REPUBLIC OF SINGAPORE - 2019

MARC recommends affirming the Republic of Singapore’s (Singapore) foreign currency sovereign rating of AAA with a stable outlook based on its national rating scale. The AAA rating reflects Singapore’s prudent economic management, robust external position, high fiscal discipline, as well as strong governance and institutions. Its credit strengths are, however, tempered by its susceptibility to external developments, as well as challenges coming from a rapidly ageing population. Singapore’s stable outlook is based on expectations of its continued ability to respond effectively to domestic and external developments without eroding its considerable fiscal and external buffers.

The Singapore economy, resilient and globally competitive, is likely to remain so given its credible and effective policies, as well as stable political environment. In 2017, its gross domestic product (GDP) per capita in purchasing power parity (PPP) terms came in at 94,104.70 international dollars, making it one of the world’s richest nations. Its upbeat growth performance thus far has been supported by the highly diversified nature of its economy. Over the past five years, the resilient services sector contributed on average about two-thirds of total annual output, while manufacturing accounted for about 18%.

Singapore’s persistent current account (CA) surpluses are a strong rating support. In 2018, its CA registered an all-time high surplus balance of SGD86.2 billion (USD63.9 billion), equivalent to 17.7% of GDP. Not surprisingly, its net international investment position (NIIP) stands at a significant 227.5% of GDP. While we foresee CA surpluses easing over the medium term amid increasing spending related to structural reform efforts, Singapore’s external position will likely remain exceptionally robust given its substantial buffers.

The Singapore government operates on a balanced budget over each term of government. As such, it has zero fiscal debt and zero government guarantees. Given prudent fiscal management, the city-state has enjoyed fiscal surpluses in all but five years over the last 20 years. Government spending had averaged 15.3% of GDP while operating revenue averaged 14.7% over that period. As a result, it has built up large fiscal buffers. This was also due in part to the Net Investment Returns Contribution (NIRC) of its sovereign wealth funds.

Singapore’s strong governance and institutions are central to its development success. Over the last decade, the city-state has consistently remained in the top three of the World Economic Forum’s (WEF) Global Competitive Index (GCI). Apart from this, Singapore also ranked well in all the sub-indicators of the World Bank’s Worldwide Governance Indicators, as well as in the World Bank’s Ease of Doing Business report. Given the country’s 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.

As a small and highly open economy, Singapore is susceptible to global headwinds. This is reflected by its high GDP growth volatility. Over the nine-year period through to 2018, it came in at 3.9%, way above the median of 0.8% of its AAA-rated peers. It has not been spared the uncertainties triggered by trade tensions between the US and China. Notwithstanding this, the US-Singapore free trade agreement (FTA) should partially shield it from the spillovers of a global trade war. In any case, MARC believes that Singapore is capable of riding through potential external shocks given its significant fiscal and external buffers.

Over the medium term, the Singapore economy faces issues related to its rapidly ageing population. Its old-age support ratio has fallen to 4.8 in 2018 from 7.6 in 2008. This translates into fewer working age adults supporting each resident aged 65 years and above. As fiscal policy needs to accommodate rising social and security expenditures, there will be implications for fiscal performance. Meanwhile, the rapidly ageing population could potentially slow down Singapore’s march towards an innovation-based economy, thereby affecting productivity and economic growth.

Major Rating Factors

Strengths

• Prudent economic management;
• Robust external position;
• High fiscal discipline; and
• Solid institutional framework.

Challenges/Risks

• Susceptible to external developments; and
• Ageing population.