DBRS Morningstar Confirms Republic of Singapore at AAA, Stable Trend

DBRS, Inc. (DBRS Morningstar) confirmed the Republic of Singapore’s Long-Term Foreign and Local Currency – Issuer Ratings at AAA. At the same time, DBRS Morningstar confirmed the Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (high). The trend on all ratings remains Stable.

KEY RATING CONSIDERATIONS

The confirmation of the Stable trend reflects DBRS Morningstar’s view that Singapore’s credit fundamentals remain solid despite the economic shock from the Coronavirus Disease (COVID-19). The Singapore economy contracted 5.4% in 2020. This is less severe than initially expected due to the array of fiscal, monetary, and financial measures introduced by the government and the Monetary Authority of Singapore (MAS) to minimize the fallout on the economy. Direct and indirect fiscal stimulus measures amounted to SGD 97.3 billion (20.7% of GDP), with the budget shifting from a surplus of 0.2% of GDP in FY2019 to a record high deficit of 13.9% of GDP in FY2020. Despite the hit to the government balance sheet, 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. The Monetary Authority of Singapore (MAS) expects the economy to rebound 6%-7% in 2021.

Singapore’s AAA ratings are underpinned by the country’s prudent fiscal framework, strong public sector balance sheet, sound external position, and high-quality governing institutions. The ratings reflect Singapore’s wealthy economy with one of the highest living standards in the world. Its conservative fiscal framework has enabled a substantial buildup of reserves, which not only serve as a buffer against external shocks, but also provide a stable income stream for budgetary operations. These credit strengths offset the challenges associated with the Singapore’s small and open economy, its vulnerability to external shocks stemming from global trade and financial flows, and its exposure to potential tax policy changes in major economies.

RATING DRIVERS

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.

RATING RATIONALE

Prudent Fiscal Framework and Strong Balance Sheet Underpins Singapore’s Creditworthiness

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. Following an unprecedented fiscal deficit of 13.9% of GDP in FY2020, that was largely financed by a drawdown in reserves, the government expects the deficit to decline to 2.2% of GDP in FY2021 on the back of an improving economy and the winding down of the emergency pandemic related financial support. This includes a SGD 11 billion (2.2 % of GDP) COVID-19 Resilience Package aimed at extending some measures from 2020. The government’s commitment to maintaining a balanced budget remains strong. On the revenue side, the government plans to move forward with an increase to the goods and services tax (GST) during 2022-2025, and expects government expenditure to normalize as the health crisis winds down.

Compliance with Singapore’s fiscal rules has led to sustained fiscal surpluses and the buildup of large net assets. The government’s gross assets are invested by GIC Private Limited (GIC), Temasek, and Monetary Authority of Singapore (MAS). Though the size of the GIC is undisclosed, the Sovereign Wealth Fund Institute ranks GIC that was set up in 1981 as the 6th largest public fund globally with estimated assets of around USD 545 billion (149.1% of GDP). The government is also the sole equity shareholder of Temasek Holdings, that was set up in 1974 and owns and manages assets acquired from the Government of Singapore. As of August 2021, Temasek’s assets stood at USD 283 billion (77.4% of GDP), while MAS’s forex holdings stand at USD 418 billion (123% of GDP). The SWFs are both a current source of income (supplementing the annual budget) and a source of resilience (buffering shocks during downturns).

As per estimates from MAS, Singapore’s headline gross debt currently stands at USD 510 billion or 150.2% of GDP in 2020. However, 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. While this could change following the proposed issue of SGD 19 billion bonds under the Significant Infrastructure Government Loan Act (SINGA) to finance long-term infrastructure projects, authorities reaffirmed that the government would finance current spending with current revenues, and that it would only borrow to finance projects that have multigenerational benefits.

Rather, the government issues domestic local currency debt to develop the domestic debt market and to service the investment needs of the Central Provident Fund (CPF). The Protection of Reserves Framework in Singapore’s constitution prevents spending any proceeds generated through bond issuance. Thus, 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. Proceeds from the recent proposal to issue SINGA bonds are directed towards green investment and not financing current budgetary expenditures. Consequently, the gross debt figure does not reflect the country’s public financial strength. This accounts for a 6 category uplift in the ‘Debt and Liquidity’ building block.

