Singapore: Risk Assessment
Country Risk Rating
Business Climate Rating
- Significant non-price competitiveness
- Development of high added value sectors (new technologies, finance, chemicals, pharmaceuticals)
- Major regional and international trading hub and for the financial sector
- Large FDI inflows thanks to the advantageous tax regime, political stability, and an excellent business climate
- Leading exporter of capital in Asia through the Temasek and Government of Singapore Investment Corporation (GIC) sovereign funds
- Economy dependent on exports
- Shortages of skilled labor
- Aging population
- Vulnerability to slowdown in the Chinese economy
External headwinds lead to a slower but still dynamic growth
The economy will expand less rapidly in 2019, mainly due to external headwinds, with exports (180% of GDP) and domestic demand remaining the main drivers of growth. The slowdown in the Chinese economy will continue to dim exports, as it is Singapore’s main trading partner (around 14% of trade). A pickup in exports to other markets, including South Asian countries (who will benefit from the CPTPP) and the United States, will partly compensate for this decline. The outlook will also continue to be dimmed by the US-China trade war and related uncertainty, as well as the deceleration of global demand growth for electronics (13.5% of exports), which poses an excess output challenge for Singapore due to growing domestic production. These headwinds will notably affect the manufacturing industry (20% of GDP). However, higher oil prices should benefit trade, as Singapore is the world’s third-largest refinery centre.
On the domestic front, the construction sector will continue to underperform, further discouraged by government measures to curb housing price growth. These measures will help to stabilize inflation, which faces pressure from rising oil prices and stronger core inflation. The Monetary Authority of Singapore (MAS) is therefore likely to continue following a tightening policy stance. Demand will continue to boost the services industry – predominantly via finance and insurance but also the retail sector – which will be helped by steady growth in the number of tourists and of disposable income. Moreover, public investments to boost economic diversification, R&D, invest in human capital, and attract FDIs will continue to be favorable to growth and business confidence.
Confirmed Resilience of Financial Situation
The budget balance will remain very sound. Thanks to receipts from sovereign fund investments, the country will continue to record a budget surplus while maintaining expansionary budget policy. In addition, the high level of public debt is more than compensated for by the financial assets held within sovereign funds. Bond issues are not used to finance the public debt; rather they are used to develop a local state bond market and to support the Central Provident Fund, the leading Singaporean pension fund.
The current account balance will likely run a large surplus in 2019. The surplus in the balance of trade will increase, notably as a result of the uplift in energy prices, but will continue to be partly counterbalanced by a deficit in the balance of services and deterioration of the income balances (primary and secondary). Thanks to the city-state’s role as a regional and international trading hub, downwards trends in exports are mirrored by fluctuations in imports.
Although the banking sector is exposed to property market risks, its granting of mortgages has been cautious and remains in line with regulatory requirements: the rapid expansion of credit, combined with high property prices, is not expected to present a risk for 2019. The sector is also exposed to risks associated with the high level – although deemed sustainable – of household indebtedness (above 70%of GDP) and the slowdown in the Chinese economy through trade finance operations. However, the levels of capitalisation and liquidities, the stabilizing of bad debt levels, as well as strong performances in the resistance tests carried out by the Singaporean financial authorities, would indicate that the banking sector will be resilient in 2019.
Durable stability of the political environment
The People’s Action Party (PAP) has been in power since Singapore gained its independence in 1965. Its dominance is expected to last given the tranquil nature of the social milieu and effective proactive economic policies, but also due to the lack of strong opposition figures. The term of office of Prime Minister Lee Hsien Loong ends in 2021. The PAP will elect a succession candidate internally, and if there are internal opposing factions backing different candidates, these conflicts will not be made public. The government agenda will likely stay focused on securing competitiveness to ensure long term growth. An absence of political risk, a strong rule of law, and a liberal economic structure underpin the strength of the business climate, which took second place in the World Bank’s 2019 assessment.