REPUBLIC OF SINGAPORE - 2018

MARC has affirmed the Republic of Singapore’s (Singapore) foreign currency sovereign rating of AAA with a stable outlook based on MARC’s national rating scale. The AAA rating reflects Singapore’s prudent macroeconomic management, strong fiscal and external positions, as well as credible governance and institutions. Its strengths are, however, moderated by its rapidly ageing population, which could pose challenges for economic growth, productivity and fiscal performance over the medium term. Singapore’s stable outlook is based on expectations of continued pragmatic and effective policy-making by the authorities to counter negative external and domestic developments, as well as to prevent the erosion of its considerable fiscal and external buffers. We are, nevertheless, cautious on the outlook because rising global trade tensions could spin out of control.

Economic growth in Singapore is likely to remain resilient and sustainable on the back of prudent and proactive macroeconomic management. While there have been some growth concerns in the recent past, Singapore’s economic fundamentals remain strong and its economy globally competitive. In 2017, growth momentum picked up, supported by strong manufacturing sector growth against the backdrop of a synchronised global trade recovery. As Singapore is highly reliant on trade, any escalated global trade tensions could have downside risks. Meantime, its gross domestic product (GDP) is expected to expand 2.5%-3.5%, and thus inflation should stay firm.

Singapore has consistently recorded more years of fiscal surpluses than deficits. We expect this to continue over the medium term, though there will be pressure coming from rising spending to address issues related to its rapidly ageing population. Meanwhile, fiscal surpluses have meant that Singapore has not had to borrow for fiscal funding purposes. In fact, its accumulated fiscal surpluses have enabled it to build up an asset position large enough to allow for flexibility when responding to economic shocks. Singapore also has no foreign currency debt, and neither is there government-guaranteed debt.

The city-state continues to churn out current account (CA) surpluses and has built up a substantial net international investment position (NIIP). In 2017, its NIIP stood at a record 240.3% of GDP. Going forward, uncertainties related to trade and geopolitics, as well as an increase in fiscal spending to counteract the demographically induced downward pressure on growth potential could weigh on its CA balance. Nevertheless, its external position will likely remain strong because of significant external buffers. In April 2018, its foreign exchange reserves rose further to USD287.7 billion.

Singapore’s credible governance and institutions, which remain key to its development success, are rating supports. According to the World Bank’s Worldwide Governance Indicators research dataset (2017 update), Singapore scored above the 95th percentile in five of the six aggregate indicators of governance. With its proven track record of policy-making and implementation capacity, as well as proactive embrace of technological change, MARC expects Singapore’s strong governance and institutional framework to continue supporting its overall credit profile.

Over the medium term, the Singapore economy faces challenges from a rapidly ageing population. With the resident old-age support ratio having fallen from 7.7 in 2007 to 5.1 in 2017, there are now fewer working-age adults supporting each resident aged 65 years and above. Going forward, there will be implications for economic growth, productivity and fiscal performance. Fiscal policy, for example, will become even more challenging as allocations for social expenditure rise. This could affect government efforts to transform into a technology-driven and innovation-based economy.

Major Rating Factors

Strengths

• Prudent macroeconomic management;
• Strong fiscal and external positions; and
• Credible governance and institutions.

Challenge/Risk

• Rapidly ageing population.