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Fitch affirms Singapore at 'AAA'; outlook stable

[HONG KONG] Fitch Ratings has affirmed Singapore's long-term foreign- and local-currency Issuer default ratings (IDR) at 'AAA' with stable outlook. The debt issue on Singapore's senior unsecured local-currency bonds is also affirmed at 'AAA'.

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 per cent 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 per cent of GDP by end-2015, as against the 'AAA' median's 6.3 per cent.

Fitch has revised downward its growth outlook for Singapore in 2015-2016 to an average of 2.1 per cent, as against our previous forecast of 3.2 per cent. 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 per cent 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.

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.