DBRS Confirms AAA Rating to Singapore, Stable Trend

DBRS, Inc. has confirmed 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 rating and trend confirmations 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 is exposed to downside risk to global trade and financial flows associated with Britain’s exit from the European Union, possible protectionist trade policies pursued by the Trump administration, and rising global interest rates. Singapore nonetheless safeguards against its exposure to external shocks by maintaining significant fiscal and financial savings buffers.

The Singapore economy has seen a protracted slowdown in growth performance that reflects cyclical and structural factors. After 3.9% expansion from 2012-2014, real economic growth decelerated to 2.0% in 2015 and 1.8% in 2016. Cyclically, the slowdown has been a consequence of weak external demand from the sluggish global recovery and a more measured pace of physical capital accumulation. Structural challenges to the labor market, including the aging population and restrictions on foreign workers, have also created a drag on growth. The official forecast is for a modest 1-3% expansion in 2017.

Singapore’s open economy is wealthy and highly productive, with output per capita at $52,888 in 2015. Notwithstanding 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.

Singapore has a conservative fiscal framework. This is despite the shift towards higher government spending to offset cyclical and structural challenges. Total expenditures increased by 3% of GDP in the year to 3Q16, yet the fiscal impulse is unlikely to undermine fiscal management. Fiscal rules require a balanced budget over the political cycle, and the government operating surplus, which averaged above 4% in the last decade, has resulted in large fiscal reserves. Singapore’s large net assets in its sovereign wealth funds position the public sector as a large net creditor, even with gross government debt above 100% of GDP. All proceeds from bond issuance flow into the Government Securities Fund, from which the constitution prohibits spending.

The country’s unusually large public and private net creditor position is a credit strength. Singapore’s current account surplus averaged above 20% of GDP over the last decade. It reflects a robust goods balance and high domestic savings. In 2015, the net international investment position was 210% of GDP and the savings rate was 48% of GDP. Such high savings provides a comfortable buffer against adverse external shocks.

The nature of Singapore’s small and open economy – dependent on the volume of direct and indirect global merchandise trade and cross boarder financial transactions – exposes it to external shocks. 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. Furthermore, rising global interest rates indirectly tighten demand conditions domestically. 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.

Rising interest rates could be challenging for leveraged households and corporates. In the decade from 2Q07 to 2Q16, the BIS measure of credit to non-financial private sector increased to 150% of GDP from 95%, as global expansionary policies and low interest rates encouraged lending. A sharp rise in interest rates could expose vulnerabilities. Nonetheless, private sector balance sheets appear resilient and regulatory and supervisory standards are strong. This is evident by macro prudential measures that reduced credit growth and reversed rising real estate prices from the 2013 peak.

With a maturing economy and society, the current administration aims to improve the quality of growth through productivity gains. Authorities view general shifts in the economic model of regional partners – particularly China’s move up global value chains and increased consumption – as an opportunity for Singapore corporates to take advantage of increased regional demands for services. Furthermore, the rapid population aging has spurred a policy shift towards increasing productive capital investments and skills-upgrading of the labor force. Recent budgets have increased public funding towards improving social policy.

RATING DRIVERS
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.

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. These can be found at http://www.dbrs.com/about/methodologies.

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 was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process. DBRS did not have access to the accounts and other relevant internal documents of the rated entity or its related entities.

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.

Lead Analyst: Jason Graffam, Assistant Vice President, Sovereign Ratings Group
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global Financial Institutions Group and Sovereign Ratings Group
Initial Rating Date: 29 January 2016
Most Recent Rating Update: 29 January 2016

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