AT FIRST sight, Singapore seems well-equipped to weather the financial storm lashing the global economy.
It is entering the crisis from a position of strength, going by the Financial Stability Review released by the Monetary Authority of Singapore last month.
Singapore banks are among the best capitalised in the world. Every dollar lent out is backed by 11.3 per cent of capital - a level unmatched by United States and British banks.
And prudent lending practices mean the proportion of non-performing loans on the books of local banks is at an all-time low of 1.4 per cent, compared with more than 11 per cent during the Asian financial crisis.
Even the companies here are not doing too badly, with far stronger balance sheets than a decade ago. They are also prudent borrowers and borrow only 40 cents for every dollar put up by shareholders. That is all a far cry from the more profligate practices of the 1990s when it was considered normal for a firm to borrow one dollar for every dollar it raised from shareholders.
Surely, with these rosy numbers, corporate Singapore can rest easy while waiting for the financial turmoil to die down.
But the storm threatens to run smack into its doorstep. Businessmen have been grumbling that banks are tightening the screws on working capital loans and refusing to accept letters of credit from counterparty banks they no longer consider sound.
Even big firms are not immune. Last month, Mr Kuok Khoon Hong, the chairman of plantations giant Wilmar International, the third most valuable firm on the Singapore Exchange with a market value of $18 billion, complained that some banks had threatened to cut credit lines to his company.
With a firm of Wilmar's financial clout, Mr Kuok had no qualms voicing his unease about the credit crunch. But bosses of lesser firms may find themselves in a deeper quandary as they face a serious deterioration in their available credit lines.
One businessman outlined the situation facing many firms here.
Take a firm that, for the past five years, has had an overdraft facility of $1 million with its bank. The company has never taken advantage of the full sum available but it runs up an overdraft of $500,000 occasionally to use as working capital. It likes to know that in times of need, it can draw down on this
$1 million facility to meet any cash flow problem.
Well, times are hard now but the cash is not available. The bank tells the company that it can carry on borrowing $500,000 as usual but will not be able to draw down the rest of the credit facility - just at a time when it is needed urgently.
While the bank knows the company is good credit, it is concerned that the bank's customers may not be as reliable. It may also be wary of lending more money as it knows that a lot of businesses in the same sector as the company are going under, and it has received orders from its head office to exercise caution.
The company's suppliers, faced with their own credit squeeze, also want upfront payments before they deliver fresh supplies of raw material. So at a time when the company needs the credit line to pay suppliers upfront, it cannot get access to it.
With no working capital, it will not take long for the firm to fold.
It is this type of financial disaster which small companies are worried about when they are confronted by a squeeze in credit from their banks.
Even when a company is prudently managed with minimal debts, it may still fail because of an unwillingness by its bank or suppliers to extend credit.
To be fair, steps have already been taken to prevent such corporate disasters. Last month, the Government said it would back an additional $2.3 billion worth of loans to help about 124,000 firms that may be caught by the credit squeeze.
But while $2.3 billion is a big sum, it only works out to a paltry $18,548 for each firm if all the 124,000 companies need some form of credit urgently.
Given the many foreign banks operating here, it is likely the credit crunch may worsen as they receive instructions from their head offices overseas to cut back on all fronts - from credit cards to corporate loans. It may also be hard to rely on local banks to fill the gap left by the foreign banks fleeing the field as lending risks escalate with the economic slowdown.
Clearly, more schemes will be needed to ensure that businesses have the credit they need to keep going during what is looking like a protracted crisis.
There have been suggestions that we should adopt a more coordinated approach to tackle the credit problem before it becomes a full-blown crisis.
Some recall that when Singapore faced a severe slowdown in 1985, an economic committee was established to get feedback from all quarters - bankers, businessmen and professionals. Given the likelihood that the crisis could hit us in the same way it has already hurt businesses in the United States and Britain, they suggest a similar committee be set up.
Saving jobs will be of paramount importance as the credit crunch hits but to keep those jobs, businesses must be thrown a lifeline to stay afloat first.
Rather than hope for a handout in next month's Budget, bosses should articulate the steps needed to keep their businesses from going under.
This article was first published in The Straits Times on December 15, 2008.
