Morningstar DBRS Confirms Republic of Singapore at AAA, Stable Trend

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

KEY CREDIT RATING CONSIDERATIONS
The confirmation of the Stable trend reflects Morningstar DBRS' view that Singapore's credit fundamentals remain solid and will allow the country to withstand shocks. Singapore's small and open economy is experiencing a broad-based rebound after the brief slowdown experienced in the first half of 2023. A cyclical recovery in the tech sector coupled with a modest rebound in the advanced economies have aided Singapore's growth. The economy is expected to close the negative output gap this year and expand by 2-3% in 2024 according to government forecasts. Inflation is also gradually coming down due to lower import prices and effective fiscal and monetary policy. The Monetary Authority of Singapore left tighter monetary policy in place since October 2022, which has worked in conjunction with neutral fiscal policy to slow the pace of inflation. The government's release of the Forward Singapore report indicates a fiscal policy with greater focus on shoring up the social safety net and enhances existing support for young families, the elderly, and displaced workers. Budget 2024, the first `installment' of the program, will result in a modest surplus of 0.1% in the overall fiscal position. The IMF expects medium-term growth to be broadly in line with Singapore's potential of 2.5% in 2026 onwards, although the outlook could worsen if geopolitical tensions and trade disputes escalate.

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 fiscal 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 Singapore's small and open economy, its vulnerability to external shocks stemming from global trade and financial flows, and its exposure to potential changes in global taxation.

CREDIT 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) the government's institutional strengths deteriorate significantly.

CREDIT RATING RATIONALE
Singapore's Credit Ratings Are Underpinned by Prudent Fiscal Policy And Substantial Government Assets

Singapore's fiscal stance is returning to neutral with Budget 2024 after a slightly expansionary fiscal result in FY2023. The government's overall fiscal position is shrinking from a modest 0.5% in FY 2023 to a surplus of just 0.1% in FY 2024. Similar to prior years' budgets, Budget 2024 includes additional targeted support for households, workforce development, and elder care initiatives in the form of tax credits and cash transfers. This additional spending corresponds to the government's new objective to shore up social support programs (Forward Singapore). The government also plans to align Singapore's corporate tax rate to Pillar 2 of the OECD's global minimum tax and introduce a domestic top-up tax to be implemented on large multinational corporations by January 2025. These additional revenues will likely be offset by tax deductions and credits, having a net neutral impact to the fiscal accounts.

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 800 billion (155% 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 289 billion (57% of GDP as of March 2024). The sovereign wealth funds are both a current source of income (supplementing the annual budget) and a source of resilience (buffering shocks during downturns).

Singapore's high gross government debt figures understate its creditworthiness. Singapore's headline gross debt currently stands at USD 885 billion (174.3% of GDP) in Q1 2024. 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 pandemic-related spending between FY20 and FY22, the government drew down its reserves for the second time in its history. Since 2021, Singapore has issued SINGA bonds to fund infrastructure-related spending. A subset of the SINGA bonds are green bonds, which also serve to deepen the green bond market and provide a point of reference for the private sector. Total SINGA related debt stands at 1.6% of GDP and interest costs amount to 0.1% of GDP. Due to these several factors, the gross debt figure does not reflect the country's public financial strength. This accounts for our six category adjustment in the Debt and Liquidity building block assessment.

Singapore's Economy is Rebounding On The Back of The Tech Sector And A Strong Labor Market

Singapore's economic prospects are improving as the external environment recovers. Singapore ended 2023 expanding by 1.1% year-over-year due to weak demand in the manufacturing and trade-related sectors and a slower-than-expected recovery in China. Growth gathered pace in the first half of 2024 due to the cyclical recovery in the global tech sector and Singapore's deep integration within global value chains, particularly in the semiconductor industry. Stronger performance in professional services also aided growth. On the expenditure side, private consumption continues to support the economy, bolstered by higher real wages. The labor market has eased from the record tightness seen in 2021/2022, but measures such as the unemployment rate and the job vacancies to unemployed ratio indicate a still-tight labor market by historical standards (at 2.0 and 1.56 in Q1-2024, respectively). The government forecasts growth at 2-3% for 2024, although the outlook faces several risks in terms of escalating protectionist trade policies and rising geopolitical tensions.

Singapore's credit ratings are underpinned by its wealthy and highly productive economy, with per capita GDP at USD 84.7 thousand. 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 challenges such as aging, climate change, and deglobalization. The strength and resilience of Singapore's economy accounts for a one category uplift in the Economic Structure and Performance building block assessment.

