Sector Review:

Asia-Pacific Credit Trends 2014: Labor Shortage And Property Curbs Would Shrink Singapore Corporates' Profitability
Primary Credit Analyst: Wee Khim Loy, Singapore (65) 6239-6303; wee.khim.loy@standardandpoors.com Secondary Contact: Andrew M Wong, Singapore (65) 6239-6306; andrew.wong@standardandpoors.com

Table Of Contents
Sector Outlook Key Risks And Trends Ask The Analyst Related Research

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Sector Review:

Asia-Pacific Credit Trends 2014: Labor Shortage And Property Curbs Would Shrink Singapore Corporates' Profitability
(Editor's Note: This article is part of a series on the credit trends of Asia-Pacific's corporate sectors for 2014. The series responds to analytical queries received recently on a sector or a specific issuer in that sector.)

Sector Outlook
The credit outlook for Singapore's rated corporates would largely be stable in 2014 (see table 1). This is based on Standard & Poor's Ratings Services' expectation that Singapore's GDP will grow at 3.4% and 3.7% in 2014 and 2015 respectively.
Table 1

Singapore Corporate Sector

Business conditions Satisfactory Business outlook Financial trend Sector outlook No change Same Stable

Key Risks And Trends

Key risks are the performance of the world's two largest economiesU.S. and Chinarising operating costs, and the impact of the strong Singapore dollar. Singapore's economy relies considerably on exports, and the two largest destinations, U.S. and China, account for about 22% of Singapore's total non-oil domestic exports in the first nine months of 2013. In fact, Singapore is highly vulnerable to external conditions. This was evident in the recent capital outflows from Asia-Pacific because of the possibility of U.S. tapering its asset purchases (quantitative easing or QE) and the depreciation of Asian currencies, namely the Indian rupee and Indonesian rupiah. While the capital outflows did not pose a direct immediate shock to the Singapore economy, we believe that Singapore companies could be negatively affected if these factors persist for a longer period. One reason is that some Singapore corporates have extensive investments in Asia; therefore currency depreciation in some Asian countries could drag down the performance of these investments. We believe any setback in the U.S. and Chinese economies, and volatility in Asian currencies, could directly dampen revenue growth for Singapore corporates. Exacerbating this exposure is the declining operating trends of domestic companies. Rising expenses, mainly labor, transport, and real-estate related costs, have worsened these companies' performance.

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Sector Review: Asia-Pacific Credit Trends 2014: Labor Shortage And Property Curbs Would Shrink Singapore Corporates' Profitability

The government's stance of maintaining a strong Singapore dollar to counter inflation also erodes local companies' competitiveness. However, we believe rated domestic companies have sufficient cushion to withstand volatility in their financial metrics and maintain their credit quality. Rated entities' fair-to-strong business risk profiles also provide resilience to potential deterioration.

Ask The Analyst

What are the major policy/regulatory risks that could affect the corporate sector in 2014?
We believe the government's current initiatives to restructure the economy and reduce Singapore's reliance on foreign labor have created a manpower shortage for many corporates, particularly those in the services sector. Margins may therefore narrow in the short to medium term as labor costs increase. In the longer term though, workforce productivity could improve and temper the impact of higher operating costs. Government efforts to rein in property price growth and rising household debt in Singapore could also dent the revenue growth of real estate companies. Singapore's housing affordability ratio (median house price divided by gross median household income) is about 12x in 2012, significantly above the benchmark of 3x. As a result, the government has introduced various measuresthe most recent regulation introduced in June 2013 restricts the quantum of bank financing that purchasers can obtain. On the supply side, the government has been selling more land to property developers and providing more subsidized housing, further alleviating price pressures. We therefore consider the outlook for Singapore's real estate sector to be slightly negative, compared to a year ago. Still, we believe that the government is pragmatic and would be proactive, adjusting policies/regulations should the economy perform worse than it expected.

