Companies’ debt levels in Singapore low, banks and insurers can withstand shocks: MAS

SINGAPORE - Despite still-high borrowing costs and weaker earnings, businesses in Singapore have been able to service their debts, the central bank has found, adding that macroeconomic uncertainty and geopolitical tensions are key hurdles ahead.

The Monetary Authority of Singapore (MAS) said on Nov 27 in

its annual review of the corporate sector’s financial resilience

that in the past four quarters, businesses’ balance sheets have stayed stable despite market volatility.

“Singapore corporates have benefited from the improving growth momentum in the third quarter of 2024, particularly in manufacturing and export activities,” it noted.

Corporates have also benefited from financial conditions that have turned less restrictive as global interest rates ease, said MAS.

In assessing the corporate sector, MAS looked at four areas – firms’ debt levels and their repayment abilities; how much liquid assets the companies have to cover short-term liabilities; their ability to roll over short-term debt; and the share of foreign currency debt to total debt.

It said defaults in businesses, including that of small and medium-sized enterprises, have been low, although vulnerabilities in the corporate sector have risen moderately due to weaker earnings and borrowing costs that are still high.

Even so, corporate debt levels have stayed largely below pre-pandemic levels and firms have maintained healthy debt maturity profiles, said MAS.

In the months ahead, borrowing costs are expected to stabilise, which would help businesses.

MAS also said earnings are expected to improve in the second half of 2024, which reflects the pickup in economic growth in the third quarter of 2024. The Singapore economy

expanded by 5.4 per cent on a year-on-year basis in the third quarter,

faster than the 3 per cent growth in the second quarter.

It added that there has been some pickup in firms’ foreign currency borrowings, but noted that the risks are limited.

Businesses’ liquidity buffers have also stayed healthy even though there was withdrawal of some of the excess reserves built up during the pandemic.

In the year ahead, corporate debt servicing capabilities are expected to remain resilient with less restrictive domestic financial conditions, the central bank said.

“Stress tests show that most firms still have adequate buffers to manage unfavourable earnings and interest rate shifts that could arise from inflationary shocks, negative growth surprises, trade frictions or an escalation in geopolitical tensions,” it added.

The review found that businesses that are more vulnerable are those that are predominantly external-oriented firms whose margins were compressed by the challenging global environment.

Firms that are capital-intensive and have higher operating leverage are also less resilient.

Banks and insurers

The authority’s review and stress tests of the financial sector found that Singapore banks and insurers remained resilient, with strong capital and liquidity buffers.

MAS said banks in Singapore are well positioned to manage challenges to the macro financial outlook from an uncertain political and economic environment.

Asset quality also remains healthy, although borrowing costs are still high.

Banks here also have adequate precautionary buffers to guard against any credit quality decline.

MAS said local banking groups have continued to register healthy net profits in 2024, as both net interest income and non-interest income rose.

It said: “Banks should thus continue to maintain sound underwriting standards, ensure that their loan provisions are adequate, and remain vigilant against potential liquidity risks.”

As for non-bank entities such as insurers and investment funds, MAS said the sector continues to grow and is expected to pose limited systemic impact to the rest of Singapore’s financial system.