SINGAPORE is a poster child for fiscal prudence.
It almost always runs a budget surplus, and its constitution virtually prohibits borrowing to pay for current spending.
All three major credit rating agencies assign it triple-A ratings, and the International Monetary Fund (IMF) judges its sovereign debt risks to be low.
But the country also has a whopping ratio of debt to gross domestic product — around 170 per cent.
By the end of the year it will be the third most indebted nation on the planet.
Are there lessons to take from the country’s approach to debt?
If so, they come from understanding how it has arisen.
First, the Monetary Authority of Singapore (MAS), which is equivalent to Bank Negara Malaysia (BNM), has intervened frequently to prevent the Singaporean dollar from appreciating relative to the basket of currencies against which it is managed, selling Singaporean dollars for foreign currency.
As with Switzerland, the result has been burgeoning foreign exchange reserves, far more than the government’s estimate of what they need to maintain their peg.
The government’s solution to this reserve glut has been to issue close to 40 per cent of GDP in non-marketable debt to the central bank.
Second, the social security system is configured in a manner bound to drive up government liabilities.
Residents and their employers are compelled to contribute a significant portion of their salaries to the Central Provident Fund (CPF), from which they can draw money to pay for healthcare, housing and retirement.
All CPF receipts are passed back to the government in return for non-tradable government debt certificates, which amount to over 90 per cent of GDP.
Third, the government understands the importance of maintaining a liquid bond market.
At Wall Street, we’ve come to regard bond markets simply as the only venues large enough to satisfy government borrowing needs rather than public goods in themselves.
But absent deep debt capital markets, companies have little option but to channel all their financing needs through the banking system.
In the wake of the 1997 Asian Financial Crisis (AFC), Singapore acted to ensure that companies could raise funds in capital markets rather than tie their collective fortunes to a small group of financial institutions.
Bonds and bills sold into the market add close to 40 per cent to the debt-to-GDP ratio.
BUILDING RESERVES WITHOUT RESOURCE WINDFALLS
Despite its high debt ratio like Malaysia, the Singapore government is not allowed to borrow to spend on recurring operating expenses.
Those familiar with its prudence in fiscal management would know that it has squirreled away its excess reserves for decades, building up a secret enviable sum that allowed it to not take on sizeable debt when the COVID-19 pandemic hit.
The power of Singapore’s reserves was already visible more than two decades ago.
Since 2000, its annual budget has been enjoying what it calls a Net Investment Returns Contribution (NIRC), which has covered more than 10 per cent of the government’s annual expenses since 2009.
The NIRC includes the 50 per cent net investment returns from Temasek Holdings Pte Ltd, GIC Pte Ltd and the MAS. GIC manages the government’s reserves, while Temasek is its investment arm.
Since 2016, the NIRC has covered between 17 per cent and 20 per cent of the government’s annual budget expenses except for 2020, when the pandemic hit and it was forced to ask parliament for permission to dip into its reserves.
IAP’S ROLE IN FINANCIAL MANAGEMENT
For a little context, the NIRC covers nearly one-fifth of Singapore’s government expenses.
That means the portion of investment income it gets to spend each year is almost on par with the country’s annual corporate income tax collection — a striking comparison I picked up during last month’s International Advisory Panel (IAP) meeting, chaired by Prime Minister Lawrence Wong and MAS chairman Gan Kim Yong.
The IAP, established in November 1998, is essentially a dream team of financial brilliance with 29 of the biggest names in global banking — think BlackRock’s Larry Fink, JP Morgan Chase’s Jamie Dimon, and Goldman Sachs’ John Waldron — pooling their expertise to guide MAS on shaping Singapore’s financial strategies and reforms.
The NIRC of S$22.38 billion or 3.3 per cent of gross domestic product (GDP) in 2022, for example, is comparable to Singapore’s corporate income tax that came in at 3.4 per cent of GDP that year.
The NIRC of S$23.5 billion or 3.3 per cent of the estimated GDP for 2024 is still sizeable, even though it is expected to be smaller than the corporate tax haul of S$28.03 billion or 3.9 per cent of GDP.
The sum is larger than the income expected from the goods and services tax (GST), which stood at S$14.1 billion or 2.1 per cent of GDP in 2022 and is estimated to amount to S$19.4 billion or 2.7 per cent of GDP in 2024, data from Singapore’s Ministry of Finance show.
Despite having sizeable reserves, Singapore decided to raise its GST last year and this year because it knows its healthcare needs will be great in the future.
There is no assurance that it will always have excess reserves if prudence is not exercised.
People are going to continue getting older.
This generation is going to be a burden on the next generation and the generation after.
Therefore, there are two ways to fund these generations.
One is to again find surpluses but the government cannot be certain whether we can get any more surpluses in future.
The other option is to collect money in small amounts earlier to prepare for something coming up, rather than collecting it later when the problem comes and then they have to collect much more.
GST has that effect. Collect small amounts today but accumulate over time and this can then be used for what they need in the future.
In other words, if you want to have a comfortable financial situation at the end of your life, you’d better start saving.
The earlier you start, the less you need to save.
But if you keep postponing, you’ll have to save much more later.
This explains why Singapore could set aside S$8 billion for its Pioneer Generation’s old-age healthcare and related needs from its existing reserves and yet decided to raise the GST rate from 7 per cent to 8 per cent on Jan 1, 2023, and to 9 per cent on Jan 1 this year.
SINGAPORE’S RESERVES VS. MALAYSIA’S PETRONAS DIVIDENDS
Here is another area policymakers in the Ministry of Finance (MoF) will need to ponder thoroughly, more so in the face of the possibility of smaller dividends from Petroliam Nasional Bhd (PETRONAS).
On Sept 5, PETRONAS president and group CEO Tan Sri Tengku Muhammad Taufik Tengku Aziz admitted the possibility of the national oil company paying less dividend to the federal government should its free cash flow be materially impacted by new arrangements in matters related to oil and gas in Sarawak that are currently being negotiated with the state government.
Dividends from PETRONAS totalled more than RM600 billion between 2000 and 2024, contributing 10 per cent to Malaysia’s total annual budget, on average. And this at a time when Singapore is enjoying a new revenue pillar with the NIRC.
If Malaysia’s fiscal conditions had allowed those dividends from PETRONAS to be invested at 5 per cent a year since 2000, the accumulated “principal” of RM600 billion would have grown to more than RM1 trillion today, my simple math show.
A fund that size could potentially bolster the country’s annual budget with income of RM50 billion a year (easily 2.5 per cent of GDP) if there is discipline to use just the “dividends” and reinvest the “principal”.
That is larger than the expected individual income tax collection of RM42.5 billion estimated in Budget 2024.
Having accumulated debt that requires nearly RM50 billion a year to just service the annual interest payments, there is much catching up to do.
Medecci Lineil has over a decade of experience leading a niche-focused team within Goldman Sachs’ investment banking division (IBD). His expertise extends beyond the bank, having been instrumental in establishing consultancy firms in Kuala Lumpur and Singapore, where he serves as a founding board member.
