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MAS flags leverage risk in businesses tied to trade, properties

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, with these sectors accounted for around two-thirds of overall corporate debt growth between 2010 and 2019. 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.

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That being said, 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 add, the median firm in the construction sector has a negative ICR, 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 few construction firms listed relative to other industries. The median return on assets for the construction sector remains positive as at Q2 2019.

"This could be due to the prolonged weakness and hence 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. 

"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 have strengthened alongside a moderation in leverage risks, with default rates of household debt remaining low. 

Household leverage risk has also moderated, as slower growth in property prices following the July 2018 property cooling measures tempered housing loan growth and contributed to an improvement in overall indebtedness.