MARC has affirmed the Republic of Singapore’s foreign currency sovereign rating of AAA with a stable outlook based on its national rating scale. The rating reflects MARC’s opinion of the sovereign’s ability to meet its foreign currency obligations in full and on time. The government of Singapore has no debt rated by MARC. The rating also serves as a country ceiling for ringgit-denominated debt issued locally by issuers domiciled in Singapore. Transfer and convertibility (T&C) risks are reflected in the country ceiling. The analysis is based solely on information available in the public domain.
The rating reflects Singapore’s position as an advanced economy, underpinned by credible and proactive macroeconomic policies. With limited natural resources, continuous and successful economic reforms have shaped the economy to become an important global trade and financial hub, contributing to a rapid improvement in the standard of living. Its gross domestic product (GDP) per capita in purchasing power parity (PPP) terms which stood at USD85,382 in 2015 is almost ten times larger than it was in the early 1980s and ranks fourth globally. While overall economic growth has eased in recent years due to cyclical and structural factors, it also reflects an economy that is maturing, as commonly experienced by other advanced economies. In fact, its performance fared sharply better than other similar advanced economies, expanding at an average 3.3% pace in the five years through to 2016, twice as fast as its advanced economies peers of 1.5%.
Also supporting the rating is Singapore’s remarkably robust external position as evidenced by sustained current account (CA) surpluses for nearly three decades. It averaged at nearly 20% of GDP in 2010-2016, outperforming its advanced nation peers by a whopping 16.0% of GDP. While we foresee CA surpluses moderating over the medium term amid rising age-related spending and the drive to restructure its economy, it will remain exceptionally strong. Adding to this is the city-state’s strong net external creditor position, as demonstrated by its huge positive net international investment position (IIP). As of 2016, Singapore’s net IIP stood at 224.0% of GDP and averaged at 204% of GDP over the past decade, substantially stronger than any other country in the world. Based on these favourable statistics, MARC is of the view that Singapore is indeed in a very strong position to weather exogenous shocks.
The rating is also anchored by Singapore’s high degree of fiscal discipline. Thanks to its conservative fiscal rules, the fiscal balance remained in the black in all but two of the last ten years. While the government has maintained its expansionary fiscal stance since FY2015, the overall government balance sheet remained remarkably strong. Its history of fiscal surpluses has contributed to the build-up of its large fiscal reserves, enabling the government to act pre-emptively amid a challenging economic environment. In fact, its fiscal balance averaged at 0.7% of GDP in the five years through fiscal year ended March 2017 (FY2016), a shade lower than the 0.8% of GDP registered prior to FY2012. Singapore’s relatively high government debt (112.9% of GDP) is not a concern, in our view. This is premised on its role of providing a benchmark for its capital market as well as its sole reliance on domestic sources. Most importantly, the proceeds raised are fully invested and are long term in nature, providing an additional income stream for the government. In addition, the amount of proceeds are more than adequate to cover the debt servicing costs.
Singapore’s solid institutional framework supports its overall credit profile. The policymaking is effective and highly recognised in most global rankings and indicators. Despite being in power since independence, the government is well-known for its efficiency and for being largely corruption-free, ranking seventh in Transparency International’s 2016 Corruption Perception Index. Similarly, its exceptionally high ranking in all but one of the sub-indicators of the World Bank’s Worldwide Governance Indicators affirms its solid institutional setting. As a global financial and trade hub, Singapore’s competitive advantage continues to be assured, maintaining second position out of 152 countries in the World Economic Forum’s (WEF) Global Competitiveness Index (GCI) for a sixth year running through 2016-2017.
The rating also takes into consideration Singapore’s vulnerability to external developments given its small and highly open economy. Singapore’s growth volatility of 4.6% in the seven-year period through to 2016 was broadly higher than its advanced economies peers’ 0.8% rate. Nevertheless, it is important to note that Singapore’s resilience to the uneven external environment reflects its main credit strength. In fact, the economy still grew at a respectable pace of 2.0% in 2016 (2015: 1.9%), despite tepid global growth momentum and heightened financial volatility. In addition, the economy is well-diversified, with two-thirds of its total output contributed by the services sector while the manufacturing sector accounted for an average 19.0% of GDP over the past decade.
The prospects over the long term, however, will be challenged by its structural issues, arising from a rapidly ageing population and tepid productivity growth. Singapore’s median age stood at 40 years in 2016 (2000: 34 years), while its total fertility rate of 1.2 births per woman was the world’s lowest, on par with South Korea. Meanwhile, its productivity growth of 0.9% per annum since 2012 was much lower than the average 3.7% pace registered in the pre-Global Financial Crisis (GFC) period. These, along with tight control on low-skill foreign workers, will further constrain labour supply growth and could have an impact on domestic demand over the medium to longer term. In this regard, MARC views positively the government’s persistent efforts to restructure its growth model towards a productivity and knowledge-based economy. While economic growth is expected to remain modest over the transitionary period, this would translate into a more sustainable growth path over the medium to longer term.
The stable outlook represents MARC’s expectations that Singapore’s macroeconomic fundamentals will remain intact, supported by improving global growth prospects and ample policy space as well as credible macroeconomic policies to respond to rising geopolitical and protectionism risks.
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May 9, 2017