Moody's: Results of Singapore's Elections Underpin AAA Sovereign Rating

Singapore's People’s Action Party's (PAP) assurance of political and policy continuity underpins the island nation's Aaa sovereign rating and stable outlook, comments Aninda Mitra, Vice President-Senior Analyst, Sovereign Risk Group of Moody's Singapore Pte Ltd.


The ruling PAP won 60% of the popular vote and 82 out of 87 seats during the elections helf on May 7.


"However, the recent election also proved to be the most closely contested in Singapore’s history and marks the PAP’s narrowest margin of victory," says Mitra. "A further rise in popular dissatisfaction with the PAP may eventually alter the economic policy framework if political pressures for increased attention to social welfare demands weaken Singapore’s economic competitiveness."


In its previous sovereign risk assessments, Moody's highlighted the possibility of an unprecedented shift in political power away from a PAP-led administration as a potential source of “political event risk” through which Singapore’s economic policy framework has not been tested.


"The possible materialisation of this political transition risk is now at least five years away. During which time, both, the economic agenda of an increasingly robust political opposition and the response of the ruling party and government to that challenge are new developments that may alter the course of Singapore in the future," says Mitra.


Mitra highlights three key socio-economic trends which are widely perceived to be fueling popular  dissatisfaction with the political status quo.


First, is the rapid increase in home prices which has accompanied Singapore’s sharp economic rebound (+14.5% year-on-year real GDP growth) in 2010 after a shallow recession in 2009 (-1.3%). Alongside macro-prudential measures, such as raising minimum down-payment requirements for second mortgages and higher taxes for short-term sales, rising home prices have squeezed first-time home-purchasers and as well as made government subsidized housing less affordable than in the past.


Second, the dependence on foreign labor has lowered real wages in low value add sectors. Meanwhile, substantial increases in permanent residents in the past decade and the arrival of larger numbers of highly skilled workers have also heightened labor market competition. These have also fueled wage disparities, pressured public services, and fueled questions about the inclusiveness of Singapore’s relatively strong growth fundamentals.


Lastly, a growing maturity of the electorate, fueled by demographic shifts in the voting population and a general desire for greater political voice, appears to have been ably exploited by a better organised opposition.


According to Mitra, the PAP-led government appears to have anticipated many of these issues when it convened the Economic Strategies Committee (ESC) in the wake of the global financial crisis. The ESC’s recommendations focusing on raising medium-term productivity and social inclusiveness include:


1. tax incentives, grants and subsidies to help companies and workers innovate and deepen their skills and expertise;

2. incentives to companies to develop growth capabilities, commercialize their R&D, and expand abroad; and

3. helping lower skilled workers reach their full potential, and benefit from more gainful employment and quality of life.


Mitra notes that Singapore’s dynamism and competitive edge in large part comes from its very strong rule of law, its openness to foreign participation in the economy and increasingly strong technological base. The country is well positioned to take advantage of the shift in global demand towards Asia. "Ongoing tax and regulatory incentives, alongside flexible labor and product markets and amidst an effective policy framework, should also facilitate further specialization and value-added activity, and thereby ensure Singapore’s prosperity," says Mitra.


Mitra adds that Singapore’s competitiveness will also need to be bolstered by a deepening of strategic reforms.





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