Fitch upgrades Singapore's sovereign to 'AAA'
By Fitch Ratings
15 May 2003

Fitch, the international rating agency, today upgraded the Republic of Singapore’s Long-term foreign currency rating from ‘AA+’ to ‘AAA’, citing the authorities’ proven ability to navigate a series of external shocks, while continuing to build on the city state’s superior fiscal and external financial ratios. At the same time the agency affirmed the Short-term foreign currency rating of ‘F1+’ and the Long-term local currency of ‘AAA’.

Fitch says Singapore’s robust public finances, coupled with flexible monetary and exchange rate policies, afford the authorities considerable room for manoeuvre and have served the nation well throughout the Asia crisis of 1997-98 – when the risk of contagion from the surrounding region, notably Indonesia, appeared high – and the more recent global economic downturn. Policymakers customarily focus on a very conservative measure of the fiscal balance that excludes investment income and the surpluses of the Central Provident Fund (CPF). However, Fitch says adjusting for these omissions reveals a long period of unbroken budget surpluses which have generated huge, albeit unquantified, fiscal reserves.

Issues of domestic public debt are dictated solely by the need to absorb the mandatory savings of the CPF and develop the domestic bond market. The agency underlines the fact that consolidating the fiscal accounts reduces public debt as a share of GDP from almost 100% at the central government level to 37% at the general government level, on account of the CPF’s significant holdings of government paper. This level of public indebtedness puts Singapore in the top tier of ‘AAA’ Fitch-rated sovereigns, on a par with the UK and Ireland. Fitch notes that there is no external public debt, while international reserves have continued to climb to USD82 billion, quite apart from undisclosed external public financial assets.

Singapore’s highly open economy leaves it especially vulnerable to external shocks of which SARS (Severe Acute Respiratory Syndrome) is the latest to take hold. The speed with which the city state has confronted and isolated SARS has been impressive. Nonetheless, SARS has hit consumer and business confidence hard, depressing tourism and forestalling continued recovery from the downturn of 2001. In contrast to Hong Kong, Singapore is not shackled by a burgeoning fiscal deficit and SARS is unlikely to
have any material impact on sovereign creditworthiness. Yet the authorities continue to err on the conservative side at a time when the economy is expected to encounter several quarters of weak growth and incipient deflation. Arguably, a more relaxed policy stance would help to support domestic demand, currently facing its third straight year of recession, in the wake of heightened regional and global economic uncertainty. Fitch has cut its 2003 growth forecast from close to 4% to around 2%.

Looking beyond the near term, in addition to the reassuring fiscal and external financial buffers at its disposal, Fitch says Singapore continues to implement a wide range of reforms and economic restructuring is accelerating in the financial, manufacturing and service sectors. However, beyond some token loosening of its control over Government-Linked Corporations, the government retains a pervasive involvement in the economy, while transparency at the macro-economic level still leaves something to be desired. The rating outlook is Stable.