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 uncertainty caused by the pandemic and the war in Ukraine. Singapore’s rapid economic recovery and strong public finances offset the risks posed by a worsening global economic outlook. Following an economic expansion of 7.6% in 2021, the Ministry of Trade and Industry (MTI) expects the Singapore economy to grow by 3-4% in 2022. The labor market is strong and domestic consumption has recovered. Additionally, 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. Both monetary and fiscal policy have already responded quickly to mitigate the risks posed by high inflation and rising global interest rates. The Monetary Authority of Singapore (MAS) has tightened monetary policy four times since October 2021, including two off-cycle policy actions, to slow the inflation momentum and help ensure medium-term price stability. Taking into account an off-cycle support package (SGD 1.5 billion) providing targeted support to households to soften the impact of inflation, the government’s FY2022 budget is expected to result in a deficit of 0.5% of GDP declining from -10.8% in 2020 and -0.9% 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 global taxation risks.

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 stance is normalizing back to being a balanced budget as COVID-19 related expenditures fade. The Ministry of Finance expects the overall fiscal deficit to decline to -0.5% of GDP in FY2022, from -0.9% in FY2021 and -10.8% in FY2020, as the focus of fiscal policy shifts from pandemic support measures to long-term objectives. The FY2022 budget centers on facilitating the green transition, digitalization, and economic inclusion. In June, Singapore announced a SGD 1.5 billion package to blunt the impact of rising food and energy prices on lower-income and more vulnerable groups. Households will receive cash payments and utility credits, while measures for small businesses include co-funding investments in more energy-efficient equipment. Through a combination of better than expected revenue out turns and reallocation of budget, the package will have limited effect on Singapore's fiscal position. Additionally, Singapore’s commitment to maintaining a balanced budget remains strong. The government plans to move forward with a one percent increase annually to the goods and services tax (GST) to 8% in 2023 and 9% in 2024 to offset the gradual increase in social expenditures over the medium term.

Singapore’s prudent fiscal management and low public debt levels underpin the country’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. 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 assets managed by GIC is undisclosed, the Sovereign Wealth Fund Institute ranks GIC that was set up in 1981 as the 5th largest public fund globally with estimated assets of around USD 690 billion (173.8% of GDP). The size of GIC will likely increase further because MAS transfers official reserves in excess of the amount needed to conduct monetary policy (65-75% of GDP) to GIC. The government is also the sole equity shareholder of Temasek Holdings, which was set up in 1974 and owns and manages assets acquired from the Government of Singapore. Temasek’s assets stood at USD 297 billion (74.8% of GDP as of March 2022), while MAS’s forex holdings stand at USD 289 billion (72.9% of GDP) as of August 2022. The SWFs are both a current source of income (supplementing the annual budget) and a source of resilience (buffering shocks during downturns).

Government debt figures have risen sharply since the onset of the pandemic, but unlike other countries, the figure does not reflect the government’s debt burden. Singapore’s headline gross debt currently stands at USD 710 billion (178.9% of GDP) in Q2 2022. However, Singapore does not borrow money to fund current expenditures; 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. Instead, current spending is funded through investment income from net assets. To fund additional stimulus spending over the course of the pandemic, the government drew down its reserves by SGD 42.9 billion. This was only the second time in its history that Singapore drew down its reserves.

The passage of the Significant Infrastructure Government Loan Act (SINGA) in June 2021 authorized the government to finance capital spending up to SGD 90 billion and marked a deviation from the usual practice. That said, proceeds from the SINGA bonds are directed towards green investment and not financing current expenditure. As of Q2 2022, the government has borrowed SGD 2.6 billion (0.5% of GDP) to be directed towards multigenerational infrastructure and green investment that will last at least 50 years. Due to these several factors, the gross debt figure does not reflect the country’s public financial strength. This accounts for a six category uplift in the ‘Debt and Liquidity’ building block assessment.

Singapore’s Strong Post Covid Recovery is Clouded By The Global Outlook

Singapore experienced one of the strongest economic recoveries among advanced economies, growing 7.6% YoY in 2021, after undergoing a 4.1% contraction in 2020. Strong external demand boosted export growth and the residual impact of accommodative fiscal and monetary measures from 2020 supported the economy through continued border closures and a resurgence of COVID-19 infections in the middle of 2021. Both the IMF and MTI project slower growth in 2022 due to persistently higher inflation, rising global interest rates, and a decline in external demand. The recovery in travel-related and consumer-facing sectors as restrictions are lifted has been offset by a contraction in manufacturing and trade-related sectors impacted by supply chain disruptions in the first half of the year. However, the labor market has recovered strongly, with the unemployment rate falling from a peak of 3.6% in October 2020 and returning to pre-pandemic levels of 2.1% as June 2022. MTI expects the economy to grow by 3-4% in 2022, down from earlier expectations of 3-5% growth.

