Wednesday, May 11, 2016
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 status as an advanced economy supported by credible macroeconomic management, an exceptionally strong external balance sheet, strong fiscal discipline and a solid institutional framework that outweigh its susceptibility to the volatile external sector and rapidly ageing population.
Singapore’s status as the third wealthiest country in the world with credible macroeconomic management supports the rating. The focus on structural growth factors, progressive economic policies and consistently stable political environment have contributed to the success of its economic story. The economy has grown rapidly since the 1970s, with an average growth of 6% to 7% per annum that contributed significantly to its per capita income. From a low of USD8,845 in 1980, gross domestic product (GDP) per capita in purchasing power parity (PPP) terms surged almost tenfold to USD83,066 in 2014, leading to a rapid improvement in the standard of living. In spite of depressed global commodity prices and weakening global economic momentum, Singapore continued to record a still healthy non-inflationary economic growth of 2.0% year-on-year (y-o-y) in 2015, although moderating from 3.3% in the preceding year. This was commendable given the fact that Singapore’s economy is highly dependent on global trade performance which has weakened significantly since late 2014.
Also supporting the rating is Singapore’s exceptionally strong external balance sheet. Several years of huge current account (CA) surpluses have, to a large extent, contributed to the accumulation of large external assets. Singapore’s CA surplus averaged a whopping 19.7% of GDP in the six-year period post-Global Financial Crisis (GFC), outperforming its advanced countries peers’ of just 0.2% of GDP. Although CA surpluses are expected to moderate over the medium term due to the drawdown of domestic savings to address some structural challenges, they will likely remain exceptionally strong. Singapore’s status as a large net creditor nation has further strengthened its external position. Its net international investment position (IIP) stood at an average of 202.2% of GDP over the last six years, one of the highest in the world, suggesting that Singapore is in a very strong position to guard against exogenous shocks.
The fact that Singapore’s government continued to maintain high fiscal discipline is also a major credit strength. The strong fiscal balance over the years reflects credible fiscal management which contributed to the build-up of large fiscal reserves that the government can utilise during hard times. Its fiscal surpluses averaged at 0.5% of GDP in the six years through fiscal year ended March 2016 (FY2015), a tad lower than the 0.9% of GDP in the pre-GFC period. While the stock of government debt is relatively high (104.7% of GDP), the public sector essentially has zero direct liabilities. The issuance of the debt was intended primarily to provide a risk-free benchmark for its domestic capital market and to supply a guaranteed income stream to its obligatory central pension fund. In fact, proceeds from the issuances of the securities are fully invested, providing an additional income stream for the government which is more than sufficient to cover the debt servicing costs.
Also underpinning the rating is Singapore’s solid institutional framework. The policymaking is effective and highly ranked in most global rankings and indicators. The city-state is well-known for its efficiency and for being largely corruption free, ranking eighth in Transparency International’s 2015 Corruption Perception Index. It ranked exceptionally well in all but one of the sub-indicators of the World Bank’s 2015 Worldwide Governance Indicators, and has consistently ranked second out of 151 countries in the World Economic Forum’s (WEF) Global Competitiveness Index (GCI) in the five years through 2015-2016. Similarly, its top-notch ranking on the World Bank’s Ease of Doing Business index since 2007 confirmed its business-friendly environment.
The rating also takes into consideration Singapore’s susceptibility to the external sector given its status as a small and highly open economy. Among the advanced countries, Singapore’s growth volatility was significantly higher at 4.8% in the six-year period through 2015 (advanced countries: 0.7%). Notwithstanding this, the fact that Singapore continues to demonstrate resilient economic performance in the face of uneven global growth momentum reflects its credit strength. This can be attributed to the significant diversification of its economy as evidenced by the service sector’s share of the economy which has risen steadily to a new high of 67.9% in 2015 (2014: 67.0%). The manufacturing sector’s share, on the other hand, declined to 17.8% (2014: 19.1%).
The prospects of long-term growth, however, will continue to be constrained by the rapidly ageing demographic profile. Singapore’s median age stood at 39.6 years in 2015, up from just 34 years in 2000, while about 50% of total residents are aged 40 years and above. In this regard, MARC views positively the authorities’ persistent efforts to restructure its growth model towards a productivity- and knowledge-based economy which will reduce its reliance on foreign workers. This would set the stage for a more sustainable growth path over the medium to longer term, although economic growth, in general, will remain modest over the transitionary period.
The stable outlook reflects MARC’s expectations that Singapore’s macroeconomic fundamentals will remain intact in the face of volatile external developments, supported by a high degree of policy flexibility and effective macroeconomic policies.
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