DBRS Assigns AAA Rating to the Republic of Singapore, Stable Trend

DBRS, Inc. has assigned issuer ratings of AAA to the Republic of Singapore’s long-term foreign and local currency debt, and issuer ratings of R-1 (high) to its short-term foreign and local currency debt. The trend on all ratings is Stable.

The ratings and Stable trends reflect DBRS’s view that the Singaporean economic and institutional fundamentals are strong. A prudent fiscal framework and strong governance indicators anchor Singapore’s wealthy economy. As a small and open economy, Singapore safeguards against its exposure to external shocks by maintaining high savings.

The ratings could come under downward pressure if an external shock were to significantly weaken public sector surpluses and feed through to a structural deterioration in economic growth and fiscal outcomes. A surprise weakening of the government’s institutional strength could also adversely pressure the ratings. Nonetheless, DBRS considers Singapore’s credit fundamentals resilient to foreseeable shocks.

Singapore’s open economy is wealthy and highly productive, with output per capita at $56,287 in 2014. Despite the city-state’s physical limitations, Singapore retains a competitive high-value manufacturing sector and remains a financial and trading center that serves global markets.

However, cyclical and structural factors are responsible for the moderation of Singapore’s growth performance and projections. The pace of real trend growth, which averaged 6.5% each year in the three decades to 2014, has slowed as a natural consequence of economic development. DBRS expects growth of 2.2% in 2015 and 2.9% this year, below estimates for output potential of 3.2%. The slower near-term performance reflects weak external demand and a more measured pace of physical capital accumulation.

Singapore’s conservative fiscal framework illustrates its institutional strength. The fiscal rules require a balanced budget over the political cycle. The general government operating surplus, which averaged above 4% in the last decade, does not fully capture revenues available to the government and has resulted in the buildup of large fiscal reserves. Singapore does not disclose the overall size of its reserve funds. Based on available information, DBRS assesses the government of Singapore as a net creditor, despite the gross government debt position near 100% of GDP. Debt issuance is for the sole purpose of developing domestic bond markets and servicing the investment demands of the national pension fund. Such large public savings allow authorities to increase the fiscal impulse to smooth economic volatility inherent to a small and open economy.

The country’s unusually large net creditor position is another core credit strength. Singapore’s current account surplus averaged above 20% of GDP each year over the last decade. It reflects a robust goods balance and high domestic savings. The net international investment position was 182% of GDP in 2014, and the savings rate averaged 47% of GDP over the last decade. Despite savings that are expected to slowly decline over the medium term, as the population ages and as the government directs more public savings to enhance the social safety net, such high savings provides a comfortable buffer against external shocks.

While Monetary Authority of Singapore (MAS) stress tests suggest risks are well contained, the nature of Singapore’s small and open economy exposes it to external shocks. External risks stem from slower direct and indirect global trade and financial channels. Singapore is strategically located where major east and west shipping lanes converge. As China and other regional trading partners reorient their economies, gross trade is likely to continue its decline. As a financial center, Singapore’s financial system is also exposed to possible spillovers from a regional economic slowdown. The IMF estimates a 1% annual decline in China’s growth reduces output in Singapore by 0.36%. Furthermore, short-term interest rates in Singapore historically correlate with U.S. interest rates. A 100 bps increase in U.S. rates is associated on average with a 40 bps increase in domestic rates. The slow contractionary cycle in the U.S. and rising risk premiums could serve as headwinds to economic activity.

Rising interest rates could be challenging for over-indebted households and corporates. Low interest rates from global expansionary monetary policy over the last decade have encouraged lending. As a result, household debt increased to 76% of GDP in 2014, up from 60% in 2007. The BIS measure of credit to non-financial corporates rose to 82% of GDP from 58% over the same period. A sharp rise in interest rates could expose vulnerabilities. Nonetheless, private sector balance sheets remain strong. Household liabilities represented 17% of assets as of 3Q15, illustrating households’ high net worth, and listed companies appear able to absorb interest rate shocks given high interest coverage ratios. Furthermore, regulatory and supervisory standards are strong in Singapore, as evident by recent key macro prudential measures that slowly reversed rising real estate prices.

With a maturing economy and society, the current administration aims to improve the quality of growth through productivity gains. General shifts in the economic model of regional partners and the rapid population aging in Singapore has spurred a policy shift towards increasing productive capital investments and skills-upgrading of the labor force. Government policies, and a 1.4% of GDP fiscal impulse in the FY15 Budget, aim to close the widening wage gap between high-skilled and low-skilled workers and improve on inequality indicators. Consensus estimates are for growth to average 2-3% over the five-year forecast period.

Notes:
All figures are in U.S. Dollars unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales.

The sources of information used for this rating include Ministry of Finance, Singapore Department of Statistics, Accountant-General's Department, Monetary Authority of Singapore, Bank of International Settlements, International Monetary Fund, World Economic Outlook. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

For further information on DBRS’ historic default rates published by the European Securities and Markets Administration (“ESMA”) in a central repository see http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

DBRS does not typically accept editorial changes other than to correct for factual, accuracy and/or to remove confidential, material non-public, or sensitive information that might otherwise be inadvertently disclosed.

Lead Analyst: Jason Graffam
Rating Committee Chair: Roger Lister
Initial Rating Date: 29 January 2016
Most Recent Rating Update: NA

For additional information on this rating, please refer to the linking document under Related Research.