OREANDA-NEWS. Increased expenditures in Singapore's latest budget are in line with long-term government plans to raise investment and boost social spending, and should not pose a risk to the country's sovereign credit profile, says Fitch Ratings. Singapore continues to face a challenging macroeconomic outlook in 2016 as external factors weigh on growth. But the country's robust fiscal framework should remain a substantial credit strength for the foreseeable future, while a strong external balance sheet should continue to bolster the credit profile.

The budget is projected to move into a surplus of 0.8% in the fiscal year starting 1 April 2016 (FY16) from a 1.2% deficit in FY15, despite strong spending growth. Singapore's constitutional requirement on a government to run at least a balanced budget over its five-year term often means governments run surpluses early in the term to build a buffer in case deficits need to be incurred later. However, the move into surplus in FY16 mainly reflects a cut in special government transfers to endowment and trust funds and to the inclusion of revenue from state holding company Temasek in investment returns. The primary deficit before these items is expected to widen modestly to 1.2% of GDP from 1.1% in FY15. Fitch believes this gives a better gauge of the fiscal stance.

Singapore is facing long-term economic challenges from an aging population, social pressures from perceived widening income inequality and a need to bolster productivity to enhance long-term growth. The FY16 budget - released on 24 March - marks a continuation of the expansionary fiscal policy in the previous budget intended to address these challenges. Overall, total fiscal expenditure as a share in GDP is likely to rise to 17.9% in FY16 from 17% a year earlier, and operational expenditures are planned to increase by 11.7%, mainly owing to rises in social spending on healthcare, education and housing.

Innovation and infrastructure investments were the other key plank of the increased budget. Transport spending will remain high relative to recent history and elements of the multi-billion dollar Industry Transformation Package, such as the National Research Fund, will receive large capital infusions to support innovation.

Fitch believes that Singapore's disciplined fiscal framework and healthy finances, relative to peers, are not at risk from rising expenditures. The authorities have been proactive in increasing revenues to ensure that fiscal targets are met over the medium term. Notably, Singapore outperformed its FY15 fiscal deficit target and the country has a history of meeting multi-year fiscal plans.

Operating revenues will also benefit from the removal of a one-off personal income tax rebate that was included in the FY15 budget and an increase in contributions from statutory boards - autonomous entities that perform public functions under legal mandates.

Fitch affirmed Singapore's 'AAA/Stable' rating in December, highlighting public and external finances as key ratings strengths. Economic growth for 2016 was revised down to 2.1% at the time and this is in line with the government's 1%-3% forecast as outlined in the FY16 budget. The key risk for Singapore remains a major regional or global external shock as a result of the country's high export dependence and historically higher GDP volatility relative to the 'AAA' category median. Singapore's out-sized financial sector and its international linkages also make it more susceptible to global financial developments.