Fitch Affirms Singapore at 'AAA'; Outlook Stable

Fitch Ratings has affirmed Singapore's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'AAA' with Stable Outlooks. The debt issue on Singapore's senior unsecured local-currency bonds is also affirmed at 'AAA'. The Outlooks on Singapore's Long-Term IDRs are Stable. The country Ceiling is affirmed at 'AAA' and the Short-Term Foreign-Currency IDR at 'F1+'. 

KEY RATING DRIVERS 

Fitch's affirmation balances Singapore's exceptionally strong external balance sheet, robust fiscal framework, high levels of per capita income, and strong governance indicators against its high vulnerability to external shocks - given that Singapore remains a small, open economy. 

Exceptionally strong current account surpluses have led to a large positive net international investment position, which is equivalent to close to 200% of GDP as of end-2015 as per Fitch estimates. Fitch estimates that the current account surplus would gradually decline over the medium term on lower savings, which is related to an ageing population. Nevertheless, Singapore's current account surplus is far above the 'AAA' median, and Fitch estimates that it would be close to 20% of GDP by end-2015, as against the 'AAA' median's 6.3%.

Fitch has revised downward its growth outlook for Singapore in 2015-2016 to an average of 2.1%, as against our previous forecast of 3.2%. The downward revision is based on a less favourable external environment, accompanied by the ongoing economic transformation of the Singapore economy. Nevertheless, Fitch does not view this growth slowdown as leading to a significantly weakened credit profile. The sovereign's external balance sheet remains strong, while fiscal discipline remains underpinned by a constitutional mandate that requires the government to run a balanced fiscal position, on average, during its term.

Singapore's fiscal position is a credit positive in the sovereign's credit profile. Presidential approval is required to use the country's "past reserves" (fiscal reserves accumulated during the terms of previous governments). The general government fiscal surplus (based on Fitch's broader definition of the general government balance) averaged about 15% of GDP between 2010-2014. Furthermore, Singapore has no fiscal financing needs, and general government debt is issued to develop the local bond market. The sovereign does not issue any foreign-currency debt.

Singapore does not disclose the overall size of its foreign reserves. The size of assets managed by the Monetary Authority of Singapore (MAS) and sovereign wealth fund Temasek are disclosed, but the assets of Government of Singapore Investment Corporation (GIC) are not fully disclosed. GIC mentions that it manages over "USD100bn" of assets, but Fitch believes this number to be significantly higher. The agency bases its credit assessment on publicly disclosed information, and believes that this information is sufficient to support the ratings at 'AAA'. 

Important political issues are rising income inequality, an ageing population, and increasing participation in the labour force by foreigners. The economic transformation programme aims to raise the level of productivity, in order to maintain growth in the face of an ageing population and slower population growth. The Peoples' Action Party (PAP) was re-elected in September 2015 with a strong mandate, which could be positive for continued implementation of policies to address these issues. 
 

RATING SENSITIVITIES

The Stable Outlook reflects Fitch's assessment that downside risks to the 'AAA' rating are not significant. Nonetheless, the following risk factors could result in negative rating action: 

-A severe regional or global economic shock sufficient to force the sovereign to draw down past reserves on a scale that impairs the sovereign's balance-sheet strength. By implication, this would have to be more severe than the global shock of 2008-2009. 

-Sustained rapid credit growth that eventually increases Singaporean private-sector leverage to a level significantly above rated peers and leads to reduced resilience to macroeconomic volatility.

-A severe banking system crisis could have a major spill-over 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

KEY ASSUMPTIONS

- Fitch assumes the continuation of a broadly open global economic environment conducive to cross-border trade and investment activity from which Singapore strongly benefits.

- The global economy performs broadly in line with Fitch's Global Economic Outlook, including a gradual slowdown of growth in China to 6% by 2017 and average Brent oil price assumptions of USD55 per barrel in 2015 and 2016.