DBRS Confirms Singapore at AAA, Stable Trend

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

KEY RATING CONSIDERATIONS

The rating confirmation reflects Singapore’s solid economic and institutional fundamentals, its prudent fiscal framework, strong governance indicators, and large public and private net creditor position. As a result of its role as a dynamic trading and financial hub, Singapore has one of the highest living standards in the world, with GDP per capita at $57,734 in 2017. 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.

As a small and open economy, Singapore is exposed to downside risk stemming from global trade and financial flows, possible protectionist trade policies, and rising global interest rates. However, Singapore’s institutional and policy framework is strong and the country safeguards against its exposure to external shocks by maintaining significant fiscal and financial buffers. The Stable trend reflects the view that the challenges Singapore faces are manageable.

RATING DRIVERS

The ratings could come under downward pressure if an external shock were to significantly weaken public sector finances and cause a structural deterioration in economic growth prospects. A substantial weakening of the government’s institutional strength could also put downward pressure on the ratings.

RATING RATIONALE

Conservative Fiscal Framework Puts the Government in a Strong Financial Position

Singapore’s fiscal rules require a balanced budget over each term of the government. The budget balance, based on revenues that the government can spend under the constitution, is budgeted at -0.1% of GDP in 2018. A broader definition of 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. Singapore’s fiscal surpluses have resulted in an accumulation of assets, primarily managed by GIC Private Limited (GIC), Temasek, and Monetary Authority of Singapore (MAS). Though the size of GIC is undisclosed, the Sovereign Wealth Fund Institute ranks GIC as the 13th largest public fund globally with assets of US$390 billion (120% of GDP). As of March 2018, Temasek’s assets stood at S$308 billion (67% of GDP), while MAS’s forex holdings stand at US$289 billion (July 2018).

Singapore does not borrow money to fund government expenditure. Its fiscal rules allow the government to spend only 50% of net realized investment income. However, the government issues debt to develop the domestic debt market and to service the investment needs of the Central Provident Fund (CPF). All proceeds raised from securities issuance flow into the Government Securities Fund (GSF) and are invested over a long-time horizon by GIC. The investment returns exceed debt servicing costs. Moreover, the Protection of Reserves Framework in Singapore’s Constitution prevents spending any proceeds generated through bond issuance. Consequently, the gross debt figure of US$375 billion, or 112% of GDP in 2017, does not reflect the country’s public financial strength.

Singapore’s Open Economy is Wealthy and Highly Productive

Notwithstanding the city-state’s physical limitations, Singapore has a strong track record as a competitive, high-value manufacturing base and a financial and trading center that serves global markets. Real GDP growth averaged 7.1% in the three decades prior to the global financial crisis, but has slowed as a natural consequence of structural and cyclical factors, with growth averaging 3.6% from 2012-2017. Employment remains strong and wage growth of resident workers remains above the average inflation rate. Given Singapore’s demographics and restrictions on foreign workers, the Government’s Committee on the Future Economy has proposed further transforming Singapore into a knowledge-based and labor lean economy. The spread of the digital economy is expected to result in Singapore growing by 2-3%, aligned with the IMF’s 2.75% measure of potential output.

External Shocks a Key Risk, But Singapore’s Large Public and Private Net Creditor Position Provides a Strong Buffer

Reflecting a robust goods balance and high domestic savings, 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. In 2017, the net international investment position was 240% of GDP and the savings rate was 46.5% of GDP. As the population ages, the savings rate is expected to slowly decline. However, with the government continuing to direct more public savings to enhance the social safety net, high savings provides a comfortable buffer against external shocks.

While MAS stress tests suggest risks are well contained, the nature of Singapore’s small and open economy – dependent on the volume of direct and indirect global merchandise trade and cross border financial transactions – exposes it to external shocks. With China being one of Singapore’s largest export markets, uncertainties over the US-China trade war poses downside risks to Singapore’s growth outlook. Moreover, as a financial center, Singapore’s financial system is also exposed to possible spillovers from a regional economic slowdown. Furthermore, rising global interest rates indirectly tighten demand conditions domestically. Historically, a 100 bps increase in U.S. rates is associated with a 40 bps increase in domestic rates on average. However, the country’s extremely high current account surplus and ample external and fiscal buffers help defend against external risks.

