Forex movements could hit almost one in three firms: MAS

But central bank finds corporate sector has shown enough resilience to weather financial shocks


NEARLY one in three listed firms here could be adversely affected by exchange-rate movements, Singapore's central bank said on Friday. In addition, there are now more highly-leveraged firms, and more firms finding it hard to service their debts.

Making the situation more tenuous is the fact that corporate earnings have weakened over the past year, brought on by poor showing of trade-oriented firms.

But the corporate sector has shown enough resilience to weather financial shocks, said the Monetary Authority of Singapore (MAS) in its latest Financial Stability Review (FSR) released on Friday.

It added: "While corporate balance sheets remain healthy in aggregate, highly-leveraged firms in certain sectors could be vulnerable if interest rates were to rise or if the earnings outlook were to weaken.

"Firms with foreign-currency exposures could also face increased foreign-currency mismatch risks should currency-market volatility persist."

The report comes at a time when regional currency movements against the US dollar have been more unsettled.

It also comes amid heightened speculation about the US Federal Reserve normalising interest rates next month.

Selena Ling, head of treasury research and strategy at OCBC, said: "For the last seven years or so, people have gotten used to a low- or zero-rate environment. We're now probably at a turning point, and the FSR is clearly laying out possible scenarios."

MAS said that it conducted an analysis on the exposure of about 600 Singapore Exchange-listed firms to exchange-rate movements between January 2012 and September 2015. It looked at sensitivity of their stock prices to exchange-rate movements and also the depreciation of the Singapore dollar, regional currencies and other major currencies against the US dollar.

MAS found that almost half of all listed firms were sensitive to foreign currency movements. In addition, up to 30 per cent of these firms are vulnerable to a weakening of regional currencies against the US dollar.

However, a stress test conducted by MAS found that firms that are sensitive to exchange rate movements are generally larger and financially stronger. These are typically firms with large cash reserves that can counteract currency risks (see chart).

In addition, MAS noted that many firms have taken active steps to protect themselves from currency risks through natural hedging or the use of currency derivatives. Itfound that "firms with a diversified hedging strategy are more effectively hedged against currency risks".

But even so, MAS said that not all hedging options may be available or viable for all firms, and suggested that firms should consider business and operational conditions before deciding on a hedging strategy.

The central bank recommended that small and medium-sized enterprises (SMEs)"pay closer heed to their currency risks".

Separately, MAS noted that corporate leverage has stabilised since corporate debt as a ratio to Singapore's gross domestic product (GDP) reached 145 per cent last yearin 2014.; it was 95 per cent in 2010.

However, the number of firms with significantly more debt than equity has gone up.

The share of firms with a debt-to-equity ratio greater than two times reached 7 per cent in the second quarter this year, up from 5.7 per cent in the corresponding period last year.

If one were to add in an additional metric of debt at four times the size of their profits- defined as earnings before interest, taxes, depreciation, and amortisation (Ebitda)- their share of corporate debt would increase to 10 per cent in Q2 this year, compared to 8 per cent a year ago.

"Such firms would be most susceptible to debt-repayment difficulties if interest rates were to increase or if earnings projections were not met," said MAS.

The central bank also found that firms' ability to service their debts has weakened over the past year.More firms now have an interest-coverage ratio (ICR) of less than two, meaning that their Ebitda would not be enough to cover two times of total interest on outstanding debt.

Such firms now make up about 23 per cent of all listed corporates, up from 21 per cent in Q2 2014.

The increased exposure to risks by some corporates comes against a backdrop of weaker earnings.

MAS noted that the median profitability of SGX-listed companies in relation to their assets, measured by return on assets (ROA),inched down to 3.5 per cent in the second quarter of this year; last year, it was 3.9 per cent.

The ROA of manufacturing firms recorded the biggest drop, to 1.5 per cent in Q2 this year, compared to 3.2 per cent a year ago. This was the worst-performing sector.

Among the banks, the ratio of non-performing loans from corporates went up to 1.8 per cent in Q3 this year from 1.4 per cent a year ago.

Yet, despite weaker earnings, corporate balance sheets have generally remained resilient, said MAS.

The median current ratio, or current assets to current liabilities, of listed companies stayed firm at 1.7 times, reflecting corporates' ability to meet their cashflow needs.

"Nonetheless, given the uncertainties in economic and financial conditions, firms should continue to be pro-active in managing their debt levels and foreign currency exposures," said the central bank.

READ MORE: Highly-leveraged households more at risk

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