DBRS, Inc. (DBRS Morningstar) confirmed the Republic of Singapore’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA and Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings is Stable.
KEY RATING CONSIDERATIONS
The confirmation of the Stable trend reflects DBRS Morningstar’s view that Singapore’s credit fundamentals remain solid despite the severe economic shock from the Coronavirus Disease (COVID-19). The pandemic and the public health measures implemented to contain it have resulted in a severe economic downturn in Singapore. The government and the Monetary Authority of Singapore (MAS) swiftly introduced an array of fiscal, monetary and financial measures to minimize the fallout on the economy. The unprecedent fiscal stimulus amounting to SGD 92.9 billion (19.3% of GDP) will result in a substantial, but temporary increase in the deficit. However, Singapore’s solid fiscal framework and the public sector’s sizable net creditor position provide the government with significant fiscal space to implement counter-cyclical policies without jeopardizing its ratings.
Singapore’s AAA ratings are underpinned by the country’s solid economic fundamentals, its prudent fiscal framework, strong public sector balance sheet, and high-quality governing institutions. As a result of its role as a trading and financial hub, Singapore has one of the highest living standards in the world. GDP per capita stood at USD 65,249 in 2019. Its conservative fiscal framework has enabled a substantial buildup of reserves, which not only serves as a buffer against external shocks, but also provides a stable income stream for budgetary operations. In addition, its current account surplus, which has averaged nearly 20% of GDP over the last fifteen years, reflects a robust goods balance and high domestic savings. Nonetheless, as a small and open economy, Singapore is exposed to downside risk stemming from global trade and financial flows and protectionist trade policies.
A downgrade of Singapore’s ratings in the near term is unlikely. Nonetheless the ratings could be downgraded over time if: (1) external shocks were to significantly and durably weaken public sector finances and cause a sustained deterioration in economic growth prospects; or (2) a substantial weakening of the government’s institutional strength materializes.
Pandemic Results in a Severe Downturn, But the Country Has Ample Policy Space to Respond
Though initially successful in containing COVID-19 from January through March, Singapore experienced an increase in infections in April, spread primarily through worker dormitories. As of September 8, 2020, the country has recorded 57,044 infections and 27 deaths related to the outbreak. To stem the spread, the government imposed ‘circuit breakers’ from April 7 to June 1, closing schools and all non-essential services. As a result, the number of new infections has fallen from a peak of almost a thousand cases per day in late April to around 60 new cases by mid-August. That said, the ‘circuit breakers’, coupled with disruptions in external trade and global supply chains, have led to a severe downturn in economic activity. Following the 0.3% YoY contraction in Q1 2020 GDP, GDP contracted 13.2% YoY in Q2. Government authorities expect GDP to contract between -5% to -7% annually in 2020, the most severe downturn since Singapore’s independence in 1965.
In response to the unprecedented crisis, the government and MAS swiftly introduced an array of fiscal, monetary, and financial measures to minimize the fallout on the economy. At the heart of Singapore’s economic response is the SGD 92.9 billion (19.3% of GDP) fiscal package, announced by the government over four budgets. The Monetary Authority of Singapore also eased its monetary policy stance and injected liquidity in financial system. These measures aim to support household incomes, and ease liquidity constraints for firms. Sectors receiving additional support include tourism, aviation, retail, food services, and transport services.
While DBRS Morningstar expects the support measures to be effective in supporting the economy, the near-term outlook is clouded by considerable uncertainty on the severity and duration of the pandemic and the resulting drop in activity. Moreover, given Singapore’s small open economy status, a longer-than-expected global outbreak resulting in persistent softness in external final demand could have additional negative spillovers to the trade-related and service sectors in Singapore. In addition to the pandemic, Singapore is exposed to downside risk stemming from global trade and financial flows, protectionist trade policies as well as the global electronics cycle.
Although, the near-term global economic outlook is severely challenging, Singapore’s ratings are underpinned by its wealthy and highly productive economy. Given Singapore’s demographics and restrictions on foreign workers, the government’s Committee on the Future Economy has proposed transforming Singapore into a knowledge-based and labor lean economy. Notwithstanding the city-state’s physical limitations, Singapore’s continuous transformation has enabled it to retain a competitive high-value manufacturing sector and to remain a financial and trading center that serves global markets. The strength of the economy and its resilience accounts for a 1 category uplift in the ’Economic Structure and Performance’ building block.
