SINGAPORE: Singapore’s companies, households and banks have to stay vigilant and prudent given an uncertain outlook for the economy, said the Monetary Authority of Singapore (MAS) on Tuesday (Dec 1).
While the system has been resilient amid the COVID-19 crisis so far, a protracted economic recovery bears the risk of financial stresses, the central bank cautioned in its annual financial stability review.
The COVID-19 pandemic has dealt a heavy blow to the Singapore economy, which is expected to see its worst recession in history this year with a 6 to 6.5 per cent contraction.
The Ministry of Trade and Industry said last week that it expects a rebound in 2021, with growth of 4 to 6 per cent.
READ: Households urged by MAS to stay prudent when it comes to taking up debt or buying new property
But even then, MAS warned of an "uneven trajectory" that will "impinge on jobs and corporate profits".
"The risk of financial stresses remains during this protracted recovery period. Continued vigilance and prudence therefore remain warranted," it wrote.
RISKS FOR SMALLER, FINANCIALLY WEAKER FIRMS
In its assessment of the corporate sector, MAS said Singapore firms have weathered the initial earnings shock from the pandemic "relatively well".
Corporate balance sheets in Singapore were "relatively resilient" at the turn of the new year. Companies also took proactive steps to retain liquidity and were supported by Government initiatives that helped to ease cash flow and provide continued access to financing.
Nonetheless, a fall in corporate profitability and a further rise in debt have worsened leverage risk.
For instance, corporate debt as a percentage of gross domestic product (GDP) rose to 163 per cent in the second quarter on the back of higher corporate debt and a fall in GDP, the report showed. This compared with around 150 per cent in 2019.
READ: COVID-19 downturn to be more prolonged than past recessions, slow recovery for jobs market: MAS
Most firms should be able to withstand short-term pressures on their financial positions, although the central bank noted that corporates that are highly leveraged and smaller firms with weaker cash buffers remain vulnerable and could come under more severe strain.
"While the economy is expected to pick up next year, its uneven trajectory will impinge on corporate profits," it wrote in the 112-page report.
"Within the corporate sector, smaller firms that tend to be financially weaker, and those in the domestically oriented and travel related services impacted by COVID-19 remain vulnerable."
BANKS TO SEE CHALLENGING CONDITIONS
Turning to the financial sector, MAS said banks will likely face challenging operating conditions in the near term.
Even as banks continue to maintain strong underwriting standards and healthy capital buffers, a prolonged low interest rate environment and asset quality deterioration amid continued uncertainty in the global outlook will exert pressure on their profitability.
MAS also urged lenders to continue guarding against a renewed tightening of global funding conditions by actively monitoring and managing their foreign currency risks prudently.
Likewise, low interest rates will have an impact on insurers who should keep a close eye on their solvency positions, while adopting a prudent and forward-looking perspective to capital management, MAS said.
HOUSEHOLDS TO EXERCISE PRUDENCE
Lastly, the central bank noted that household balance sheets were "relatively healthy" at the onset of the pandemic, in part due to financial buffers built up in the previous years.
Government transfers, as well as measures it rolled out together with the financial industry, mitigated the impact of a sharp fall in employment and incomes in the first half of the year, it added.
But while growth in overall household debt has moderated, leverage risk edged up as a sharp decline in third-quarter GDP resulted in a temporary rise in the debt-to-GDP ratio.
Given the prospect of a protracted recovery in the labour market, MAS urged households to be prudent when taking up new debt and making property purchases.
It added that whenever possible, households "should continue servicing or consolidating their existing obligations to enhance resilience against unexpected shocks".