DBRS Confirms the Republic of Singapore at AAA, Stable

DBRS Inc. (DBRS) 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 and Stable trend 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 $64,580 in 2018. 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. In addition, its current account surplus, which has averaged nearly 20% of GDP over the last fifteen years, reflects a robust goods balance and high domestic savings.

In DBRS’s assessment, Singapore’s strong credit fundamentals are underpinned by its strong fiscal and external positions and strong institutions. As a small and open economy, Singapore is exposed to downside risk stemming from global trade and financial flows and protectionist trade policies. For instance, lower global growth, sluggish demand for electronics and U.S.-China tariff uncertainty resulted in Q2 GDP growth slowing to 0.1%. 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.

RATING DRIVERS

DBRS considers the likelihood of downward pressure on Singapore ratings to be low. Nonetheless 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

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

Singapore’s ratings benefit from its prudent fiscal management and its strong balance sheet. Its 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 three years of a fiscal surplus, the government is expected to run a small deficit in 2019 due to a modest increase in developmental expenditure. 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 6th largest public fund globally with assets of US$440 billion (120% of GDP). As of March 2019, Temasek’s assets stood at US$231 billion (64% of GDP), while MAS’s forex holdings stand at US$272 billion (August 2019).

In most countries, the main purpose of government borrowing is to finance a budget deficit. Singapore does not borrow money to fund government expenditure. 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. 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. 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$401 billion, or 111.3% of GDP in 2018, does not reflect the country’s public financial strength.

Singapore’s last few budgets have been expansionary, providing both near-term cyclical support as well as contributing to the long-term restructuring of the economy. With its population slowly aging, the government has targeted healthcare, education, public transportation, and domestic security as the principal areas for increased spending. The government has been balancing the increase in spending by (1) higher taxes, including stamp duties and (2) by financing the additional spending with a larger share of the government’s investment income. Authorities are cognizant of aging-related expenditure pressures with the 2019 Budget proposing a 2% hike in the GST rates during 2021-2025.

Singapore is a Wealthy, Productive and Continuously Transforming Economy

Singapore’s open economy is wealthy and highly productive, with output per capita at $64,580 in 2018. 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. But, as a small and open economy, Singapore is exposed to downside risk stemming from global trade and financial flows and protectionist trade policies. For instance, lower global growth, sluggish demand for electronics and U.S.-China tariff uncertainty resulted in Q2 GDP growth slowing to 0.1% from 1.1% in Q1 with the manufacturing sector contracting -3.1%. This resulted in H1 2019 growth slowing to 0.6% as compared to 4.4% in H1 2018. The Ministry of Trade and Industry (MTI) indicated that the sharp decline was primarily due to the slowdown in the electronics and precision engineering sectors, which reflects the electronics downcycle and slower global growth. Given the deepening downturn in the global electronics cycle, rising global uncertainties including the escalation of tariffs, slower Chinese demand, the trade dispute between Japan and South Korea and geopolitical tensions, the MTI has downgraded Singapore’s growth forecast for 2019 to “0.0 to 1.0%” from “1.5 to 2.5%”. However, 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. This is reflected in intangible assets (intellectual property products, research and development, and software and databases) becoming an important source of growth. The spread of the digital economy is expected to result in Singapore growing by 2-3%, aligned with the IMF’s 2.5%-3% measure of potential output.

Singapore’s Large Public and Private Net Creditor Position Provides a Strong Buffer to External Risks

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 2018, the net international investment position was 226% of GDP and the savings rate was 44.5% 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.

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. Moreover, with China being one of Singapore’s largest export markets, uncertainties over the U.S.-China trade war poses downside risks to Singapore’s growth outlook. In addition, as a financial center, Singapore’s financial system is also exposed to possible spillovers from a regional economic slowdown. However, the country’s extremely high current account surplus and ample external and fiscal buffers help defend against external risks.

Prudent Monetary Policy and Strong Private Sector Balance Sheets Bode Well for Financial Stability

Given that Singapore is a small and open economy that imports most consumer goods, monetary policy has been centered on managing the nominal effective exchange rate (S$NEER) as a means to achieving price stability. MAS operates its policy in a ‘basket-band-crawl’ framework, where the nominal trade-weighted exchange rate fluctuates within an undisclosed and periodically adjusted policy band. It adjusts the pace of appreciation or depreciation of the Singaporean dollar by changing the slope, width, and center of the band. Given the deterioration in the external environment and the weak GDP data, MAS is expected to remove most of 2018’s monetary policy tightening in its October policy by removing the appreciation bias in its FX policy by reducing the slope of the S$NEER trading band currently at 1%.

