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 is Stable.

KEY RATING CONSIDERATIONS
The confirmation of Stable trend reflect DBRS Morningstar’s view that Singapore’s strong credit fundamentals offset the challenges of weak near-term growth prospects and still-high inflation. Singapore’s small and highly open economy has been adversely impacted by weakness in its major trading partners. The government forecasts growth to slow to 0.5-1.5% in 2023, but the slowdown is expected to be short-lived. The economy grew by 0.1% Q/Q in Q2 2023, after contracting 0.4% in the first quarter. At the same time, a prudent fiscal stance and tighter monetary policy have worked in conjunction to slow the pace of inflation. Fiscal support measures in Singapore’s Budget 2023 are offset by higher consumption taxes, leading to a nearly balanced budget. After tightening monetary policy five times over the course of 18 months, the Monetary Authority of Singapore (MAS) left the policy stance unchanged in the latest April 2023 meeting. Inflation looks to have peaked at 7.5% in September 2022 and last registered at 4.1% in July 2023. Financial risks seem contained as banks, households, and corporates have weathered the rise in global rates well thus far. The IMF expects the economy to rebound and expand by 2.1% in 2024.

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 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 approaching a balanced budget on the back of buoyant tax revenues and restrained expenditure growth. Singapore ended 2022 with a fiscal deficit of 0.3% of GDP as the government wound down COVID-19 related expenditures but came out with targeted support to households to ease the impact of inflation. Looking ahead, the government’s Budget 2023 points to a nearly balanced stance with a projected deficit of 0.1% of GDP in 2023. The budget will offer additional support to low-income households, additional spending on the National Productivity Fund, and tax incentives for research and development. Over the medium term, the MOF projects government expenditures to increase from 18% of GDP to 19-20% due to higher old-age related healthcare expenditures and increased infrastructure spending. To meet these increased spending needs, the government implemented in Budget 2022 a phased two percentage point increase to the goods and services tax (GST) rate, which will rise from 7% to 8% in 2023 and 9% in 2024. The 2023 budget increased tax rates on property, autos, and tobacco. The government also plans to align Singapore’s corporate tax rate to Pillar 2 of the OECD Inclusive Framework on Base Erosion and Profit Shifting with a Domestic Top-up Tax to be implemented on large multinational corporations around 2025.

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 an additional fiscal rule limiting government expenditure to 50% of net realized investment income. Compliance with Singapore’s fiscal rules has led to sustained surpluses and the buildup of large net assets. The government’s gross financial assets are invested by GIC Private Limited (GIC) and Temasek. Although the size of the assets managed by GIC is undisclosed, the Sovereign Wealth Fund Institute estimates that the fund holds assets of around USD 770 billion (165% of GDP). The government is also the sole equity shareholder of Temasek Holdings, another fund which owns and manages assets acquired from the Government of Singapore. Temasek’s assets stood at USD 287 billion (59% of GDP as of March 2023). The SWFs are both a current source of income (supplementing the annual budget) and a source of resilience (buffering shocks during downturns).

Singapore’s high government debt figures understate its creditworthiness. Singapore’s headline gross debt currently stands at USD 813 billion (167.5% of GDP) in Q1 2023. 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. The GSF can only be used for interest and principal repayment. The investment returns typically exceed debt servicing costs, so the fund does not represent a net fiscal cost. Instead, current spending is partially funded through investment income from net assets. To fund additional stimulus spending between FY20 and FY22, the government drew down its reserves by SGD 40.0 billion. This was only the second time in its history that Singapore drew down its reserves. 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.

Headwinds Grow Stronger but Singapore’s Economy Remains Resilient

Singapore’s small, open economy faces a challenging external environment due to the country’s deep linkages with the global economy. Growth is expected to slow substantially in 2023, with the IMF projecting the Singaporean economy to expand by 1.5% in 2023 following growth of 3.6% in 2022. The manufacturing and trade-related sector has been impacted by weak demand in the region, most notably as a result of a slower-than-expected recovery in China, and the broader global manufacturing slowdown. The economy avoided a technical recession in the second quarter of 2023 with 0.1% growth Q/Q, after contracting 0.4% Q/Q in the first quarter. Growth was primarily supported by strong domestic demand for services, backed by a resilient labor market. The government anticipates growth between 0.5-1.5% in 2023. Despite some signs of easing, the labor market remains tight: the job vacancy rate remains higher than the historical average and the unemployment rate is still below pre-pandemic levels. Looking ahead, the IMF expects a moderate acceleration in growth to 2.1% in 2024.