Singapore’s ratings are underpinned by its wealthy and highly productive economy, with per capita GDP at USD 72,766. 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 government is also embarking on reforms to address long-term issues such as aging, climate change, and deglobalization. The strength and resilience of Singapore’s economy accounts for one category uplift in the ‘Economic Structure and Performance’ building block assessment.

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 about 18% of GDP over the last fifteen years reflecting a robust goods balance and high domestic savings. Moreover. Singapore has a large positive net international investment position of 253% of GDP as of Q1 2022. This reflects its high stock of net portfolio assets and foreign reserves.

The Monetary Authority Of Singapore Has Tightened Policy Significantly In Response To Inflation

Similar to global trends, inflation has been continually rising in Singapore since late 2020. MAS's preferred measure of core inflation, which excludes accommodation and private transport costs, reached a 14-year high in July at 4.8% YoY. Overall inflation rose to 7.0% YoY in July, up from 2.3% in 2021. Both figures have consistently landed at the upper range of MAS forecasts, with core inflation well above the historical average of 1.5%. Price pressures are expected to stay elevated in Singapore for the rest of the year, before moderating in 2023. The Russian invasion of Ukraine and continued lockdowns in China have increased global energy and agricultural commodity prices and exacerbated existing supply chain congestion. Domestically, the removal of COVID-19 related restrictions and the tight labor market leading to higher wage growth have also contributed to inflationary pressures.
MAS responded to higher inflation with four consecutive policy tightening actions over the last 11 months, including two off-cycle actions. Since 1981, monetary policy in Singapore has been centered on managing the Singapore dollar nominal effective exchange rate (S$NEER), rather than interest rates, as a means of achieving price stability. This is mainly because Singapore is a small open economy which imports most of its goods. Consequently, MAS operates its policy in a ‘basket-band-crawl’ framework, where the nominal trade-weighted exchange rate fluctuates within an undisclosed and periodically adjusted policy band. Re-centering upwards the midpoint of the S$NEER policy band and increasing the rate of appreciation work to moderate rising import prices. One-year-ahead inflation expectations are showing signs of easing as monetary policy begins to take effect. Inflation expectations continue to be well anchored.

Singapore’s financial 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 139% of GDP in 2007 to 220% of GDP in 2021. 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 and measures taken by the government and MAS. With the increase in interest rates, households with variable or short-term rates are facing a rising debt burden, but repayment capacity continues to be strong. The average loan-to-value ratio has been declining since Q3 2017, now standing at 44.1% in Q1 2022, and non-performing mortgages are low at 0.3%. MAS stress tests and supervisory reviews indicate that Singapore’s banking and insurance sectors have the capacity to absorb shocks, with their stressed capital adequacy ratios remaining well above minimum regulatory requirements. Banks and insurers would also have sufficient liquidity buffers to meet cash outflows under stress.

Singapore’s AAA Ratings Are Supported by Strong And Credible Institutions

Singapore’s ratings are underpinned strong and credible institutions and a stable political environment. The city-state 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, currently tied at 4th place with Sweden and Norway. Property rights are secure, the crime rate is low, and macroeconomic policymaking is of high quality.

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. Within the PAP, the transition of power is ongoing between the third and fourth generation leadership. Current Finance Minister Lawrence Wong was elected by party leadership as the Deputy Prime Minister in April 2022, and may take over as Prime Minister before the next general elections (to be held no later than November 2025), but the direction of policymaking is not expected to change. Singapore’s political stability and strong track record of effective policymaking accounts for the one category uplift in the “Political Environment” building block assessment.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

Governance (G) Factors
The Institutional Strength, Governance and Transparency (G) factor is relevant to the ratings assigned to Singapore. Singapore ranks low in the World Bank’s Worldwide Governance Indicators for voice and accountability at 38th place and political speech and expression remains highly regulated. Reporters Without Borders ranked Singapore 149th in the world in the 2021 Press Freedom Index. These considerations have been taken into account in the Political Environment building block.

There were no Environmental and Social factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://www.dbrsmorningstar.com/research/402535.

DBRS Morningstar notes that this press release was amended on October 6, 2022, to include the Environmental, Social, and Governance Risk Factor that is relevant to the rating.

Notes:
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/401817/global-methodology-for-rating-sovereign-governments (August 29, 2022). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17 , 2022).

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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