Unprecedented Pandemic Spending is Supported by Reserves and a Credible Fiscal Framework
To offset the pandemic shock, authorities announced a series of fiscal stimulus packages. Cumulatively, the measures amount to SGD 92.9 billion (19.3% of GDP). Three quarters of the stimulus is in the form of direct fiscal injections, while the remaining SGD 22 billion is earmarked as capital for loan guarantees. The overall budget deficit for FY2020 is estimated to be SGD 74.3 billion (15.4% of GDP), the largest in Singapore’s history. The most important measure is the Job Support Scheme which entails wage subsidies for local employees, with businesses receiving a maximum of 75% wage support for local workers up to a wage cap of SGD 4,600 a month, for a total of ten months. Other measures aimed at relieving cashflow pressures for businesses include tax rebates, rental waivers and targeted cash transfers and income support to lower income households and individuals.
Despite an unprecedent fiscal deficit estimated at 15.4% of GDP due to the pandemic, Singapore’s solid fiscal framework and the public sector’s sizable net creditor position due to its sovereign wealth funds provide the government with significant fiscal space to implement counter-cyclical policies without jeopardizing its ratings (see Norway & Singapore: Ratings Supported by Sovereign Wealth Funds, November 13, 2019). Singapore’s fiscal framework requires a balanced budget over each term of the government, with fiscal rules limiting the government expenditure to 50% of net realized investment income from net assets managed by GIC, Temasek and MAS. As this 15.4% deficit exceeds the available fiscal resources from the current term of government, the government obtained the President’s approval to draw a total of SGD 52 billion of government reserves to finance the deficit. The only other time this was done was during the global financial crisis when SGD 4 billion was taken out of the reserves, which were later replenished.
Singapore’s Strong Government Balance Sheet Underpin the AAA Ratings
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. These surpluses are invested by GIC Private Limited (GIC), a sovereign wealth fund established in 1981 with the sole purpose of managing Singapore’s reserves. Though the size of the GIC is undisclosed, the Sovereign Wealth Fund Institute ranks GIC as the 8th largest public fund globally with estimated assets of around USD 453 billion (121.7% of GDP). A second fund Temasek was set up in 1974 and owns and manages assets acquired from the Government of Singapore. As of March 2020, Temasek’s assets stood at USD 214 billion (57.5% of GDP). The SWFs are both a current source of income (supplementing the annual budget) and a source of resilience (buffering shocks during downturns). In addition, the Monetary Authority of Singapore manages the country’s foreign reserves which currently stand at USD 280 billion (75% of GDP). While the pandemic will result a drawdown of reserves, DBRS Morningstar expects Singapore to adhere to its fiscal framework once the situation normalizes.
Singapore’s headline gross debt currently stands at USD 470 billion or 127.8% of GDP. However, unlike most countries, Singapore does not borrow money to fund government deficits. Even in the current pandemic, the government has not borrowed but has instead drawn down its reserves to fund the stimulus packages. Rather, the government issues debt to develop the domestic debt market and to service the investment needs of the Central Provident Fund (CPF). (The CPF money is invested by the CPF board in Special Singapore Government Securities, issued by MAS and guaranteed by the government). All proceeds raised from securities issuance flow into the Government Securities Fund (GSF) and are invested over a long-time horizon by GIC. Payment from the GSF is limited to interest and principal repayment. This separation ensures that public borrowing does not fund government expenditures. The investment returns exceed debt servicing costs, so the fund does not represent a net fiscal cost. Moreover, the Protection of Reserves Framework in Singapore’s constitution prevents spending any proceeds generated through bond issuance. Consequently, the gross debt figure does not reflect the country’s public financial strength.
With financial assets far exceeding total debt, DBRS Morningstar estimates that the government’s net asset position currently stands at 211% of GDP. This is explained by Singapore’s fiscal surpluses that have resulted in an accumulation of assets, managed by GIC Private Limited (GIC), Temasek, and MAS. The strength of Singapore’s government balance sheet accounts for the substantial uplift to the ‘Debt and Liquidity’ building block assessment.
Measures by MAS Complement the Fiscal Packages; Private Sector Balance Sheets Remain Healthy
Given that Singapore is a small and open economy that imports most consumer goods, monetary policy has been centered on managing the nominal effective exchange rate (S$NEER) as a means to achieving price stability. MAS operates its policy in a ‘basket-band-crawl’ framework, where the nominal trade-weighted exchange rate fluctuates within an undisclosed and periodically adjusted policy band. In response to the severe negative impact of the pandemic, MAS significantly eased its S$NEER trading band in March 2020 by re-centering the midpoint of the band lower and setting the slope of the band to zero. Along with exchange rate management, the Monetary Authority of Singapore (MAS) announced a series of measures to support the economy and maintain easy financing conditions. Measures include a SGD 125 million support package for financial services and the fintech sector and a funding facility for corporates at a low interest rate of 0.1% per annum. Further, MAS adjusted banks’ capital and liquidity requirements and deferred the implementation of the final set of Basel III reforms providing financial institutions more latitude on submission timelines for regulatory reports. In addition, MAS entered into a USD 60 billion swap facility with the U.S. Federal Reserve.
