Small Country, Big Money: Why Does Singapore Have Large Reserves?

It’s only been a few months into 2020, and governments around the world have been busy grappling with the Covid-19 global pandemic outbreak. In Singapore, initial stages of the outbreak coincided with the announcement of the annual government budget, Budget 2020. Needless to say, the highlight of the budget was a slew of Covid-19 relief measures.

It doesn’t stop there either. Just this week, Deputy Prime Minister cum Minister for Finance Heng Swee Keat announced the third budget of the year, in light of the worsening Covid-19 situation. A S$4 billion further draw on past reserves to fund various additional support packages was also raised, inevitably drawing attention to the resulting government deficit and the strength of our national reserves.

To better appreciate the budget, we have to first understand what exactly makes up the reserves, how it works, and the concept of NIRC (not NRIC, although both are equally important).

What exactly are the reserves?

According to Singapore’s constitution, reserves are “the excess of assets over liabilities of the Government, statutory board or Government company”. These assets could be in cash, shares, land or even buildings.

The 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 draw from the Past Reserves for budget funding is generally not allowed, except ‘under dire circumstances’.

Who manages the reserves?

Singapore’s reserves are distributed to and managed by three distinct entities – the Monetary Authority of Singapore (MAS), Government of Singapore Investment Corporation (GIC) and Temasek Holdings. All three organisations are given the mandate to invest some of the reserves with the objective of maximising the long-term value of the assets.

1. Monetary Authority of Singapore (MAS)

As Singapore’s central bank, the Monetary Authority of Singapore (MAS) enacts policies to stablise inflation, unemployment and meet other long-term economic growth.

While most other central banks use interest rates as a means to do this, MAS does things a bit differently. In Singapore, the corporate sector is dominated by large multinational corporations (MNCs) who rely on funding from their head offices abroad. This means that a change in interest rates in Singapore would not affect their behaviour.

Thus, Singapore uses exchange rates as a means to meet these aforementioned goals. For example, if MAS sees a need to stimulate the economy and engage in expansionary policy, it could devalue the Singapore Dollar (SGD) against a basket of other global currencies. This would make it cheaper for other countries to import goods from Singapore, and will cause an increase in economic output. 

But in order to devalue or revalue Singapore’s currency, MAS needs a stockpile of foreign currencies. The global currency market is much like most other markets — with set demand and supply for each currency. In order to affect this demand and supply, MAS would either have to buy or sell its own currency on the open market. You can only buy SGD when you have foreign currencies (as the global market for currencies is inherently an exchange) and this is precisely why MAS is given some of the reserves to manage. This stockpile is called the Official Foreign Reserves (OFR).

2. Government of Singapore Investment Corporation (GIC)

The Government of Singapore Investment Corporation (GIC) is a professional fund management organisation that manages the Government’s foreign assets (that are separate from the OFR) and serves as Singapore’s sovereign wealth fund. It aims to achieve good long-term returns to preserve and enhance the international purchasing power of the reserves.

Throughout the 1970s, Singapore had accumulated a substantial amount of foreign reserves OFR that well-exceeded what was required for MAS’ exchange rate operations due to persistent government surpluses, large capital inflows and increased private savings rate. As such, GIC was established in 1981 to manage part of the reserves, for higher returns without the central bank’s liquidity constraints. 

3. Temasek Holdings

Temasek is an investment company wholly owned by the Government and managed on commercial principles to create and deliver sustainable long-term value for its stakeholders. Temasek’s only shareholder is the Minister for Finance. In 1974, Temasek was formed as a holding company to own and commercially manage investments and assets previously held by the Singapore Government. 

Unlike MAS and GIC, Temasek owns the assets it manages. It is also credit rated, issues international bonds and pays taxes. Temasek does not have predefined concentration limits, or targets for investing by asset class, country, sector, theme or single name. This provides Temasek with full flexibility to reshape and rebalance its portfolio and basically do whatever it deems fit (in compliance with relevant laws, of course).

How does each entity work in growing the reserves? 

In short, the Government – and its investment entities – does two things very well: strategic diversification and reinvestment. As part of the larger strategy for diversification, each of the three entities play a distinct role, varying in where they lie on the risk-return spectrum in their investment approach and strategies.

1. MAS

As Singapore’s central bank, the MAS is the most conservative of the three entities in its investment approach. Its main aim in investing is to grow the OFR, so that it can be of a suitable size to serve as a buffer and allow for more flexibility in exchange rate decisions.

The MAS invests it mainly in a well-diversified portfolio of safe and liquid assets. A three-prong approach is used to manage the OFR: robust risk management; balanced asset allocation; and efficient investment process.

As part of the Robust Risk Management, a comprehensive range of stress tests is carried out on a continuous basis to assess the risks to the portfolio. Depending on the stress test results, MAS will then consider appropriate responses and make portfolio adjustments where necessary. 

To ensure a Balanced Asset Allocation, MAS invests in a well-diversified portfolio. Diversity in this sense refers to geography (across advanced and emerging market economies), currency and asset class (cash, bonds and equities).

To ensure an Efficient Investment Process, MAS taps on relevant investment expertise by hiring reputable external fund managers with deep investment expertise and specialised knowledge in specific investment fields to manage part of the MAS portfolio. 

2. GIC

GIC manages most of the Government’s financial assets, other than its deposits in the MAS and stake in Temasek Holdings. GIC receives funds from the Government for long-term management on behalf of the Government, and is paid a fee as the fund manager looking after Singapore’s foreign reserves. 

