DBRS Confirms Singapore at AAA, Stable Trend

DBRS Inc. has confirmed the Republic of Singapore’s Long-Term Foreign and Local Currency - Issuer ratings at AAA, and its Short-Term Foreign and Local Currency - Issuer Ratings at R-1 (high). The trend on all ratings is Stable.

The ratings reflect DBRS’s view that Singapore’s economic and institutional fundamentals are strong. A prudent fiscal framework coupled with strong governance indicators and a wealthy economy provide support to the rating. As a small open economy, Singapore is exposed to downside risk to global trade and financial flows, possible protectionist trade policies, and rising global interest rates. The stable trend reflects the view that the challenges Singapore faces are manageable. The policy framework is strong and Singapore safeguards against its exposure to external shocks by maintaining significant fiscal and financial savings buffers.

Singapore’s open economy is wealthy and highly productive. 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. Real GDP growth averaged 6.8% in the three decades prior to the global financial crisis, but has slowed as a natural consequence of structural and cyclical factors, resulting in growth averaging 3.2% from 2012-2016. Nonetheless, employment remains strong, and wage growth of the resident worker remains above the average inflation rate. Consequently, as a result of Singapore’s continuous transformation and the city-state’s strategic location and role as a trade and financial hub, Singapore has one of the highest living standards in the world, with GDP per capita of $52,983 in 2016. Growth has accelerated slightly to 2.7% in the first half of 2017, and a continued improvement in the external environment is likely to support a faster pace of expansion in 2017-18, as compared to the 2% growth in 2016.

Singapore’s conservative fiscal framework puts the government in a strong financial position. The fiscal rules require a balanced budget over each term of the government and limit public expenditures to 50% of the annual net investment income from net assets. The budget balance, based on revenues that the government can spend under the constitution, is budgeted at 0.4% of GDP in 2017. A broader definition of the government’s budget balance which includes proceeds from land sales and investment income from reserves, has averaged an annual surplus of 4.5% over the last decade and has resulted in the buildup of large public sector financial assets.

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 at US$320 billion or 113% of GDP. Debt issuance is for the sole purpose of developing domestic bond markets and servicing the investment demands of the national pension fund. 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 19.4% of GDP over the last decade. It reflects a robust goods balance and high domestic savings. Being a financially open economy, Singapore has developed into a competitive international hub recording large cross border flows. In 2016, the net international investment position was 214% of GDP and the savings rate was 44.4% of GDP. As the population ages, savings are expected to slowly decline over the medium term. However, with the government continuing to direct more public savings to enhance the social safety net, high savings provides a comfortable buffer against external shocks.

Despite its strengths, the nature of Singapore’s small and open economy – dependent on the volume of direct and indirect global merchandise trade and cross border 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 to decelerate. 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. Historically, a 100 bps increase in U.S. rates is associated on average with a 40 bps increase in domestic rates.

Rising interest rates could pose a risk due to elevated household and corporate leverage. Over the last decade (2006-2016), thanks to global expansionary policies and low interest rates, credit to the non-financial private sector increased from 118% of GDP to 180% of GDP. While a sharp rise in interest rates could challenge over-indebted households and companies, private sector balance sheets appear resilient and regulatory and supervisory standards are strong. This is evidenced by macro prudential measures that reduced credit growth and partially reversed real estate prices from the 2013 peak.

In an effort to improve trend growth through productivity gains and harness the advantages in new technologies and automation, the Committee on the Future Economy (CFE) has proposed transforming Singapore into a labor lean economy, through increased global integration, digitalization and continuous investment in skills. However, as the economy restructures, skills mismatches among residential professionals could persist.

RATING DRIVERS
The ratings could come under downward pressure if an external shock were to significantly weaken public sector finances and cause a structural deterioration in economic growth prospects. A substantial weakening of the government’s institutional strength could also put pressure on 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, UNDP, Haver, Bank of International Settlements, International Monetary Fund, and 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: Rohini Malkani, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: 29 January 2016
Last Rating Date: 31 January 2017

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.