Using reserves to fight a pandemic
Singapore has shown the way in managing Covid-19 without incurring debts
GOVERNMENTS and central banks around the world have been allocating billions and trillions for fiscal packages and monetary stimulus measures to counteract the raging Covid-19 global outbreak.
Many of the extraordinary measures involve direct fiscal actions, interest rate cuts, liquidity injection and quantitative easing.
Due to the actions that involve huge amount of money, investors’ attention has been drawn to governments’ financial strength and budgetary capacity to fund relief packages.
Since the 2008-2009 Global Financial Crisis, most governments have been running persistent budget deficits; and the debts of these countries have risen substantially since.
In Asia, Singapore has stood out as the only government that has drawn on past reserves to fund several fiscal and financial support packages, without resorting to borrowing and incurring debts.
This international business and financial centre has been debt-free from the early days of nation building when Lee Kuan Yew – the late father of Singapore’s Prime Minister Lee Hsien Loong – ruled as the first leader and founding father.
This time around, a total of S$52bil (about Rm150bil) was drawn down from the government’s past reserves to mitigate the economic damage caused by Covid-19.
This drawdown marks the second time the government had dug into past reserves.
The first time was in January 2009 (due to the 2008-09 financial crisis) when S$4.9bil was drawn down from the past reserves to fund special schemes during a bad recession then.
How large is Singapore’s past reserves?
Singapore has never disclosed the amount of its past reserves publicly.
The size of Singapore’s past reserves are a matter of national security and cannot be disclosed, lest its economic and financial stability be threatened, deputy Prime Minister Heng Swee Keat said on April 7 in response to a question in parliament.
According a report in The Straits Times, Heng – also the Finance Minister – said these funds serve as a “strategic defence” to protect the Singapore dollar from speculative attacks, and bolster the confidence of investors and citizens.
He compared the country’s reserves to Armed Forces’ arsenal, and said: “No country’s armed forces will ever tell you exactly how much ammunition and weaponry they really have.”
In 2008, Singapore allowed a sum of Us$150bil from past reserves to guarantee bank deposits during the global financial crisis, which had helped prevent a run on banks.
“As a small country without any natural resources and highly-dependent on imports, our reserves are vital to our overall economic and financial stability, and our well-being,” Heng told parliament.
It is not easy for most people to understand Singapore’s reserves system.
Indeed, Singapore’s past reserves is separate from the international reserves held by the central bank – the Monetary Authority of Singapore (MAS).
In April 2020, MAS’ total foreign exchange reserves stood at S$424.8bil (Us$301.8bil) – the highest among Asean countries.
In comparison, the total foreign reserves of Indonesia – the largest Asean country in terms of population – stood at Us$127.9bil in April and Malaysia at Us$102.5bil.
Singapore’s past reserves is also separate from the other two entities that manage the government’s reserves – Government of Singapore Investment Corp (GIC) and Temasek Holdings.
Singapore’s past reserves comprise returns from assets invested by the Monetary Authority of Singapore (MAS), Temasek Holdings and GIC.
While MAS and Temasek disclose the sum of the funds they have invested, those invested by GIC are not disclosed. Temasek’s portfolio is valued at S$313bil, according to the latest figures cited by The Straits Times.
Governments can learn from Singapore
Despite being small and short of natural resources, Singapore is a model to emulate in implementing a sound reserves management strategy.
Its success is attributable to three key factors: disciplined fiscal management, sound economic policy, and professional decision (without political interference) adopted in investments.
From the start, Singapore has set out to be prudent in the management of its finance and reserves.
The government’s reserves are a critical resource for the future and have served to provide a key defence for Singapore in times of crisis, allowing it to mount a decisive and effective response.
The right strategy employed in the investment of Singapore’s reserves provides a valuable stream of income for the government’s budget.
Singapore operates on a balanced budget over each term of government, backed by a strong balance sheet that has assets well in excess of its liabilities.
The government does not borrow to fund its budget. All borrowings from the issuance of Singapore Government Securities and Special Singapore Government Securities are invested, and investment returns are more than sufficient to cover the debt servicing costs.
Singapore does not have any net government debt, and given its strong net asset position, its international credit ratings have consistently been accorded the highest short- and long-term credit ratings of AAA.
Strict rules on use of past reserves
According to Singapore’s Constitution, reserves (could be in cash, shares, land or even buildings) are defined as “the excess of assets over liabilities of the government, statutory board or government company”.
These reserves are protected by the Constitution of Singapore and cannot be transferred outside of the government and government linked companies without the approval of the President.
Making a drawdown from the past reserves for budget funding is generally not allowed, except “under dire circumstances” as done in 2008-09 financial crisis and current Covid-19 pandemic.
Singapore’s reserves are derived from assets of three distinct entities with different mandates: the Monetary MAS, GIC and Temasek Holdings.
These entities are mandated to maximise the long-term value of the assets through strategic diversification and reinvestment.
MAS is mandated to grow the size of official foreign reserves to buffer and allow for more flexibility in exchange rate decisions.
GIC manages most of the government’s financial assets, other than its deposits in the MAS and stake in Temasek Holdings.
Being an active equity investor, Temasek’s primary sources of funds include divestment proceeds from the sales of its investments, as well as dividends and distributions received from its portfolio.
Returns from investing the country’s reserves from the three entities (MAS, GIC, Temasek) are pooled together and placed under the Net Investment Returns (NIR).
The Net Investment Returns Contribution (NIRC) is currently the largest single source of contribution to the government’s revenues, and a key component of the annual budget funding.
Singapore’s approach of fortifying its financial reserves to safeguard the nation’s future offers an important lesson for others. It’s not only about for today’s use, but also tomorrow’s needs.
Every government has its own approach of managing the government’s fiscal balance and assets. But it is important to maintain strong fiscal discipline and keep spending in check.
Malaysia had enjoyed a brief five years of fiscal surpluses in 1993-97 when the GDP growth was high, near 9% for some years.
However, since the 1997-98 Asian Financial Crisis, federal government’s budget had incurred 22 years of continuous budget deficit.
Although Malaysia’s budget deficit has been narrowing progressively for nine successive years – from 6.7% of GDP in 2009 to 2.9% of GDP in 2017 – the trend was reversed in 2018 to 3.7%.
The previous Pakatan Harapan government had managed to bring the budget deficit down to 3.4% of GDP in 2019, but the covid-19 is expected to force the deficit to widen to 6% this year.
Singapore’s experience has shown that fiscal prudence and sound financial management are crucial during good and bad times.
It is important that a government institutionalise strong governance and fiscal rules to maintain a balanced budget or yield a surplus during good or booming economic cycles.
Senior economist Lee Heng Guie, who formerly worked as chief economist for CIMB, is heading private think-tank Socio-economic Research Centre. The views expressed here are his opinions.
“As a small country without any natural resources and highly-dependent on imports, our reserves are vital to our overall economic and financial stability.” Heng Swee Keat