Corporate debt in China, Singapore and South Korea is rising

Among Asian economies, corporate debt is building up the fastest and the most in China, South Korea and Singapore, according to a report by Australian bank ANZ last week.

Companies in those countries had already been rapidly chalking up debt in the past few years, said the report by ANZ Research. But the coronavirus situation has hurt revenues and in turn, affected their ability to service their debts.

“The magnitude and speed of debt accumulation is the highest in China, Singapore, and South Korea,” the report said. “Owing to both the intensity of the COVID-19 pandemic as well as the various government measures that have followed, corporate revenues in several industries have been impacted … If this situation continues, it can result in credit rating downgrades and defaults and drag economic growth lower.”

Companies in the energy sector are particularly hard-hit in Singapore and South Korea, while in China, real estate companies are stretched, according to the report.

Singapore’s energy sector, which comprised one-fifth of the city-state’s gross domestic product in 2019, is experiencing negative earnings, in other words, incurring losses — an issue for the cash-strapped sector, ANZ said.

“Although this is a characteristic of the energy industry globally, there is the additional risk of constrained liquidity in Singapore, which makes it concerning,” it wrote. Those companies account for 15.7% of total debt repayments this year in the country, ANZ said.

Energy companies in South Korea, too, are “over-leveraged and short on cash buffers,” the report said.

Overall, small- and medium-sized enterprises (SMEs) in the country are a concern, as they have taken on more credit in the past two years, it said. “Smaller businesses tend to become cash-strapped more quickly than their larger peers, which poses a macroeconomic risk due to the importance of these SMEs in the South Korean economy.”

Meanwhile, in China, the real estate sector is “over-extended due to the hectic pace of expansion over the past few years,” ANZ said.

In Singapore, corporations seem to be “more vulnerable,” as they face cash flow and foreign exchange risks, the report said.

“Six out of 10 corporate sectors are heavily leveraged and cash-constrained,” it said.

Singapore companies are more susceptible to foreign exchange risks as compared with the other two countries; 60.9% of outstanding corporate bonds are denominated in U.S. dollars, and only a third in local currency. That’s in contrast to South Korea, which has only a fifth of outstanding bonds denominated in foreign currency, according to the report.

But, ANZ said, South Korean firms have other risks, being very cash-strapped. “Although exposed to lower level of foreign exchange risk, firms have an unsustainably large share of ‘high-risk’ debt and 80% of heavily leveraged sectors have limited cash buffers,” it said.

Chinese companies fare the best, as only three out of 10 sectors are over-extended, and most debt is state-owned, which comes with “an implicit guarantee against defaults,” the report said.