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MAS flags leverage risk in businesses tied to trade, building sectors

MAS said the poorer showing from the construction segment could be a result of prolonged weakness and the ensuing lower profitability in the sector over the past three years.


CORPORATE debt in Singapore has built up amid loose financial conditions, with pockets of risks for corporates exposed to the trade-related sectors, and segments including construction and property, said the annual Financial Stability Review of the Monetary Authority of Singapore (MAS) released on Thursday.

While corporate balance sheets are broadly resilient, businesses have also been warned that amid weak revenue growth, too much leverage could catch them unawares.

The increase in leverage was mainly driven by the property and commerce sectors, which together accounted for around two-thirds of overall corporate debt growth between 2010 and 2019.

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The uncertainties in the economic outlook, softening labour market, and a large supply of unsold units in the medium term could weigh on the property market, MAS said.

To be clear, the median interest coverage ratio (ICR) for listed property firms have held steady at about four times in Q2 2019, above the overall median across all corporates.

ICR is calculated as the ratio of earnings before interest and taxes to interest. MAS considers firms to be at risk of not meeting their debt obligations if their (ICR) falls below two.

The median ICR of listed firms remained above two in Q2 2019. The regulator said this would imply that for a majority of firms, their earnings provide sufficient buffer to cover interest payments.

One sector that sticks out is the construction sector. The average construction firm, based on the regulator's check, has a negative ICR.

To be sure though, MAS flagged that only about one-third of listed firms report their ICR, significantly lower than the 60-80 per cent reporting rates for their other financial ratios.

There are also few construction firms listed relative to other industries, while the median return on assets for the construction sector remained positive as at Q2 2019.

MAS said the poorer showing from the construction segment could be a result of prolonged weakness and the ensuing lower profitability in the sector over the past three years.

"The financial conditions of construction firms are expected to improve going forward, supported by a steady pipeline of both public and private infrastructural projects."

In addition, the commerce sector, as well as businesses that operate hotels and restaurants, saw median ICRs of below two times in Q2 2019.

Meanwhile, the non-performing loan (NPL) ratios for the trade-related sectors showed an uptick in the recent quarter in the Singapore banking system.

As another indicator, fresh statistics from the advance labour force report on Thursday showed the unemployment rate for non-PMETs ticked higher to 4.7 per cent in June 2019 from 4 per cent a year ago. The Ministry of Manpower said this was due to "cyclical effects such as the US-China trade conflict, affecting manufacturing and retail trade". Unemployment rate for PMETs was unchanged at 2.9 per cent.

MAS said: "While the projected improvement in the manufacturing sector in 2020 should cap a further deterioration in NPLs, the trade-related sectors as a whole still bears closer monitoring."

Since 2015, corporate debt-to-GDP (gross domestic product) has stabilised - though still elevated - at around 150 per cent, the report showed.

Household balance sheets in Singapore have strengthened alongside a moderation in leverage risks, with default rates of household debt remaining low.

MAS has flagged that prospective buyers and over-extended households need to be cautious over taking on new debt, given the uncertain economic outlook.

The same labour statistics out on Thursday also showed that while the resident employment rate inched higher in June this year compared to a year ago, the growth in workers' income has decelerated.