Moody's Investors Service says that Singapore's Aaa sovereign rating and stable outlook reflect the country's very high economic, institutional, and government financial strengths, and its low susceptibility to risks from financial, economic, and political events.
However, the challenges facing the authorities include containing consumer price and property inflation over the near term, and fostering a growth model that remains driven by productivity and innovation over the longer term.
Moody's expects Singapore's real GDP growth to recover only slowly, to 3% in 2013 and 3.5% in 2014, from 1.3% in 2012.
Moody's annual report on Singapore says that last year's GDP growth, which was the slowest since the economy contracted by 1% in 2009 during the global financial crisis, was dragged down by weak demand in the European Union, Singapore's largest export destination.
On inflation, the report says that rise in prices in 2013 should moderate slightly and average close to 4% from an average of 4.6% in 2012. Moody's further expects nominal wage increases to outpace inflation in 2013, which should lend support to private consumption.
However, Moody's considers as ambitious the Singapore government's aim to increase labor productivity by 2% to 3% every year until 2020, and 1% to 2% between 2020 and 2030, given the historical productivity growth in other advanced economies, which ranged from -0.4% to 3.2% per year between 2000 and 2010, and because Singapore's overall productivity decreased by 2.6% last year.
In addition, government initiatives to improve productivity through, for instance, tax incentives, grants and subsidies will likely show positive results only in the next two to three years.
Nonetheless, Singapore has demonstrated a very high degree of resilience to global financial shocks, despite the openness of its economy, its dependence on global trade and finance, and its spatial and resource constraints.
As Moody's report points out, Singapore's economic output now exceeds by more than 20% its pre-global financial crisis level. Singapore's gain in output is much higher than for all the other 13 Moody's-rated Aaa sovereigns.
The country also has one of the world's largest net-asset international investment positions, at close to 223% of GDP as of end-2012, and despite a high inward foreign direct investment (liability) position.
Moreover, the government has projected a budget surplus of SGD2.4 billion for this year, which is equivalent to 0.7% of estimated GDP. On average, since 1996, Singapore's fiscal surplus has been about 1% of GDP.
In addition, Singapore's high domestic savings rate of 50% of GDP on average over the past five years is almost double the average of all Moody's-rated Aaa sovereigns.