13 Mar 2012
Fiscal performance is strong, policymaking effective, structural reforms adequate
By MALMINDERJIT SINGH
(SINGAPORE) Singapore's strong fiscal performance, effective policymaking and structural reforms are key to minimising the impactfrom a potential recession.
If the country's sovereign ratings are to remain stable this year, it will need to maintain its sizeable reserves and flexible policy responses; this, even though it is vulnerable to external shocks from a slowing global economy.
In its latest sovereign report book on Asia Pacific economies, credit rating agency Standard & Poor's (S&P) explained that Singapore has a stable outlook owing to these factors and is likely to hold on to its AAA rating that the agency has accorded it.
'The stable outlook reflects our expectation that Singapore will maintain its considerable fiscal and external reserves,' said Tan Kim Eng, Asia-Pacific head of sovereign ratings at S&P. 'The outlook also incorporates our expectation that the government's forward-looking and pragmatic approach to policymaking will prevail in the long term, ensuring that ongoing structural reforms will sustain Singapore's high global competitiveness.'
The report listed robust public finances, a strong net external creditor position and a strong track record of political stability and macroeconomic management as strengths supporting Singapore's macroeconomic stability.
'Strong fiscal performance continues to underpin the sovereign ratings (of Singapore),' said Mr Tan. He added that although the government had estimated a balanced budget for the previous fiscal year from 2011-12, higher corporate income tax collections and larger property stamp duties led to an eventual budget surplus of about $2.3 billion, which amounted to 0.7 per cent of GDP.
Mr Tan expects this strong fiscal performance to continue this fiscal year. 'For the fiscal year ahead, the government projects the overall budget surplus to be $1.3 billion, although we expect the eventual outcome will likely be higher due to the government's prudent and conservative fiscal track record.'
While the flow of people, capital and goods continues to be instrumental in Singapore's economic growth, S&P also lists the country's small and open economy as a weakness as it increases its vulnerability to exogenous shocks. 'Given its high export exposure, the country is vulnerable to external shocks.'
Nevertheless, Singapore's strengths should help it counter this vulnerability, said S&P. 'The sizeable reserves and the flexible policy responses of the sovereign would meet the potential challenges associated with such shocks. Hence, the likelihood of the sovereign ratings coming under pressure in the near to medium term is remote,' explained Mr Tan.
There is also cause for optimism for the rest of the region. The report said continued, albeit slower, economic growth in most of the region means that there will be no trend of downgrades within Asia Pacific economies, though it acknowledged that such a pattern may also be true for any upgrades.
The main expected threat to Asia Pacific sovereign creditworthiness this year comes from the risk of a sharper-than-expected worsening of European economic performance and its impact on the European banking sector, S&P said in the report.
Drawing from the experience of the 2008-09 crisis, the report added that deepening intra-regional trade is still insufficient in shielding Asia Pacific from a steep decline in the developed economies and that there will be less assistance from any Chinese stimulus this time as there was in the previous crisis.
In the event of a global recession, Japan and Vietnam would have the hardest impact on their sovereign credit.
'For Japan, a new economic slowdown would accelerate the increase in debt beyond the already significant expansion that we project in the next three years. It would also make an increase in the consumption tax rate more unlikely,' said Mr Tan.
'Although Vietnam's government measures implemented since 2011 have helped to stabilise the economy over the past year, confidence remains weak. Another economic slowdown or a significant easing of macroeconomic policy could trigger a new wave of resident capital outflows and higher inflation.'
Source: Straits Times