February 22, 2017 / 6:48 AM / 10 months ago

Fitch: Expansionary Singapore Budget Targets Structural Issues

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, February 22 (Fitch) Singapore's latest budget sticks to the broadly expansionary fiscal stance of the last few years, as the government looks to support the economy amid structural pressures and a difficult external environment. The higher spending and smaller budget surplus planned for the next year do not pose a risk to Singapore's sovereign credit profile, and the government's strong fiscal framework should remain a significant credit strength for the foreseeable future, says Fitch Ratings. The government projects an overall budget surplus of 0.4% of GDP in the fiscal year starting April 2017 (FY17), down from 1.3% in FY16. The projected surplus in part reflects expectations for further substantial returns on government investments - reflected by the net investment returns contribution. Fitch believes the basic budget balance - which excludes these returns, as well as top-ups to endowment and trust funds - gives a better gauge of the fiscal stance. The government expects a basic deficit of 1.9% of GDP, up from 1.4% in FY16. The broadly expansionary stance reflects the headwinds faced by Singapore's economy. Fitch expects GDP growth to remain close to 2% in 2017, which is in line with the government's 1%-3% forecast range. Weak external demand is currently weighing on the economy, while some sectors - particularly the marine and offshore industry - have been hit hard by the fall in commodity prices. Fitch has recently revised its sector outlook for Singapore banks to negative from positive in view of soft economic conditions and asset-quality pressures - stemming mainly from the oil & gas sector. The unemployment rate remains low by global standards, but has edged up from 1.9% in 2015 to 2.1% in 2016. The finance minister also noted rising redundancies and longer job-search periods. The budget included an increase and extension of the corporate tax rebate, as well as measures to help specific industries. Singapore also faces structural challenges over the medium to long term. The recent report by the government's Committee on the Future Economy (CFE) concluded that growth is likely to average 2%-3% per year over the next decade, down from a previous expectation of 3%-5%. The change in part reflects slower expected growth in labour supply - the latest budget retains a focus on reducing dependence on low-cost foreign labour. A slower pace of immigration could add to pressures created by an ageing population, such as rising healthcare costs. Fitch views the government's new labour productivity growth forecast of 1%-2% per year on average over the next decade, as more realistic than its previous 2%-3% expectation. However, average labour productivity growth was just 0.6% per year in 2006-2016, which underlines why the government is encouraging economic restructuring and channelling funds toward supporting innovation, digitalisation, and training. The National Productivity Fund, which supports industry transformation, was topped up by SGD1bn, while SGD2.4bn has been allocated over four years to support the strategies outlined by the CFE. The government's strong finances and robust fiscal framework put it in a strong position to manage the long-term economic challenges. Fiscal discipline is underpinned by a constitutional requirement that the budget is balanced over a government's five-year term, which often means that governments run surpluses early in the term to build a buffer in case deficits need to be incurred later. The government has a history of meeting multi-year fiscal plans, and the authorities are usually conservative in setting their budget targets. Fitch affirmed Singapore at 'AAA' with a Stable Outlook in September 2016. Contact: Sagarika Chandra Associate Director +852 2263 9921 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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