Singapore - 2014

MARC has assigned a foreign currency sovereign rating of ‘AAA’ with a stable outlook to the Republic of Singapore (Singapore) based on the rating agency’s national rating scale. The government of Singapore (GoS) has no debt rated by MARC; the country ceiling applies to ringgit-denominated issuances by entities domiciled in Singapore to reflect the transfer and convertibility (T&C) risk in ringgit-denominated debt issuances by foreign issuers. The rating is based solely on an analysis of information in the public domain.

The rating reflects Singapore’s economic strength which is characterised by a high-income economy supported by a well-developed financial centre, strong international creditor position and commendable fiscal policies as well as a very high global institutional ranking. The rating also takes into consideration Singapore’s heavy dependency on the external sector, high asset prices post-Global Financial Crisis (GFC) and rapid expansion in offshore borrowing.

Singapore’s rating is supported by its status as one of the wealthiest countries in the world, with per capita gross domestic product (GDP) based on purchasing power parity (PPP) at USD64,584 in 2013, the third-highest in the world and even higher than the United States (US) and Norway. Strong economic performance with high GDP growth over the decades have resulted in the acceleration of per capita income growth which has led to a rapid improvement in the standard of living. Singapore’s position as an important global financial hub has further strengthened the development of its financial industry which in turn supports the overall economy.

On the external front, Singapore has consistently maintained a high current account (CA) surplus. In the past decade, CA surpluses averaged more than 20% of GDP (2013: 18.3%), a reflection of the high savings rate of both the public and private sector. In addition, its strong international creditor position, as evidenced by the net International Investment Position (IIP) which stood at 190.9% of GDP in 2013, is a major plus point for the economy. While Singapore’s external debt has been significantly higher than its regional peers, its substantial foreign reserve stockpile as well as large net foreign asset position provide adequate buffers against its short-term external liabilities. It is also worth noting that three quarters of the external debt is concentrated in the financial sector, befitting its status as the regional financial centre, with no liability for the government which is a rarity for an advanced economy.

Also underpinning the rating is Singapore’s commendable track record of fiscal policy, with only one year of deficit since 2005 at just 0.3% of GDP in 2009. Excluding that minor dip, the government’s overall budget surplus has averaged 1.0% of GDP over the last eight years to 2013. Although Singapore maintains a high level of government debt, we are not overly concerned given its reliance only on domestic sources (the government’s external debt is virtually zero). In addition, this has been supported by ample public sector external assets coupled with consistent fiscal surpluses. MARC opines that the government’s finances will remain in good shape underpinned by strong fundamentals, giving the government a sizeable fiscal space to introduce stimulus packages should the economy weakens considerably.

The rating is also supported by Singapore’s high global ranking in terms of competitiveness and business environment. It has consistently ranked among the top five in Transparency International’s Corruption Perception Index since 2001. Singapore also scored above the 95th percentile in five of six sub-components of the World Bank’s 2013 Worldwide Governance Indicators. It has continued to maintain its traditional good showing in the World Economic Forum’s 2013-2014 Global Competitiveness Index (GCI), ranking second out of 148 nations for a third consecutive year and maintaining its lead among Asian countries. The World Bank has also placed Singapore at the top of its Ease of Doing Business ranking in its annual Doing Business report since 2007.

The rating also takes into account Singapore’s relatively high dependency on global trade which has affected Singapore’s economic growth in recent years. Global economic uncertainty following the GFC in 2008-2009 has increased growth and inflation volatility in Singapore. Rising asset inflation has become a thorny issue as evidenced by rising property prices and cost of living which have led to growing resentment against the ruling party. The Monetary Authority of Singapore’s (MAS) aggressive efforts to cool off asset price inflation have been commendable, although more measures are likely needed to address the issue of high cost of living.

While domestic credit growth through Domestic Banking Units (DBU) has somewhat moderated in recent months, the rapid expansion in cross-border lending by offshore banks as categorised under Asian Currency Units (ACU) poses a significant risk to the banking system if advanced countries begin to normalise their monetary policies earlier than expected. Compounded with the slowing growth of Asia’s economic giants such as China and India, the impact on Singapore’s banking system could be more pronounced given its high degree of interconnectedness. Moderating the risks, however, is the high capitalisation of the banking system with Regulatory Capital to Risk-Weighted Assets ratio (CAR) and Regulatory Tier-1 Capital to Risk-Weighted Assets ratio (Tier-1) at the consolidated level standing at 16.1% and 13.5% respectively in 3Q2013, far exceeding the Basel III capital requirement. The aggregate ratio of non-performing loans (NPL) for local banks also remains low, averaging 1.2% in the three years through 3Q2013.

The stable outlook reflects MARC’s expectations that Singapore will maintain its good showing supported by sound macroeconomic policies and favourable external conditions going forward.

Major Rating Factors

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Challenges