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Moody’s Singapore’s AAA rating: Strong fiscal and debt metrics

In today’s report by Moody’s Investors Service, it was stated that  Singapore’s very strong fiscal and debt metrics, strong growth outlook over the coming five years, and an extraordinarily large net external creditor position, underpin its Aaa long-term issuer ratings.

However, credit challenges exist, in the form of rising social pressures as a result of recent marked increases in living costs and other side effects stemming from the implementation of the government’s economic restructuring program.

In addition, as in other developed and highly rated countries, old-age and healthcare-related costs are on a rising trend. However, Singapore’s fully funded compulsory pension system and the absence of a comprehensive government-funded social welfare system mitigate future liabilities.

Moody’s conclusions were contained in its just-released credit analysis “Singapore”, which looks at the country’s credit profile in terms of Economic Strength [assessed as “Very High (-)”]; Institutional Strength [“Very High (+)”]; Fiscal Strength [“Very High (+)”]; and Susceptibility to Event Risk [“Very Low”].

These represent the four main analytic factors in Moody’s Sovereign Bond Rating Methodology. The analysis constitutes an annual update to investors and is not a rating action. Singapore’s long-term issuer ratings are Aaa with a stable outlook.

While Singapore’s ratings are at the highest level, maintaining a market-friendly and fiscally prudent economic policy approach will be credit positive.

As the International Monetary Fund has noted, the publication of more detailed statistics — such as the government’s external assets as well as consolidated public sector finances — would enhance transparency.

In Moody’s view, the stable rating outlook is unlikely to change over the next 12 to 18 months, given the government’s very strong credit fundamentals.

However, the rating could come under downward pressure should the country or the region slip into political or economic instability.

In such a very remote scenario, fiscal strains may emerge and the ability of the country to function as an international center of finance and commerce could be jeopardized.

The report states that Singapore’s “very high (+)” economic strength assessment is characterized by very high levels of per capita income, a strong — albeit volatile — growth performance, supported by a very high degree of competitiveness and a business-friendly investment environment.

Demographic changes pose challenges for the medium-term growth outlook, and government policies to foster productivity growth and innovation take time to show tangible results.

In terms of institutional strength, Singapore shows very high and stable scores in most of the World Bank’s Worldwide Governance Indicators. Except for “Voice & Accountability”, all scores are in the 90th percentile when compared to Moody’s universe of rated sovereigns, with particular strengths in “Government Effectiveness”, “Regulatory Quality” and “Control of Corruption”.

Moody’s also assesses the fiscal strength of the Singapore government as “very high (+)”, taking into account the country’s very strong fiscal and government debt metrics, which are supported by a prudent fiscal policy framework, the specific nature of the Singapore government securities market, and sizeable government assets.

In Moody’s view, these features will help mitigate the expected medium-term impact from an aging society on both government revenues and expenditures.

In terms of susceptibility to event risk, Moody’s assesses Singapore as “very low”.

Domestic and political event risks are very low in Singapore. The country has shown a high degree of social and political stability since its separation from Malaysia in 1965. However, this has not been tested by electoral change. While domestic politics have become livelier, political stability and social cohesion are not under threat.

While the banking system is facing headwinds from its operational environment, risks from the banking sector to the sovereign are very limited: Singapore banks are among the highest rated globally, with an average baseline credit assessment of aa3.