Fitch affirms Singapore at 'aaa'; outlook stable
Source: FxWire Pro - Ratings / 19 Sep 2017 05:06:59 Eastern Standard Time
Fitch Ratings has affirmed Singapore's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'AAA' with a Stable Outlook.
A full list of rating action is at the end of this commentary.
KEY RATING DRIVERS
Singapore's 'AAA' rating reflects its exceptionally strong external finances, sound fiscal framework and high per capita income levels that mitigate the economy's vulnerability to shocks owing to significant trade dependence and a financial sector that is highly integrated with the rest of the world. Singapore ranks in the 99th percentile of the World Bank's Ease of Doing Business Index, indicating its strong business climate.
Fitch projects GDP growth of 2.4% for 2017, within the government's 2.0%-3.0% target range, and 2.3% for 2018. Growth momentum has strengthened this year on account of a pick-up in external demand and semiconductor exports, with support from government spending. However, the stronger growth momentum has been narrowly based, as private investment and employment remain depressed from the lingering effects of the contraction in the offshore oil and gas services industry. Nevertheless, there are upside risks to our near-term growth projections, with signs that robust external demand may be having positive spill-overs on domestic consumption. Headline inflation turned positive towards the end of 2016 largely reflecting the commodity price recovery. We expect headline inflation of around 0.8% in 2017, compared with -0.5% for 2016.
Over the medium-term, the economy faces challenges from an ageing population and structural shifts in the composition of output and employment towards more highly automated and technology-driven sectors. A February 2017 report by the government's committee on the future economy concluded that growth is likely to average between 2%-3% per year over the next decade, down from the earlier expectation of between 3%-5%, as the economy undergoes these structural shifts. High foreign-worker labour-force participation and concerns about rising income inequality and social needs arising from an ageing population are increasingly important political issues, although we do not see them as a risk to political stability at this stage.
Singapore's external finances continue to benefit from large current-account surpluses, averaging almost 19% of GDP over the previous five years, underpinned by the country's high savings rate. We expect rising exports to help the current-account surplus increase to around 21% of GDP in 2017. Non-oil domestic exports climbed by 8.9% in Singapore dollar terms in 7M17 against a 4.2% contraction during the same period last year. However, we expect Singapore's current-account surplus to decline over the medium term as the economy's high savings rate gradually declines and government spending increases with population ageing.
Singapore's external balance sheet remains exceptionally strong and enjoys a very large net international investment position of over 200% of GDP, reflecting the accumulation of current-account surpluses. Fitch projects the sovereign's net foreign assets at close to 90% of GDP at end-2017, significantly above the 'AAA' median of around 8%. Singapore does not disclose the overall size of its external assets, notably those of GIC Private Limited, a sovereign wealth fund. GIC mentions that it manages over USD100 billion of assets, but Fitch believes the number is much higher. We base our credit assessment on publicly disclosed information, including assets managed by the Monetary Authority of Singapore (MAS) and Temasek Holdings Private Limited.
A robust fiscal framework supports Singapore's strong public finances. Fiscal discipline is underpinned by a constitutional requirement that the budget be balanced over the government's five-year term. The government projects a central government overall budget surplus of 0.4% of GDP for the financial year ending March 2018 (FY17), down from 1.3% in FY16. This partly reflects the government's expectations for further substantial returns on its investments - as reflected by the net investment return contribution.
Fitch believes the basic budget balance - which excludes the investment returns as well as endowment and trust fund top-ups - is a better gauge of underlying fiscal stance. The government expects a basic deficit of 1.9% of GDP, up from a deficit of 1.4% in FY16. The government has a history of meeting multi-year fiscal plans and the authorities are usually conservative in setting their budget targets. The sovereign has no foreign-currency debt and does not issue debt for funding purposes, but rather to develop the local bond market and facilitate investment by the Central Provident Fund as part of the pension system mechanism. Fitch estimates general government debt, excluding debt held by the Central Provident Fund, at around 42% of GDP at end-2017.
Although Fitch assigned a negative outlook to Singapore's banking sector for 2017, reflecting pressures on asset quality associated with the ongoing weakness in the oil and gas sector, the sector has proven more resilient than expected. Capitalisation levels, funding and liquidity of Singapore's three major banks - United Overseas Bank Limited (AA-/Stable), Oversea-Chinese Banking Corp (AA-/Stable) and DBS Group Holdings (AA-/Stable) - remain strong. The banks' combined non-performing loan ratio had stabilised at 1.4% by end-June 2017, while their average return on equity had rebounded to 11.2%, up from 10.4% at end-2016. The banks' fully loaded common equity Tier 1 ratios ranged from 12%-14% at end-June 2017.
Household debt remained elevated at around 75% of GDP at end 2Q17, but in aggregate, household balance sheets are strong, reducing risks to the banking sector from higher debt servicing costs. MAS stress tests suggest that banks can weather a range of shocks, including a tighter liquidity environment. MAS fine-tuned select property-cooling measures in March 2017, but macro-prudential settings remain tight. Singapore's regulators should have room to move against property price falls by reversing macro-prudential tightening, if needed.
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 anticipate developments with a high likelihood of leading to a rating change. However, 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 spill over into the economy because of the banking sector's large size. 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.
The full list of rating action is as follows:
Long-Term Foreign- and Local-Currency IDR affirmed at 'AAA'; Outlook Stable
Short-Term Foreign- and Local-Currency IDR affirmed at 'F1+'
Country Ceiling affirmed at 'AAA'
Long-term and short-term senior unsecured ratings affirmed at 'AAA' and 'F1+'© FxWire Pro 2018. All rights reserved. The FxWire Pro content received through this service is the intellectual property of FxWire Pro or its third party suppliers. Republication or redistribution of content provided by FxWire Pro is expressly prohibited without the prior written consent of FxWire Pro, except for personal and non-commercial use. Neither FxWire Pro nor its third party suppliers shall be liable for any errors, omissions or delays in content, or for any actions taken in reliance thereon.