Singapore’s banking system remains resilient despite increased uncertainty. 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 171% of GDP in 2018. While household credit increased from 40% of GDP in 2007 to 54.7% in 2018, non-financial corporate credit rose from 76% of GDP to 116% over the same period. Loan growth was healthy over the past year, while the overall NPL ratio stabilizing at 1.8% (2Q 2019). Furthermore, regulatory and supervisory standards are strong in Singapore, as evident by prudential measures such as the raising of the Additional Buyer’s Stamp Duty and tightening of LTV limits on residential property mortgages that have moderated the pace of price increases and transaction activity. MAS assessment is that domestic credit growth remains in line with economic conditions and consequently maintaining its Countercyclical Capital Buffer (CCyB) at 0%.

In addition, private sector balance sheets remain strong. On an aggregate basis, Singapore’s household balance sheets remain healthy, with net wealth at four times GDP. Moreover, liquid assets such as cash and deposits exceed total household liabilities, providing households with strong financial buffers. Although trade tensions have had a relatively limited impact on Singapore thus far, the negative spillovers could weigh on future corporate profitability through lower earnings. However, listed companies appear able to absorb interest rate shocks with borrowing from smaller enterprises being highly collateralized, and subject to strict underwriting standards.

The latest available MAS stress tests assumes a protracted global downturn, amid heightened trade tensions, an intensification of China’s debt overhang troubles and a disorderly Brexit which results in the rest of Asia slipping into recession and a fall in asset prices. In a scenario where Singapore experiences a recession with unemployment rising sharply and property prices falling by around 50%, MAS stress tests indicate that Singapore’s banking and insurance sectors will likely remain resilient with their Capital Adequacy Ratio’s above Basel regulatory requirements and banks having sufficient liquidity buffers to meet cash outflows.

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, with the party re-elected into its 14th consecutive term in 2015. The next general election would have to take place before 11 September 2020. 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. 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 standards. Singapore also receives top marks on the World Bank’s Worldwide Governance Indicators, including government effectiveness, political stability, regulatory quality, and control of corruption. Conversely, largely due the single party control, Singapore is a weak performer on the voice and accountability indicator. Freedom House labels the country as only ‘partly free’ and the press as ‘not free.’

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): 0.4 (2018); 4.2 (2019E); 3.1 (2020F)
Gross Debt (% GDP): 111.3 (2018); 109.4 (2019E); 111.2 (2020F)
Nominal GDP (USD billions): 364.1 (2018); 372.8 (2019E); 391.9 (2020F)
GDP per Capita (USD): 64,580 (2018); 65,624 (2019E); 68,486 (2020F)
Real GDP Growth (%): 3.1 (2018); 0.0-1.0* (2019E);
Consumer Price Inflation (%): 045 (2018); 1.4 (2019E); 1.4 (2020F)
Private Sector Domestic Credit (% GDP): 121.9 (2018) 123.9 (Jun-2019)
Current Account (% GDP): 17.9 (2018); 17.6 (2019E); 17.1 (2020F)
International Investment Position (% GDP): 225.6 (2018); 235.7 (Mar-2019)
Gross External Debt (% GDP): 416.5 (2018); 413.4 (Mar-2019)
Governance Indicator (percentile rank): 79.3 (2017)
Human Development Index: 0.93 (2017)

Notes:
All figures are in US dollars (USD) unless otherwise noted. Public finance statistics reported on a general government basis unless specified. Fiscal balance (IMF), Gross debt (IMF), Nominal GDP (DoS/IMF), GDP per Capita (DoS/IMF), Real GDP Growth (DoS/MTI), Inflation (IMF), Domestic Credit (DoS/MAS), Current Account (DoS/IMF), International Investment Position (DoS), Gross External Debt (DoS). *The Ministry of Trade and Industry (MTI) publishes a range for the GDP forecast. 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 primary sources of information used for this rating include 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, and Haver Analytics. DBRS 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 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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