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ECONOMY | Marianne Estioco, Singapore
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Will extremely high corporate debt derail Singapore’s growth story?

Corporate debt levels are at an all-time high.

Record-high corporate debt levels will act as a big drag to Singapore’s economic growth story this year, analysts warned.

Companies might be forced to reduce capital expenditure plans in order to service their debt, which in turn will result in greater pressure for the broader economy.

“Singapore's rising corporate debt levels will be increasingly difficult to service amid a backdrop of slowing economic growth not only domestically, but across the region. Particularly concerning is the fact that corporate leverage rose at a very rapid pace following the global financial crisis as firms looked to lock in record-low financing rates,” BMI Research said in a report.

BMI Research, which is part of the Fitch Group, cautioned that the breakneck pace of credit accumulation witnessed in the years after the global financial crisis is usually an indication of an upcoming economic slowdown or even another financial crisis. 

“While we do not believe that [a financial crisis] is likely, we believe that [an economic slowdown] is, particularly as firms are forced to scale back their capex plans in order to divert more resources towards debt servicing,” BMI Research noted.

BMI Research noted that corporate debt levels hover at 85.0% of the GDP, the highest on record.

In its most recent Financial Stability Report (FSR), the Monetary Authority of Singapore (MAS) warned that there are firms that look vulnerable should interest rates rise, or if earnings outlook weakens.

The central bank’s calculations showed that aggregate corporate leverage has begun to stabilize after rising sharply from 95% in 2010 to 145% in 2014. However, the number of firms with debt-to-equity ratios greater than 2.0x has increased to 7.0% of listed corporates in the second quarter of 2015, compared to just 5.7% in Q2 2014. 

MAS data also show that firms with interest coverage ratios less than 2 in 2Q15 have increased to 23% of all listed corporates, compared to 21% in 2Q14. The corresponding corporate debt held by such firms increased to 11% in 2Q15.

In a report released late in 2015, Citi warned that high corporate debt could curb domestic demand at a time when the economy is increasingly reliant on local industries to drive growth.

“Whilst not of systemic proportions, increased stress on corporate balance sheets and cash flows are likely to slow capex plans and reduce banks’ willingness to lend to companies, with knock on effects on domestic demand.” Citi warned.

Meanwhile, Morgan Stanley cautioned that high corporate debt will join a myriad of both cyclical and structural factors and global and domestic factors which will keep Singapore’s growth in check this year.

“Besides the lower global GDP growth and rising cyclical risk of a global recession, Singapore’s economy also faces other domestic macro headwinds from immigration slowdown, poor demographics and a leverage overhang (amid Fed normalisation),” Morgan Stanley said.

To combat sluggish growth, Morgan Stanley said that Singapore needs to improve productivity and change its growth strategy.

“Weak demography also means that policymakers may need to transition from a growth strategy of importing MNCs to a strategy of exporting competitive domestic corporates. In other words, policymakers may need to focus more on GNI expansion rather than GDP expansion. To the extent to which a vibrant private sector is needed to drive the former, policymakers may need to move away from the high level of state involvement to rely more on Adam Smith’s invisible hand,” Morgan Stanley said. 

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