Persistently low oil prices and heightened volatility in foreign exchange rates are key risks facing companies here in the coming months, according to UBS Investment Bank.
Ms Cheryl Lee, head of Singapore research, said during a private event at its Asean Conference yesterday: "The low oil price is a risk for Singapore corporates because there's been a long extended period of time where it was easy to justify all sorts of investments by saying the oil price will surely (go back) to a high."
She said some companies, and markets generally, were not well-prepared for lower oil prices.
At UBS Investment Bank's Asean Conference are (from left) senior South-east Asia and India economist Edward Teather, head of Indonesia equity research Joshua Tanja, head of Philippines research Jody Santiago, Malaysia research head Chris Oh, head of Singapore research Cheryl Lee and head of Thailand research Ian Gisbourne. PHOTO: UBS
She cited a large United States operator of offshore support vessels which is shelving vessels as new as one year old, in a sign of just how weak demand is.
Local lenders also have direct exposure of 4 to 7 per cent to the energy and oil and gas sectors.
Ms Lee said: "It's easy to justify investments or have exposure.
"But if vessels that are as young as one year old are having trouble finding work, just bear that in mind."
The other major risk that companies face is volatile forex rates.
Firms say they have risk exposure in foreign debt hedged against various instruments and several measures to deal with forex risks, Ms Lee noted.
But it remains to be seen in the next reporting season "whether or not these (companies) are as robust as they themselves think".
With the looming US interest rate hike, Singapore firms are well-prepared, as they have been gearing up for it for the last two to three years, said Ms Lee.
She said corporations have started working on their debt, with research finding that about 60 per cent of debt on average is locked in at fixed rates.
As for households, she said: "The man in the street is surprised that rates are rising... "Sibor (Singapore Interbank Offered Rate) will go to 2.75 per cent by the end of next year."
Households will be hurt by paying more for home loans, and that will have an impact on discretionary income.
Ms Lee also looked at the real estate investment trust (Reit) sector.
She noted the way that retail Reits are being hurt by people cutting back on discretionary expenses and falling tourist spending. Office Reits will be hit by the upcoming supply of offices. Tighter immigration policies do not offer relief.
Ms Lee said: "We have incrementally become more negative on retail Reits.
"Office Reits still have some downside and the industrial Reits could perform relatively better. The expectations for industrial Reits are low and they could possibly overcome those low expectations."