Leverage Rises, But Private Sector Balance Sheets and Regulatory/Supervisory Standards are Strong

Low interest rates from global expansionary monetary policy over the last decade have encouraged lending. Over the last decade, as per the BIS data, credit to the non-financial private sector increased from 115% of GDP in 2007 to 177% of GDP in 2017. While household credit increased from 40% of GDP in 2007 to 59% in 2017, non-financial corporate credit rose from 76% of GDP to 118% over the same period. A sharp rise in interest rates could expose vulnerabilities. Nonetheless, private sector balance sheets remain strong. While higher interest rates could challenge over-indebted households and companies, private sector balance sheets remain strong and stress tests indicate private sector debt servicing would be manageable in scenarios of rapidly increasing interest rates. Listed companies maintain high interest coverage ratios and appear able to absorb interest rate shocks. Borrowing from smaller enterprises is highly collateralized, and subject to strict underwriting standards. Furthermore, regulatory and supervisory standards are strong in Singapore, as evident by recent key macro prudential measures that have helped to reverse rising real estate prices.

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. 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. Underlying Singapore’s impressive growth performance are proficient public institutions that score favorably on development indicators. Singapore receives top marks on the World Bank’s Worldwide Governance Indicators, including government effectiveness, political stability, regulatory quality, and control of corruption. Likewise, the city-state is the top-ranking country on the Ease of Doing Business standards.

RATING COMMITTEE SUMMARY

The DBRS Sovereign Scorecard generates a result in the AA (high) to AA (low) range. Additional considerations factoring into the Rating Committee decision include: Singapore’s considerable financial assets, the structure of the economy and its financial buffers. Singapore gets a poor Debt and Liquidity score for carrying general government debt over 100% of GDP. However, Singapore does not engage in sovereign borrowing to finance public spending and holds an unusually large amount of liquid government assets in the broader public sector. The main points discussed during the Rating Committee include Singapore’s political outlook, its economic and fiscal performance, net asset position and financial buffers.

KEY INDICATORS
Fiscal Balance (% GDP): 2.1 (2017); 2.3 (2018F); 1.9 (2019F)
Gross Debt (% GDP): 112.2 (2017); 110.2 (2018F); 108.8 (2019F)
Nominal GDP (USD billions): 324.0 (2017); 349.7 (2018F); 367.8 (2019F)
GDP per Capita (USD): 57,734 (2017); 61,766 (2018F); 64,410 (2019F)
Real GDP growth (%): 3.6 (2017); 2.9 (2018F); 2.7 (2019F)
Consumer Price Inflation (%): 0.6 (2017); 1.8 (2018F); 0.4 (2019F)
Domestic Credit (% GDP): 128.3 (2017) 128.9 (Jun-2018)
Current Account (% GDP): 18.8 (2017); 18.9 (2018F); 18.7 (2019F)
International Investment Position (% GDP): 240.3 (2017)
Gross External Debt (% GDP): 432.2 (2017)
Governance Indicator (percentile rank): 100.0 (2016)
Human Development Index: 0.93 (2015)

Notes:

All figures are in U.S. Dollars otherwise noted. Public finance statistics reported on a general government basis unless specified. Governance indicator represents an average percentile rank (0-100) from Rule of Law, Voice and Accountability and Government Effectiveness indicators (all World Bank). Human Development Index (UNDP) ranges from 0-1, with 1 representing a very high level of human development.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website www.dbrs.com at http://www.dbrs.com/about/methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website at http://www.dbrs.com/ratingPolicies/list/name/rating+scales.
The sources of information used for this rating include Ministry of Finance, Singapore Department of Statistics, Accountant-General's Department, Monetary Authority of Singapore, UNDP, Haver, Bank of International Settlements, International Monetary Fund, and World Economic Outlook. DBRS considers the information available to it for the purposes of providing this rating to be 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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve-month period while reviews are generally resolved within 90 days. DBRS’s trends and ratings are under constant surveillance.

Lead Analyst: Rohini Malkani, Senior Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Co-Head of Global Sovereign Ratings
Initial Rating Date: 29 January 2016
Last Rating Date: 29 September 2017

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.