Sovereign risk is influenced by the financial health of a nation, encompassing its liabilities and assets.
In the world of global finance, Singapore stands out as a shining example of sound fiscal management. Despite maintaining a higher gross government debt-to-GDP ratio than many developed economies, the city-state has managed to retain its coveted triple-A credit rating.
The key factors behind Singapore's creditworthiness extend beyond traditional debt and deficit metrics. According to a study on developed country capital markets, asset holdings, fiscal health, institutional and policy frameworks, and economic fundamentals are the primary drivers of sovereign creditworthiness.
One of the key factors is government net worth, which is defined as assets minus liabilities. Singapore's net worth is bolstered by high-value government assets, resulting in a strong net worth that underpins its creditworthiness. This net worth also encourages public investment, promotes economic growth, and supports better fiscal policy responses to varying interest rates.
Institutional strength and fiscal performance are another crucial aspect. Singapore's robust institutions and consistent fiscal discipline contribute to better credit assessments. The monetary policy credibility and effectiveness also play a significant role in reducing sovereign risk.
The sustainability of growth is another long-term factor that improves sovereign creditworthiness. Singapore's economic growth, driven by a diverse and dynamic economy, has been consistent over the years.
Singapore's currency stability and reserves are another feather in its cap. The Singapore dollar (SGD) is pegged to a basket of major trading partner currencies, which further bolsters confidence in the sovereign rating.
The city-state's public wealth funds, Temasek, and GIC, along with the Monetary Authority of Singapore, collectively manage assets estimated to be three to four times Singapore's annual GDP. About one-fifth of Singapore's government expenditure is funded through investment returns from these sovereign funds.
The importance of net worth is further emphasized as the main factor affecting bond yields. Real estate assets alone are estimated to have a total value equivalent to global GDP. However, many governments overlook large portions of assets, not least real estate, in their official accounts.
Legally, 50% of expected long-term real returns from Singapore's sovereign funds are reinvested to strengthen long-term financial stability. The remaining half can be utilized for government expenditure, an amount nearly equal to Singapore's corporate tax receipts.
Adopting net worth-driven financial decision-making and oversight can create greater fiscal space for policy-makers to achieve their strategic objectives. This more holistic approach challenges the exclusive focus on debt ratios and emphasizes net worth and qualitative factors.
The International Monetary Fund (IMF) suggests that a net worth target is relevant to the reform of fiscal frameworks, such as the euro area's framework, to allow for public investment in a high-debt environment.
Ensuring sustainable prosperity requires policy-makers to focus on better managing the public balance sheet and the level of net worth. The opportunity costs of poor asset management can obscure economic challenges and opportunities.
In conclusion, Singapore's example demonstrates the benefits of good governance, strict fiscal discipline, and effective balance sheet management in enhancing a country's fiscal and economic position. It serves as a reminder that a more holistic approach to sovereign creditworthiness, one that considers net worth and qualitative factors, can lead to more robust and sustainable economies.
References: 1. Cheung, J., & Wong, C. H. (2017). Net worth as a driver of sovereign creditworthiness: Evidence from developed countries. Journal of Economic Integration, 32(3), 369-400. 2. International Monetary Fund. (2019). Fiscal frameworks for the 21st century: Designing for resilience. 3. Climate Policy Initiative. (2018). Global Landscape of Sovereign Wealth Fund Investments in Renewable Energy. 4. Organisation for Economic Co-operation and Development. (2018). Government at a Glance 2018: How does your government compare? 5. Monetary Authority of Singapore. (2020). Currency Policy. Retrieved from https://www.mas.gov.sg/currency-policy
- Singapore's sound fiscal management, characterized by a high gross government debt-to-GDP ratio and a triple-A credit rating, is largely due to factors beyond traditional debt and deficit metrics.
- Government net worth, from high-value assets minus liabilities, is a key driver of Singapore's creditworthiness, encouraging public investment, economic growth, and improved fiscal policy responses.
- Institutional strength and consistent fiscal discipline contribute to better credit assessments, with monetary policy credibility and effectiveness playing a significant role in reducing sovereign risk.
- The sustainability of Singapore's growth, driven by a diverse and dynamic economy, improves its sovereign creditworthiness over the long term.
- Singapore's currency stability and reserves, along with its public wealth funds, significantly bolster confidence in its sovereign rating and funding a substantial portion of government expenditure.
- A more holistic approach to sovereign creditworthiness, focusing on net worth and qualitative factors, can lead to economies that are more robust and sustainable, as demonstrated by Singapore's example.
- The International Monetary Fund suggests adopting a net worth target for reform of fiscal frameworks, such as the euro area's framework, allowing for public investment in high-debt environments and promoting sustainable prosperity.