Singapore's external position benefits from consistent current account surpluses and a substantial net asset position. The country's location where major shipping lanes converge, competitive port fees, and its advanced technology and automation sectors 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 168% of GDP as of Q1 2024. This reflects its high stock of net portfolio assets and foreign reserves as a result of a mandatory pension program and consistent budget surpluses.

Inflation Is Slowing Gradually Amid Tight Monetary Policy, Financial Risks Are Manageable

The Monetary Authority of Singapore (MAS) has mitigated the pace of inflation by maintaining a tight policy stance. 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. Authorities have kept the slope and the midpoint unchanged since October 2022 after a series of increases to the slope and upward adjustments to the midpoint of the policy band starting in October 2021. As a result, inflation in Singapore continues to moderate from the peaks seen in September 2022, with headline inflation slowing to 2.4% in June 2024. Food, energy, and housing prices have eased, while services inflation has begun to moderate. MAS expects headline inflation to average between 2.0-3.0% in 2024 and for MAS's preferred measure of core inflation, which excludes accommodation and private transport costs, to fall between 2.5-3.5% in 2024. Underlying inflationary pressures are even lower after accounting for the one-off effect of the increase to the goods and services tax (GST). One-year-ahead inflation expectations stand at 2.1% and 2.0% for headline and core inflation respectively, near MAS's implicit target for price stability. Holding tighter monetary policy for longer may nonetheless dampen near-term growth.

Risks to Singapore's financial system are well contained. The banking system has healthy capitalization levels and liquidity buffers, with a diversified funding base. Credit to corporates and households have rebounded from 2022 levels, but credit growth remains muted in the high interest rate environment. Banks' overall asset quality remain robust and non-performing loans are low at 1.7% of total loans in Q1-2024. MAS stress tests and supervisory reviews indicate that under stress scenarios, Singapore's banking and insurance sectors would still have capital adequacy ratios above minimum regulatory requirements and sufficient liquidity buffers to meet cash outflows. Household balance sheets continue to be strong, backed by high residential property values. Household debt at 53.3% of GDP is significantly lower than pre-pandemic levels. Efforts by the government to cool the private housing market are beginning to take hold, with the pace of price growth slowing gradually. Furthermore, the average loan-to-to value ratio as of Q1 2024 is low at 42.4% and provides a buffer to lenders in the case of a downturn in the housing market.

While MAS has various macroprudential measures available, Singapore's monetary policy lever relies on the exchange rate, rather than interest rate, which in our view could constrain the ability to respond to shocks. High domestic interest rates, which are determined by global rates, may affect weaker corporates and households, especially new homeowners with large mortgages. As an international financial center, Singapore's financial system can be subject to volatility in cross-border financial flows. These factors account for the two-category adjustment in the Monetary Policy and Financial Stability building block.

Singapore's AAA Credit 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 May 2024, Prime Minister Lee Hsien Loong stepped down from office and was replaced by then-Finance Minister Lawrence Wong. The transition from PM Lee to PM Wong marks only the second time in the country's history that someone outside the Lee family has held the post. Prime Minister Wong is expected to continue the macroeconomic policy direction which began under PM Lee. Under the Forward Singapore initiative, the PAP government aims to strengthen the social compact by making education policy more inclusive, improving workplace flexibility, supporting child and elder care, and funding climate change adaptation. The next general elections are due by November 2025 although the PAP are likely to retain a majority in parliament. Singapore's political stability and strong track record of effective policymaking creates a favorable environment for economic growth and accounts for the adjustment in the `Political Environment' building block.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Governance (G) Factors

The following Governance factor(s) had a relevant effect on the credit analysis: Institutional Strength, Governance and Transparency. Singapore ranks low in the World Bank's Worldwide Governance Indicators for voice and accountability at 44th percentile and political speech and expression remains highly regulated. Reporters Without Borders ranked Singapore 126th in the world in the 2024 Press Freedom Index. These considerations have been taken into account in the Political Environment building block.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings (13 August 2024) https://dbrs.morningstar.com/research/437781.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments: https://dbrs.morningstar.com/research/438249.

Notes:
All figures are in U.S. dollars 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 (15 July 2024) https://dbrs.morningstar.com/research/436000. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to ESG Factors in Credit Ratings https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors (13 August 2024).

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

The primary sources of information used for these credit ratings 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. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit 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 credit rating process for this credit rating action.

Morningstar DBRS 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 credit rating action.

This is a solicited credit rating.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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