However, with the growth momentum seen in 3Q2024, corporates may see better earnings in the second half of 2024.

Singapore’s financial institutions were most concerned about uncertainty in the macroeconomic environment including a slowdown in growth and a resurgence in inflation.

Geopolitical risk as well as trade tensions and uncertain policies from newly-elected governments were also cited as risks, says the Monetary Authority of Singapore (MAS) in its financial stability review released on Nov 27.

Among the concerns cited, a slower-than-expected growth outlook for China was top of mind as this could have implications for corporates, funds and loan portfolios that have significant exposures to the country.

Geopolitical risk was also cited as another risk. The intensification of conflicts in the Middle East and Ukraine as well as rising protectionism could bring about disruptions to global supply chains. It could also see inflationary supply shocks in the commodities markets as well. All of these will have a negative impact on growth and financing conditions.

Singapore banks and fund managers also floated their concerns over rising trade frictions, noting that the rivalry between the US and China has already led to changes in supply chains in the region. This could lead to credit and market losses through their exposures to externally oriented firms that are vulnerable to supply chain disruptions.

Currency as well as capital flow volatility were also key concerns. A resurgence in inflation stemming from the heightened tensions and uncertainties could prompt a “sharp pivot” away from monetary easing and lead to a broad-based strengthening of the US dollar (USD) and higher currency and capital flow volatility in the region.

This could see assets and currencies in Asia’s emerging markets (EMs) coming under pressure on multiple fronts including households and corporates facing debt-servicing pressures under a higher-for-longer interest rate environment.

Singapore corporates may see better earnings in 2H2024

Singapore corporates’ debt servicing capabilities are expected to remain the most resilient with less restrictive domestic financial conditions.

According to the MAS, stress tests show that most firms in Singapore have enough buffers to manage unfavourable earnings and interest rate shifts that could arise from inflationary shocks, negative growth surprises, trade frictions or an escalation in geopolitical tensions.

The same companies benefitted better growth momentum during the third quarter, especially in manufacturing and export activities. Corporates also got support from the less-restrictive financial conditions.

In 2024, corporate balance sheets were “generally stable” despite market volatility. Defaults from small- and medium-sized enterprises (SMEs) have been low despite a slight increase in corporate sector financial vulnerability index (FVI), which reflects the cumulative effects of monetary tightening.

With the pick-up in economic growth in 3Q2024, companies are expected to see better earnings in the 2H2024.

The strong tech cycle and less restrictive global financial conditions are expected to contribute further to improving earnings and stabilising of domestic financing costs.

Global economy outlook

Despite the “resilient” global economic activity in 2024 amid continuing disinflation, the world still faces heightened uncertainty, trade tensions and geopolitical conflicts that could increase the possibility of “adverse shocks”, says MAS.

With this, small economies that are dependent on trade could see a mix of risks including potential terms-of-trade shocks, slower global growth, higher-for-longer interest rates and a renewed strength in the USD.

These risks may be amplified by corporates continuing to face financial imbalances including fiscal and credit risks, stretched asset valuations and leveraged positions. For instance, the sudden spikes in volatility in the global financial markets seen in August, could see a “disorderly unwinding” of leveraged positions, a sharp repricing in assets or sudden retrenchment in cross-border financial flows, the central bank adds.

Presently, the world is seeing elevated global macroeconomic and monetary policy uncertainties compared to pre-Covid-19 levels, which could see downside risks to growth and upside risks to inflation.

As such, the different central banks could diverge in their policies depending on their individual domestic conditions, although doing so could increase currency volatility, including in emerging markets (EM) Asia.

MAS also sees the possibility of larger and more frequent supply shocks occurring with rising protectionism and trade tensions along with continuing conflicts in the Middle East and Ukraine. The trade tensions could see a renewal in price pressures while rising protectionism could see central banks pausing their monetary easing policies or conduct interest rate hikes to cushion domestic inflationary pressures.

A restriction in financial flows could also impede economic activity with more impact seen in emerging market economies (EMEs), MAS adds.

Global fiscal and credit risks

As at MAS’s report, fiscal risks in many countries are currently elevated with average debt-to-GDP ratios rising to 68% from 60% before Covid-19. Coupled with a higher-interest-rate environment, interest payments now represent a higher proportion of government revenues to 9.1% in 2023 from 7.7% in 2018.

Given the limited fiscal consolidation efforts and expansionary fiscal policies of some newly-elected governments, MAS believes fiscal deficits are expected to widen further.

“Governments are mostly focused on near-term risks when managing public finances, reducing fiscal space for initiatives that enhance longer-term productivity and economic growth,” reads the report.

Sustainability in global corporate debt is also another area of concern with as many firms have not borne the full costs of the higher interest rates. In the next two years, the MAS sees some US$13 trillion ($17.51 trillion) in corporate debt due, which will need to be refinanced at higher rates.

Corporate spreads, which are at historically tight levels presently, could also be vulnerable to a sharp repricing in response to shocks, MAS adds.

In the medium term, banks may see some deterioration in asset and credit quality despite “subdued” non-performing loan (NPL) ratios as they are vulnerable to losses from weaker corporates and households.

The drop in asset and credit quality may also stem from deteriorating commercial real estate (CRE) assets, and leveraged investors including non-banking financial institutions (NBFIs).

In MAS’s view, NBFIs also pose higher risks to banks through increasing funding and liquidity interdependence and growing linkages to opaque private equity and credit markets.

In general, banks from advanced economies (AE) will have lower provisions compared to EME banks. According to MAS, this may reflect the differences in their exposures to vulnerable borrowers and loan segments, as well as in supervisory regimes.

Looking ahead, the central bank sees several instances which may bring about sudden market movements. These include more hawkish-than-expected stances by the Bank of Japan, data that may challenge market expectations of a soft landing in the US, fiscal sustainability concerns in AEs and EMs as well as more geopolitical and trade tensions.

At the same time, sell-offs in the market may occur when there is an unwinding of correlated and leveraged trades involving multiple counterparties, accompanied by spikes in long-term bond yields. A global flight-to-safety trend could also see an indiscriminate sell-offs of EM assets, tighter financial conditions through higher borrowing costs and departures from the economic recovery path.