Singapore: Risk Assessment
Country Risk Rating
Business Climate Rating
- High non-price competitiveness
- High value-added industry (new technologies, finance, chemistry, pharmaceuticals)
- Major goods transport and trading hub (air and sea), financial center
- Large FDI inflows thanks to the advantageous tax regime, political stability and excellent business climate
- Asia's leading exporter of capital through sovereign wealth funds
- Dependent on exports and imports (energy and food)
- Skilled labor and housing shortages, aging population
- Limited freedom of speech
- Vulnerable to the structural slowdown of the Chinese economy and U.S.-China geopolitical tensions
Return to growth despite limited international trade
After a year marked by a severe recession amid a global pandemic, the Singaporean economy will return to growth in 2021. Despite a remarkably positive health record - at the end of November 2020, Singapore had the world's lowest ratio of deaths to total population - the country recorded a substantial fall in activity in 2020 linked to the contraction in world trade and the lockdown that went from early April to early June. As the quintessential small open economy, Singapore is highly sensitive to the world economic cycle and international trade developments, with imports and exports representing 150% and 160% of GDP respectively. While the country's health situation was under control at the end of 2020, pointing to a strong rebound in domestic activity, any expansion will be curbed by the deteriorating international economic situation due to the economic repercussions of the ongoing pandemic elsewhere in the world - particularly in North America and Europe for at least the first part of the year - and by uncertainties linked to the U.S.-China trade war. The manufacturing industry, especially machinery and electronics, which account for almost half of all exported goods, will be particularly affected by this environment. Conversely, the financial sector, which is the main source of the services surplus (USD 22 billion in 2019), and the pharmaceutical industry will continue to grow briskly, after acting as a shock absorber in 2020. However, private investment, which plays a particularly large role compared with the situation in other developed countries (23.4% of GDP in 2019), will remain hampered by economic and health uncertainty. Buoyed by a decline in the unemployment rate, which hit a 16-year high of 3.6% in the third quarter of 2020, private consumption, which represents only 34% of GDP, should rebound vigorously, despite consumers being tempted to set aside precautionary savings in the face of the uncertain health situation. In this setting, and in the absence of inflationary pressures, the central bank should maintain an accommodative monetary policy in 2021, after easing policy in March 2020.
Public finances temporarily in deficit to support activity
As announced by Prime Minister Lee Hsien Loong, the economic and health situation will force the government to post a public deficit in 2021, for the second consecutive year, in order to support the economy under a countercyclical approach. However, the deficit will be significantly lower than in 2020, when several successive stimulus plans were announced (direct benefits for households and the self-employed, partial unemployment scheme, aid to companies, moratorium on loan repayments), worth a total USD 70 billion (20% of GDP). Until that point, the only time over the previous three decades when public accounts had been in deficit was during the 2009 financial crisis. The government can therefore easily finance the deficit by drawing on the substantial fiscal reserves accumulated over the period – while the exact amount is secret, they were estimated at 300% of GDP before the pandemic. Although seemingly high, the public debt is actually mainly made up of long-term bonds and securities issued to develop local markets and provide a risk-free savings option for individuals, and of non-marketable bonds issued for the Central Provident Fund (CPF), a system of compulsory contributions to finance social protection. Constitutionally ring-fenced from the financing of government expenditure, the public debt is exclusively denominated in local currency and held by residents. At the same time, the country will continue to post a substantial current account surplus, thanks to a trade surplus exceeding 20% of GDP. Driven over the past two decades by vigorous demand for electronic components and consumer electronics, foreign trade is now facing protectionist headwinds and, more importantly, a maturing technology cycle, over and above the pandemic-related slowdown in world trade. As the country is easily a net recipient of FDI, the income balance is in deficit. Despite these FDI inflows, the financial account reflects significant net capital outflows (about 10% of GDP), mainly due to portfolio investment abroad.
Political stability despite breakthrough results for the opposition
Although it won 83 seats out of 95, the People's Action Party (PAP), which has ruled the country since independence in 1965, emerged relatively weakened from the July 2020 legislative elections, where it won 61% of the vote, down from 70% in 2015. These elections brought breakthrough results for the opposition parties, with the Workers’ Party (WP) winning ten seats, up from six in 2015, and the Progress Singapore Party, created a year earlier, entering parliament with two seats. While he initially promised that he would relinquish power before turning 70 in February 2022, Prime Minister Lee Hsien Loong, son of founding statesman Lee Kwan Yew, ultimately said that he would not step down until the economic and health crisis was fully resolved. The business environment is a global benchmark: political stability, an apparent absence of corruption and a reliable legal framework put the country second in the World Bank's Doing Business ranking.