GIC is a fairly conservative investor, with a globally diversified portfolio spread across various asset classes. Most of its investments are in the public markets, with a smaller component in alternative investments such as private equity and real estate.

3. Temasek Holdings

Compared to MAS and GIC, Temasek is further out on the risk-return spectrum. It also does not manage the OFR, Singapore Government reserves, or Singapore CPF savings. Although its initial portfolio was provided by the Government, Temasek’s funds have since been generated mainly from the investment growth of its own portfolio. 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. 

Being an active equity investor, more than a quarter of Temasek’s portfolio is invested in Singapore, with the rest invested in Asia and global markets. While Temasek is exposed to significantly higher risk than GIC and MAS, it has also delivered higher returns over time as expected. In contrast, MAS will have more stable but lower returns over time. 

A Collective Contribution to the Budget

Singapore’s president is the ‘gatekeeper’ for the reserves and can block attempts by the government to drawn down past reserves. (Source)

Think of it like a 3-in-1 coffee sachet: Returns from investing the reserves from the three entities (MAS, GIC, Temasek) come together under the Net Investment Returns (NIR). The resulting funds available for the Government to spend is then called the Net Investment Returns Contribution (NIRC). The NIRC is currently the largest single source of contribution to the Government’s revenues, and a key component of the annual budget funding. 

What is the NIRC?

The Net Investment Returns Contribution (NIRC) to the government budget consists of two parts: up to 50% of the Net Investment Returns (NIR) on the net assets invested by GIC, MAS and Temasek Holdings, and up to 50% of the Net Investment Income (NII) derived from Past Reserves from the remaining assets. 

This means that the constitution of Singapore bars the Government from borrowing to spend or spend surpluses accumulated from previous terms of government. Instead, it allows the Government to spend up to half of the expected long-term real returns from the net assets invested by MAS, GIC and Temasek.

Net Investment Income (NII) vs. Net Investment Returns (NIR)

Net Investment Income (NII) refers to the actual dividends, interest and other income received from investing Singapore’s reserves, as well as interest received from loans, after deducting expenses arising from raising, investing and managing the reserves. 

Net Investment Returns (NIR) on the other hand, is based on expected long term rate of return from net assets (i.e. the excess of assets over liabilities), less inflation. Under the Net Investment Returns (NIR) framework, the Government can spend up to 50% of the long-term expected real returns (including capital gains). A rigorous process is used to determine the long-term expected real rates of return of the investment entities.

Why don’t we use more of the NIRC then?

Without taking into account the NIRC, Singapore runs a structural deficit on its primary fiscal balance. This is because tax and non-tax revenues are even lower than an already small government expenditure, at 14.7% of GDP and 15.4% of GDP respectively for FY2019. This is where the NIRC steps in to give things a boost.

That said, simply relying on the NIRC without increasing tax revenues is very risky for a country. Furthermore, since the NIR component of the NIRC takes into account projected, unrealised profit, the Government has to be careful and prudent in the amount of NIRC spent. If too much NIRC is spent in a fiscal year, there is a risk that cash isn’t actually there when it’s needed for spending.

Why is it important for Singapore to have strong reserves?

Deputy Prime Minister cum Minister for Finance Heng Swee Keat announced the three budget packages this year. Two of them drew on past reserves. (Source)

Singapore’s reserves serve three objectives: 

An Endowment Fund

The income from investing the reserves provides an increasingly important source of revenue to fund government expenditure. The NIRC is already the largest single contributor to revenues in the government budget, accounting for about one-fifth of revenues. The role of the reserves as an endowment from which to draw a steady stream of income to finance the government budget will become even more important in the years ahead. An ageing population will mean higher expenditures, especially for healthcare, and slower economic growth will mean lower tax revenues. 

A Rainy Day Fund

It’s no secret that Singapore is inherently vulnerable. Thus, it is imperative for Singapore to be relevant to the world and have a strong buffer so that it can withstand the shocks that come with being so small and open to the world. 

It is economically strategic for Singapore to preserve a large financial reserve, as it allows Singapore to tide over various crises without having to rely on others. It is also diplomatically advantageous as the ability to extend help to other countries in times of need will strengthen and develop long-term diplomatic relations. 

The role of the reserves as a rainy day fund is not theoretical, as the reserves have indeed served Singapore well in past crises like the 2008 global financial crisis and the recent Covid-19 global pandemic.

A Stability Fund

The reserves help to maintain confidence in Singapore’s exchange rate-centred monetary policy framework. A large and liquid foreign reserve clearly signifies MAS’ ability to defend the Singapore dollar against speculative currency attacks, as Singapore’s economy is more significantly influenced by the exchange rate than interest rates.

A strong Singapore dollar protects the purchasing power of its people. People could benefit if more of the reserves were used to reduce the tax burden on people today, but a devalued Singapore dollar means everyone suffers, especially the most vulnerable groups in society.

It’s not only about today, it’s also about tomorrow.

Over the years, the NIRC has become a key pillar of revenue for Singapore. This is because Singapore has continued to consistently grow the size of its financial reserves, while continuing to collect taxes and maintain a balanced budget.

It has already been projected that we will need to spend more in the coming years. A sustainable solution to address this issue is necessary in order to prevent an increased tax burden on the future (and ageing) population. 

A prudent and conservative approach to safeguard our nation’s future has been effective thus far. It only makes sense to fortify our reserves while our economy remains relatively strong, so that we will have sufficient – and maybe, even excess – when it rains.


Beatrix Ong


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