Fatihah Ramzi, DigitalCFO Newsroom | 25 November 2022
Companies that are vulnerable to shocks should improve their resilience as limiting the impact of present and potential hazards requires resilience.
The Monetary Authority of Singapore (MAS) advises businesses and the financial sector in Singapore to remain cautious in the midst of more difficult circumstances despite the fact that they are still able to withstand disruptions to the financial system.
According to MAS’s annual financial stability study, businesses’ financial health improved throughout the COVID-19 pandemic recovery and citizens continued to see substantial job growth and salary increases.
The government expects Singapore’s economy to expand between 0.5% and 2.5% next year, which is less than the 3.5% growth anticipated this year. A solid labor market and high import inflation are projected to keep inflation high, and continued tightening of financing conditions has increased the burden of debt servicing on borrowers, according to MAS.
For the fifth time in the year, MAS tightened monetary policy in October to assist in containing inflation. According to the most recent data, core inflation slightly decreased in October to 5.1%, but is still expected to remain high over the coming quarters.
The “unwinding of pandemic-induced precautionary buffers” has led to an increase in domestic measures of vulnerability for the business and financial sectors, according to MAS. MAS urged increased caution from businesses.
This will give them some protection against the anticipated further tightening of financial conditions in the upcoming quarters. According to MAS, businesses should continue to maintain proper buffers, including having enough liquid assets and effectively managing the debt’s maturity.
Global Risks Intensified
The MAS’s evaluation of Singapore’s financial system’s resilience, influenced by its examination of domestic and international risks and vulnerabilities, is presented in the annual financial stability review. The threats to the forecast for global financial stability have gotten worse as the world recovers from the COVID-19 pandemic.
It found a “worsening growth-inflation nexus,” with growth forecast to decline substantially over the coming year and inflation projected to stay well beyond many central banks’ goal ranges. The prognosis for commodities prices and supply chains remains uncertain due to the ongoing Russia-Ukraine conflict.
The most pressing concern is a potential breakdown in the fundamentals of global funding markets and cascading liquidity pressures on non-bank financial institutions that may soon spread to banks and corporations. In order to prevent a disorderly asset liquidation, tighter financial conditions and extremely volatile markets could result in liquidity imbalances that central banks and fiscal authorities would need to effectively handle.
According to MAS, the debt sustainability of weaker companies may become stressed, which would worsen the asset quality of banks. It also made clear that a rise in global risk aversion might lead to a further reduction in funding for emerging markets. However, banks are in a better position than they were during the global financial crisis of 2007–2008 to manage credit risks and absorb losses.
Companies Remaining Resilient
According to MAS, businesses in the corporate sector are coping with a dramatic slowdown in growth, a continuous increase in input costs, and more quickly tightening financing conditions. Due in part to the normalization of precautionary liquidity levels accumulated during the epidemic, companies’ risk has marginally increased.
According to MAS, notwithstanding a decrease, expected growth outcomes across sectors are likely to remain uneven. Corporate earnings have recovered broadly during the past year, with the exception of the hotel and restaurant and construction sectors; nonetheless, profit margins may begin to decrease in the near future.
However, should concerns materialize, the improvement of businesses’ financials over the previous year could offer some protection. According to the report, businesses typically have sufficient buffers to absorb shocks, but highly leveraged companies and smaller companies with less robust cash reserves would be particularly vulnerable if cost pressures persisted while revenue growth slowed.
Having said that, companies that are vulnerable to these shocks should improve their resilience. Limiting the impact of present and potential hazards requires resilience. Business executives will need to comprehend evolving patterns as well as adapt and develop resilience because disruptions are likely to continue.