRUDENCE
Lastly, the central bank noted that household balance sheets were “relatively healthy” at the start of the pandemic, in part due to financial buffers accumulated in previous years.
Government transfers, as well as the measures it implemented together with the financial industry, mitigated the impact of a sharp drop in employment and income in the first half of the year, he added.
READ: IN FOCUS: After COVID-19, where is Singapore’s workforce and economy headed?
But while overall household debt growth has moderated, the risk of leverage rose as a sharp drop in third-quarter GDP resulted in a temporary increase in the debt-to-GDP ratio.
Given the prospect of a prolonged recovery in the labor market, MAS urged households to be cautious when incurring new debt and making real estate purchases.
He added that, whenever possible, households “should continue to meet or consolidate their existing obligations to improve their resilience in the face of unexpected shocks.”
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