Companies in Singapore suffered a significant fall in earnings due to the Covid-19 pandemic and sank deeper into debt, although most should still be able to withstand short-term financial pressures for now, the Monetary Authority of Singapore (MAS) said.
In its annual Financial Stability Review released yesterday, MAS also said firms and banks have so far remained generally resilient, despite the shock of the pandemic.
It added that swift government support for the corporate sector has further helped, with efforts focused on extending credit to small and medium-sized enterprises.
"However, corporates with highly leveraged positions and smaller firms with weaker cash buffers remain vulnerable and could come under more severe strain," MAS cautioned.
Firms such as those in construction, travel-related services and property were also hit harder by a drop in domestic demand and safe management measures, it said.
Meanwhile, corporate debt as a percentage of gross domestic product (GDP) has been rising because of low interest rates.
The debt ratio hit 163 per cent in the second quarter of this year, reflecting both a pickup in corporate debt and a fall in GDP.
At the same time, banks saw a rise in corporate non-performing loans ratios, which rose to 3.4 per cent in the third quarter of this year, compared with 2.5 per cent in the same period last year.
"The higher ratios reflect the prevalence of firms in sectors adversely affected by the Covid-19 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," MAS said.
Overall, Singapore firms "have weathered the initial earnings shock from Covid-19 relatively well" as they took steps to retain liquidity, supported by the Government and assistance measures.
Listed firms have bolstered cash buffers, MAS noted. But it warned that efforts to ease short-term cash flow concerns have also increased other risks, such as repayment difficulties, if the economic recovery is bumpy.
Smaller firms would also have weaker cash buffers and be more severely impacted by the crisis.
That said, financing conditions remain supportive against an uneven economic recovery, and "strong capital and liquidity positions provide a robust base for banks to continue supporting the economy's demand for credit".
MAS said insurers have also remained strong amid the uncertain economic outlook, bolstered by the enhanced capital framework that came into effect in March.
The economy is expected to pick up next year, but its uneven trajectory will impinge on corporate profits. The financial sector and firms have to remain vigilant, MAS added.
"The prolonged low interest rate environment and asset quality deterioration amid continued uncertainty in the global outlook will exert pressure on banks' profitability, even as they continue to maintain strong underwriting standards and healthy capital buffers," it said.
"Banks should also continue to actively monitor and manage their foreign currency risks prudently to guard against a renewed tightening of global funding conditions."
Insurers are also expected to be impacted by a prolonged low interest rate environment and "should closely monitor their solvency positions", MAS said.