Fitch Affirms Singapore at 'AAA'; Outlook Stable
KEY RATING DRIVERS
The ratings reflect Singapore's high per capita income levels, strong governance indicators, exceptionally strong external balance sheet and robust fiscal framework, which are balanced against its high degree of vulnerability to shocks because of the economy's significant trade dependence and a financial sector that is highly integrated with the rest of the world.
Fitch has revised down its growth forecast for Singapore for 2016 to 1.8% from its earlier forecast of 2.1% and expects growth to only recover gradually to 2% by 2018. Nevertheless, real GDP growth over the five years ending 2016 is projected to average 3.1% as against the 'AAA' median of 2%. The downward revision is primarily on account of weaker external demand, accompanied by the ongoing adjustment of the economy under the government's economic transformation programme.
Fiscal finances are a credit strength. The authorities are targeting a budget surplus of 0.8% of GDP for 2016 against a deficit of 1.2% for 2015. While government spending is expected to increase in 2016, this will be more than offset by a higher contribution from investment income. Fiscal discipline remains underpinned by a constitutional mandate that requires the government to run a balanced fiscal position, on average, during its term. Gross general government debt (excluding debt held by the state pension fund) was estimated by Fitch to be 42.2% of GDP at end-2015.Debt is not for fiscal funding purposes but to develop the local bond market. The sovereign has no foreign-currency debt.
Singapore's external balance sheet remains exceptionally strong. Sovereign net foreign assets are forecast at just below 90% of GDP at end-2016, far above the 'AAA' median of 6.4%. Singapore does not disclose the overall size of its external assets, notably those of GIC Private Limited (GIC), a sovereign wealth fund. GIC mentions that it manages "over USD100bn" of assets, but Fitch believes the number to be significantly higher. Fitch bases its credit assessment on publicly disclosed information (including the assets managed by the Monetary Authority of Singapore (MAS) and Temasek) and believes that this information is sufficient to support the rating of 'AAA'.
Large current-account surpluses, which averaged about 18% of GDP over 2012-2016, support Singapore's external finances. Fitch projects a current-account surplus of around 19% of GDP in 2016, far higher than the 'AAA' median of 6.2% of GDP. Over the medium term, Fitch expects Singapore's current-account surplus to decline, due to lower savings related to an ageing population.
Implementation of the government's economic transformation programme, which aims to reduce dependence on low-cost imported labour and raise productivity, continues. Fitch believes that this is an ambitious programme and that the transition would be challenging. An ageing population, participation in the labour force by foreigners and increasing income inequality remain important political issues, although currently we do not see these as posing a risk to political stability.
High per capita income and a favourable investment climate, which is stronger than that of many 'AAA' rated peers, continue to support the rating. Singapore is at the top of the World Bank's Ease of Doing Business Index.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Singapore a score equivalent to a rating of 'AA+' on the Long-Term Foreign-Currency IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign-Currency IDR by applying its QO, relative to rated peers, as follows:
- External Finances: +1 notch to reflect Singapore's very strong net external creditor position.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a Long-Term Foreign-Currency IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could, individually or collectively, result in a downgrade include:
-A severe regional or global economic shock on a scale that would significantly impair the sovereign's balance sheet. By implication, this would have to be more severe than the global shock of 2008-2009.
-A severe banking system crisis could have a major spillover into the economy because of the large size of the banking sector. By implication, this would have to be more severe than the global shock of 2008-2009
- The global economy performs broadly in line with Fitch's Global Economic Outlook