Singapore’s banking system remains resilient. Low interest rates from global expansionary monetary policy over the last decade have resulted in credit to the non-financial private sector increasing from 115% of GDP in 2007 to 175.5% of GDP in 2019. While the pandemic could result in a rise in NPL’s (currently at 2.6%), the overall risk profile of debt has generally improved. Maturity risk has subsided as firms reduced their short-term debt, and foreign exchange risk stemming from currency mismatches remains manageable. In addition, Singapore’s household balance sheets remain healthy, with net wealth at four times GDP. Liquid assets such as cash and deposits exceed total household liabilities, provide households with strong financial buffers. As regards corporate loans, listed companies have high interest coverage ratios while borrowings by smaller companies are highly collateralized and subject to strict underwriting standards. Furthermore, regulatory and supervisory standards are strong in Singapore.
MAS stress tests (done prior to the pandemic) assume a protracted global downturn, amid heightened trade tensions, an intensification of China’s debt overhang troubles and a disorderly Brexit which results in the rest of Asia slipping into recession and a fall in asset prices. In a scenario where Singapore experiences a recession with unemployment rising sharply and property prices falling by around 50%, MAS stress tests indicate that Singapore’s banking and insurance sectors will likely remain resilient with their capital adequacy ratios above Basel regulatory requirements and banks having sufficient liquidity buffers to meet cash outflows.
Singapore’s Large Public and Private Net Creditor Position Provides a Strong Buffer to External Risks
DBRS Morningstar considers that Singapore’s solid external position will act as shock absorbers in the face of the global economic consequences from coronavirus. Singapore’s dependence on the volume of direct and indirect global merchandise trade and cross border financial transactions exposes it to external shocks. As a global financial center, Singapore’s financial system is also exposed to possible spillovers from a regional economic slowdown as well as the uncertainties from the U.S.-China trade war. However, the country’s extremely high current account surplus and ample external and fiscal buffers help defend against external risks.
Reflecting a robust goods balance, Singapore’s current account surplus has averaged nearly 20% of GDP over the last fifteen years. Singapore’s strategic location—where major east and west shipping lanes converge—coupled with its advanced technology and automation have helped bolster its market share in maritime trade. In addition, being a financially open economy, Singapore has developed into a competitive international hub recording large cross-border flows.
Singapore has a large positive net international investment position of 240% of GDP. This reflects its high stock of net portfolio assets and foreign reserves. The open capital account allows for reinvestment abroad of income from large foreign assets. Singapore’s USD 279 billion or 76% of GDP in reported foreign reserves serves as a buffer against the large stock of short-term external debt, 322.6% of GDP as of Q1 2020. External debt reflects large cross-border activities of the international banking system. Short-term assets broadly offset short-term liabilities, suggesting adequate reserve accumulation.
Political Stability and Strong Institutions Support Growth
Singapore’s political stability has supported its development strategy. The People’s Action Party (PAP) has dominated all branches of government since 1959. The ruling PAP was re-elected into its 15th consecutive term securing a super majority of 83 seats in the 93-seat parliament elections held on July 2020. While the PAP’s victory was never in doubt, its margin of victory was lower than expected. Consequently, with opposition seats and vote tally rising, there could be greater diversity of voice in the next parliament.
Single party control raises some questions regarding the transfer of power, government accountability, and transparency, but the PAP is credited with creating the conditions for Singapore’s impressive economic development. Property rights are secure, the crime rate is low, and macroeconomic policymaking is of high quality. Transparency International ranks Singapore among one of the least corrupt countries in the world and is currently tied at 3rd place with Finland, Sweden, and Switzerland.
Singapore’s impressive growth performance is supported by public institutions that score favorably on development indicators. The city-state is the top-ranking country on the Ease of Doing Business indicators. Singapore also receives top marks on the World Bank’s Worldwide Governance Indicators, including government effectiveness, political stability, regulatory quality, and control of corruption. Conversely, largely due the single party control, Singapore is a weak performer on the voice and accountability indicator. Nonetheless, Singapore’s strong track record of effective policymaking accounts for the one category uplift in the “Political Environment” building block assessment.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments.
All figures are in USD unless otherwise noted. Public finance statistics reported on a general government basis unless specified.
The principal methodology is the Global Methodology for Rating Sovereign Governments (July 27, 2020).
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
The primary sources of information used for this rating include Ministry of Finance, Singapore Department of Statistics (DoS), Accountant-General's Department, Monetary Authority of Singapore, UNDP, Bank of International Settlements, International Monetary Fund, World Bank, UN, and Haver Analytics. DBRS Morningstar 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 for this rating action. DBRS Morningstar did not have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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