Singapore’s Economy is Set to Rebound in 2021 Amid Strong Fundamentals

Following the sharpest economic contraction since independence (-5.4% YoY in 2020), Singapore’s economy is expected to rebound 6-7% in 2021 on the back of a large fiscal expansion, accommodative monetary policy measures, and a favorable external environment. While the recovery starting in Q3 2020 was interrupted by the second wave of the virus in mid-2021, the impact of the second wave was much less than that of the first, largely due to the rapid pace of the vaccination campaign. 80% of the population has been fully vaccinated, as of September 7. The recovery is being led by the electronics manufacturing sector, which faces strong global demand for semiconductors and medical exports. However, like many other economies, the recovery looks uneven, particularly in travel-related and consumer-facing sectors considering the slow reopening of borders, the tepid recovery in international travel, and ongoing distancing guidance. Moreover, potential new mutations of coronavirus remain a downside risk to the outlook.

Singapore’s ratings are underpinned by its wealthy and highly productive economy, with per capita GDP at US$59,819. 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. 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. In addition, Singapore’s external position is a key credit strength which help defend against external risks. Singapore’s strategic location where major east and west shipping lanes converge and its advanced technology and automation, coupled with reduced port fees, have helped bolster Singapore’s market share in maritime trade. Its current account surplus, has averaged nearly 19% of GDP over the last fifteen years reflects a robust goods balance and high domestic savings. Moreover. Singapore has a large positive net international investment position of 310% of GDP. This reflects its high stock of net portfolio assets and foreign reserves.

Nonetheless, global tax changes such as the proposal of a 15% minimum corporate tax could potentially impact Singapore due to a large presence of multi-national companies and the country’s lower effective tax rates. However, this would likely be mitigated by non-tax factors such as Singapore’s geographic advantages, its digital infrastructure, highly educated workforce, and stable political environment. Singapore’s continuous transformation and the strength and resilience of the economy accounts for a 1 category uplift in the ‘Economic Structure and Performance’ building block.

Monetary Policy Remains Accommodative; Banking Sector Remains Resilient

Since 1981, monetary policy in Singapore has been centered on managing the nominal effective exchange rate (S$NEER) as a means of achieving price stability. This is mainly because Singapore is a small open economy which imports most of its goods. Consequently, the Monetary Authority of Singapore (MAS) operates its policy in a ‘basket-band-crawl’ framework, where the nominal trade-weighted exchange rate fluctuates within an undisclosed and periodically adjusted policy band. Since the pandemic in April 2020, MAS has eased its S$NEER trading band by lowering the midpoint of the band, maintaining a zero percent appreciation of the policy band and kept the width of the band unchanged. Similar to most countries, headline inflation turned positive in December 2020 and rose above 2% in April 2021 on the back of higher commodity and automobile prices. Core CPI also turned positive in February 2021 and has been gradually rising but remains within MAS’s April 2021 expectations. Along with exchange rate management, MAS announced a series of measures to support the economy and maintain easy financing conditions. In addition to liquidity measures, 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.

Despite the pandemic, 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 196.2% of GDP in 2020. While the pandemic resulted in a fall in earnings and further rise in debt, firms were largely able to withstand short term pressures due to the improvement in their liquidity conditions thanks to measures taken MAS. For the household sector, MAS confirmed that households’ debt servicing burden remained manageable under stress. This reflected government transfers and measures extended by MAS which mitigated the sharp fall in income in 2020. MAS stress tests indicate that Singapore’s banking and insurance sectors have the capacity to absorb shocks with their capital adequacy ratios above Basel regulatory requirements and banks having sufficient liquidity buffers to meet cash outflows.

Singapore’s AAA Ratings are Supported by Strong and Credible Institutions

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 five of the World Bank’s six Worldwide Governance Indicators, including government effectiveness, political stability, regulatory quality, and control of corruption. 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. Property rights are secure, the crime rate is low, and macroeconomic policymaking is of high quality. Accordingly, Singapore’s political stability and strong track record of effective policymaking accounts for the one category uplift in the “Political Environment” building block assessment.

Conversely, largely due to the 60-plus years of single party control by the People’s Action Party (PAP) Singapore is a weak performer on the voice and accountability indicator. However, the stronger-than-expected outcome of the Worker’s Party in the 2020 election prompted the formal appointment of a Leader of the Opposition for the first time in the country’s history, paving the way for a larger role for the opposition in Singapore and further strengthening checks and balances within the political system.

ESG CONSIDERATIONS

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/384264.Notes:
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

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 https://www.dbrsmorningstar.com/research/381451/global-methodology-for-rating-sovereign-governments (July 9, 2021). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/373262/dbrs-morningstarcriteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (February 3, 2021).

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

The primary sources of information used for this rating include the 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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