Beneath Singapore’s glittering facade, its robust financial system is secured by a prudent fiscal strategy and safeguard. The city-state’s reserves have become a cornerstone of the nation’s success.
The reserves were recently in the spotlight during the Presidential Elections. They play a crucial role in Singapore’s stability, acting as a financial fortress from economic uncertainties.
You might have heard about these reserves in passing, but what are they, how are they managed, and why should every Singaporean care? Let’s delve into the depths of Singapore’s financial safety net.
What exactly are Singapore’s reserves?
In essence, Singapore’s reserves encompass the total assets minus liabilities of the Government and other entities specified in the Fifth Schedule under the Constitution. This may sound complex, but think of it as the nation’s emergency funds set aside for rainy days, but on a much greater scale.
The Government’s assets within these reserves include physical assets like land and buildings, as well as financial assets such as cash, securities, and bonds. On the flip side, the Government’s liabilities within these reserves include Singapore Government Securities (SGS) and Special Singapore Government Securities (SSGS), which are critical in the grand scheme of things.
The custodians of our reserves
Given the strategic importance of these assets, Singapore has to ensure the long-term value of the reserves by professionally and commercially investing them. Three key entities oversee this:
1. GIC Private Limited
GIC is a professional fund management organisation that handles most of the Government’s assets. Its primary objective is to achieve robust, long-term returns that surpass global inflation rates. This goal is chiefly evaluated through the pivotal metric of GIC’s investment performance: the rolling 20-year real rate of return. Over the two decades leading up to March 31, 2023, the GIC Portfolio delivered an impressive annualised real return of 4.6%.
GIC’s investment strategy is fairly conservative, boasting a globally diversified portfolio across various asset classes. Most of its investments are in the public markets, with some in alternative investments like private equity and real estate.
2. Monetary Authority of Singapore (MAS)
MAS, Singapore’s central bank, manages the Official Foreign Reserves (OFR). MAS’ role is distinct as it is a conservative investor with a significant portion of its portfolio invested in liquid financial market instruments. These investments ensure the stability of the Singapore dollar exchange rate and help accumulate OFR.
3. Temasek Holdings
Temasek is a commercial investment company, strategically working to create and deliver sustainable long-term value for its stakeholders. It’s an active and value-oriented equity investor, striving to maximise shareholder value over the long haul. Temasek follows a different approach, one that complements GIC and MAS, adding diversity to the management of Singapore’s assets.
Bond rating agencies closely examine Temasek’s financial performance and have bestowed upon it a prestigious AAA rating. In addition, Temasek’s financial statements undergo rigorous auditing by a globally recognised audit firm.
As of March 31, 2023, Temasek’s Total Shareholder Returns (by Market Value) stand as follows:
- A decline of 5.07% in the previous year.
- A commendable increase of 6% over the past decade.
- A solid performance with a 9% gain in the last 20 years.
- An impressive 11% growth in shareholder returns over the past 30 years further highlighting its long-term commitment.
How much do we have in these reserves?
Now that we know who manages these reserves, do we know how much they hold?
MAS and Temasek openly disclose the extent of the funds under their management, with figures standing at S$416 billion for the Official Foreign Reserves managed by MAS and S$382 billion for Temasek’s net portfolio value, as of March 31, 2023.
However, the size of the Government’s funds overseen by GIC remains undisclosed, although it is known to surpass US$100 billion. While revealing the precise scale of GIC’s assets would ostensibly complete the picture of Singapore’s financial reserves, it is vital to acknowledge that full transparency could potentially endanger our national interests.
Disclosing this comprehensive figure might make the Singapore dollar more susceptible to speculative attacks by market forces during periods of vulnerability. Our reserves, serving as a strategic asset for a resource-scarce nation, are a fundamental defence in times of crisis.
Protecting past reserves
You might wonder what’s safeguarded within these reserves, and here’s where the Constitution comes into play. It protects what’s called “Past Reserves”. This term refers to the reserves accumulated during previous terms of the Government.
A draw on Past Reserves can happen in two ways:
- The Government or a Fifth Schedule entity can tap into Past Reserves when they spend more money than they’ve saved during their current term.
- Another way is when they sell an asset for less than its fair market value, and they don’t make up the difference from the savings they’ve built up during their current term. Fair market value is the price that a buyer and seller would agree on for the item.
Singapore does utilise its Past Reserves in strategic ventures. These include land reclamation, underground space creation like the Jurong Rock Caverns, and land acquisition initiatives like SERS. Importantly, these projects convert Past Reserves from financial assets into State land, safeguarding their long-term value. When such land is sold or used, the proceeds are reinvested into Past Reserves, ensuring their preservation without any drawdown. This approach balances development with fiscal prudence.
How Official Foreign Reserves are accumulated
The accumulation of Official Foreign Reserves (OFR) is a product of the Monetary Authority of Singapore’s monetary policy. OFR increases when MAS purchases US dollars in exchange for Singapore dollars, a strategy that moderates the appreciation of the Singapore dollar exchange rate. It’s important to understand that this process is an outcome of monetary policy and not an arbitrary money creation scheme.
Capital inflows into Singapore and public sector operations, such as government borrowings, contribute to the accumulation of OFR. However, the sources of these capital inflows have evolved over time. While government surpluses were a significant contributor in the past, in recent years, exuberant liquidity conditions in global financial markets and confidence in Singapore have led to substantial capital inflows.
How reserves are transferred and managed
The transfer of reserves from MAS to the Government is a regulated process. Initially, MAS made periodic transfers to the Government of OFR in excess of what it needed to conduct monetary policy and ensure financial stability. The Government’s deposits with MAS decreased with these transfers.
However, due to the decline in government surpluses and deposits with MAS, a new mechanism was established for transferring excess OFR from MAS to the Government. The Government started issuing Reserves Management Government Securities (RMGS) to MAS in exchange for OFR. This mechanism eliminates any perceived advantage of MAS in managing Government funds and maintains the reserves’ integrity.
Dispelling myths about reserves
One common misconception is that the government can use these reserves to influence the market or hide losses. However, that’s far from the truth. These reserves exist to protect Singapore’s financial future and are managed professionally, independently, and transparently. They cannot be arbitrarily moved around for personal gain.
Many think that the reserves are just made up of cash stored in a bank or vault somewhere. In fact, Singapore’s reserves consist not just of cash, but other financial assets like bonds and equities. The reserves are also made up of physical assets, like land, buildings, real estate, and infrastructure both in Singapore and overseas.
As for the role of the government in the entities managing our reserves, ask most Singaporeans and they would think that the government has a hand in Temasek’s investment decisions. The government does not dictate Temasek’s investment strategies. Instead, Temasek has its own investment board that oversees investment decisions.
Accountability and transparency forms a strong foundation
The performance of Government investments is crucial, and it’s natural to wonder how well these entities are doing. Each year, the President’s address to Parliament includes a report on the state of the reserves, providing a transparent overview of how well they’ve been managed.
Singapore’s reserves aren’t just a stack of cash tucked away for a rainy day. They’re a vital part of the nation’s financial strategy, ensuring Singapore’s long-term economic stability, security, and prosperity. While they’re managed by professionals, the principles underpinning their management – transparency, accountability, and prudence – are integral to maintaining the trust and support of the Singaporean people.
In Singapore, the reserves don’t just serve the government; they serve the entire nation. Every citizen has a stake in these reserves’ wellbeing, for they help guard Singapore’s financial future, promising continuing success and prosperity for generations to come.