What's the impact on the real estate sector if interest rates were to rise?
Real estate investment trusts (REITs) make up about 30% of our pool of rated Singapore corporates. The trusts currently enjoy low interest rates, and about half of their outstanding debts are fixed. Therefore, if interest rates were to rise, we believe the impact on our rated REITS will not be material. For example, at Sept. 30, 2013, about 75% of CapitaCommercial Trust's (CCT) outstanding debt was fixed, with a strong interest coverage ratio of 5.5x. Furthermore, CCT's average cost of borrowings in 2013 is low, at 2.7%. This figure compares favorably to 3.9% in 2009, when CCT's interest coverage ratio was adequate, at 3.3x. What's more, we consider that rated Singapore REITs have increased their financial flexibility. They have expanded their unencumbered assets of office and retail space that can be used as collateral for financing if needed. For example, Starhill Global REIT's portion of unencumbered assets is about 79% at September 2013, compared to 60% in 2009. We believe REITs are likely able to secure competitive interest rates if they have sufficient collateral. We project that the ratings on REITs will remain stable if interest rates were to rise by less than 50 basis points, provided their EBITDA levels remain the same. In this scenario, the median EBITDA interest coverage of rated REITs is likely to weaken to 3.5x, which supports at least an "intermediate" financial risk profile.

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Sector Review: Asia-Pacific Credit Trends 2014: Labor Shortage And Property Curbs Would Shrink Singapore Corporates' Profitability

Are corporates linked to the government more resilient to weather a weaker business environment in 2014?
We rate eight Singapore government-linked corporates, which constitute about 30% of our pool of rated companies in the country. These entities have dominant market positions in their respective industries, including the utilities, telecommunication, transportation, and capital goods sectors (see table 2). In addition, we consider them to be highly efficient, with financial risk profiles ranging from "intermediate" to "minimal". Given these strengths and our opinions of the likelihood of government support, we expect these companies to be more resilient than their private-sector peers to a weaker business environment and increasing capital investment plans. We have one of the government-linked entities on negative outlook: public transportation company SMRT Corp. Ltd. We believe SMRT's substantial capital-expenditure plans could worsen the company's financial metrics to beyond levels for the current stand-alone credit profile and rating.
Table 2

Singapore Government-Linked Companies Rated By Standard & Poor's

Business Financial risk Stand-alone risk profile profile credit profile Singapore Technologies Engineering Ltd. Singapore Power Ltd. PSA Corp. Ltd. SMRT Corp. Ltd. Singapore Telecommunications Ltd. PSA International Pte. Ltd. SP PowerAssets Ltd. Temasek Holdings (Private) Limited Strong Excellent Strong Excellent Strong Minimal Significant Intermediate Modest Modest aa aaaaa Likelihood of government support Extremely high High Very high Extremely high Moderate Corporate credit rating AAA/Stable/AA-/Stable/AA/Stable/AAA/Negative/ A+/Stable/A-1

Role Critical Important Very important Critical Limited importance Very important Very important Critical

Link Very strong Very strong Very strong Very strong Strong

Strong Excellent Excellent

Intermediate Intermediate Minimal

aa aaa

Very strong Very strong Very strong

Very High Very high Extremely high

AA/Stable/AA-/Stable AAA/Stable/A-1+

Related Research
Articles in the Asia-Pacific Credit Trends 2014 series: Mining Companies' Credit Metrics Will Mend Slowly; Oil And Gas Firms Foresee Higher Demand, Dec. 4, 2013 Korea's Corporates Will Struggle With Softer Demand At Home And From Abroad, Dec. 4, 2013 Transportation Infrastructure Faces Policy Uncertainty; Utilities Deal With High Energy Costs And Green Power," Dec. 3, 2013 Still Robust Domestic Growth and Steady Financial Profiles Underpin Our Mostly Stable Outlook On Indonesia's Corporate Sector, Oct. 30, 2013 Middle Classes Fuel Consumer Products; Retail To Keep Doing It Hard; Gaming On A Roll, Oct. 30, 2013 Real Estate Developers Wrestle With Regulatory Curbs; REITs Hunt For M&As, Oct. 29, 2013

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Sector Review: Asia-Pacific Credit Trends 2014: Labor Shortage And Property Curbs Would Shrink Singapore Corporates' Profitability Tech Firms Focusing On Asia And Smart Devices Will Outperform, Oct. 28, 2013 Telcos Look To The Cloud In Search Of Growth, Oct. 27, 2013

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