Singapore’s strong credit fundamentals will enable Singapore to weather the challenging near-term external environment. The ratings are underpinned by its wealthy and highly productive economy, with per capita GDP at USD 82,807. Notwithstanding the city-state’s physical limitations, Singapore has been successful in retaining a competitive high-value manufacturing sector and 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.

Singapore’s external position is another key credit strength which help defend against risks. The country’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. Consequently, Singapore’s 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 175% of GDP as of Q1 2023. This reflects its high stock of net portfolio assets and foreign reserves.

The Monetary Authority Of Singapore Keeps Policy on Hold as Inflation Eases

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 moderating, standing around the 3-3.4% YoY mark in the June 2023 survey.

Tighter monetary policy in Singapore has been aligned with tighter fiscal policy to counter inflation, but an overly restrictive stance could delay a stronger economic recovery. MAS left the monetary policy stance unchanged in the last meeting in April 2023 to support the economy in an environment of slower global growth and easing inflation. This follows a rapidly tightening monetary policy stance where MAS gradually increased the slope and adjusted upward the midpoint of the S$NEER over five monetary policy moves beginning in October 2021. Inflation in Singapore peaked in September 2022 at 7.5% Y/Y, and has been gradually decelerating since, registering at 4.1% Y/Y in June 2023. Core inflation has also come down from its peak, standing at 3.8% Y/Y in June. MAS expects inflation to average between 4.5-5.5% in 2023 and for MAS’s preferred measure of core inflation, which excludes accommodation and private transport costs, to fall between 2.5-3.5% in 2023.

Risks to Singapore’s financial system are well contained. The banking system has healthy capitalization levels and liquidity buffers, with a diversified funding base. After a long period of strong credit growth, the rapid increase in interest rates have slowed the pace of bank lending. Credit to the non-financial private sector rose from 158% of GDP in 2011 to 207% in 2021, but has since moderated to 180% of GDP in 2022. Asset quality overall remains robust, and non-performing loans have been edging downwards. Corporate sector and mortgage NPLs stood at 2.4% and 0.2% in Q1 2023, respectively. Household balance sheets continue to be strong, backed by high residential property values. However, efforts by the government to cool the private housing market are beginning to take hold. In the second quarter of 2023, home prices experienced the first quarter-over-quarter decline falling 0.2%. Higher mortgage rates, stricter lending standards, and increased taxes on local and foreign investors are starting to cool demand. 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 by strong and credible institutions and a stable political environment. The city-state receives top marks on five of the six Worldwide Governance Indicators, including government effectiveness, political stability, regulatory quality, and control of corruption. Property rights are secure, the crime rate is low, and macroeconomic policymaking is of high quality. Conversely, Singapore is a weak performer on the voice and accountability indicator largely due to the 60-plus years of single party control by the People’s Action Party (PAP), although the 2020 appointment of a Leader of the Opposition could strengthen checks and balances within the political system. In September, an election will be held to fill the office of the President, a ceremonial post that is also in charge of managing and approving the use of reserves. The next general elections are due in 2025.

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 in late 2025, but the direction of policymaking is not expected to change. Singapore’s political stability and strong track record of effective policymaking creates a favorable environment for economic growth and 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 40th place and political speech and expression remains highly regulated. Reporters Without Borders ranked Singapore 129th in the world in the 2023 Press Freedom Index. These considerations have been taken into account in the Political Environment building block.

There were no Environmental or 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 (4 July 2023) https://www.dbrsmorningstar.com/research/416784/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/419921.

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 (29 August 2022) https://www.dbrsmorningstar.com/research/401817/global-methodology-for-rating-sovereign-governments . In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

The rating was not initiated at the request of the rated entity. The rating was initiated at the request of a third party.

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, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 312 696-6293