Are we drawing down the national reserves too fast? With President Halimah’s assent, Singapore is withdrawing another eye-popping $31 billion from its reserves to fund Covid-19 support packages, you may justifiably wonder: “Is there a limit to this?” By now, Singapore has used close to $100 billion from its reserves to fight the “deepest economic crisis since Singapore’s Independence”. That is nearly 20% of Singapore’s GDP!

Does this affect you can me? Of course, because there is no free lunch.

If you look abroad, global central banks are printing money like there’s no tomorrow. And so, it seems reasonable to ask, “Why can’t we do the same? Why must we deplete our own hard-earned savings?”

With the zero interest rate environment, why didn’t the government simply issue a “Fortitude Bond” and raise funds? After all, there is no shortage of yield-hungry investors who desperately want to lend money to our AAA government.

What is Singapore’s future? How can we get out of this economic trough?

Let’s discuss this today…

The Singapore government is not allowed to borrow to spend

Have you ever wondered, if Singapore has an annual GDP of $424 billion but the gross debt is much higher than GDP at $778 billion, then why do we still have a AAA crediting rating?

It may sound strange, but both the country’s Constitution and the Government Securities Act prevent the Singapore government from spending any funds raised through debt securities.

You may say, this cannot be true. How about Singapore Government Securities and Singapore Savings Bonds? How is our infrastructure funded?

When the government wants to build housing or new roads, they have their respective agencies issue the bonds. That is why you may have heard of HDB bonds and LTA bonds.

The Singapore government borrows to invest

The real Singapore government debts are only in the following forms:

Singapore does not borrow to fund fiscal policies (like fighting COVID-19), they borrow to invest. And the investment manager is none other than GIC.

It is worth noting that the CPF interest that you received is guaranteed by Special Singapore Government Securities, which is managed by GIC as well. And the following chart shows how GIC invests your money.

GIC Investment Portfolio Source: GIC

There is also some hearsay that Temasek invests our CPF money. However, this is incorrect. Temasek does not invest the government’s money. Given the good reputation, they have their own way of sourcing for cheap funds. The popular Astrea bond is a good example.

Why don’t we just print money?

We need to understand that there is no free lunch. When a government digs into its reserves, someone has to pay back. The government either has to depend on fantastic investment returns or collect it from the nation through taxes and other revenues.

The government understands our concerns and before you ask, they have assured Singaporeans that the planned GST hike to 9% will be postponed to 2025. But that makes people more worried about how are we going to plug this big hole.

In today’s financial world, people are increasingly embracing the Modern Monetary Theory (MMT). It essentially says that since the government is the monopoly issuer of a country’s currency, the government does not need taxes or borrowings since they can just print money to fund their fiscal spending.

If we look at the US stock market, it seems that printing money is the elixir and I have seen people propose that the Singapore government do the same. And I fully support the government NOT doing it. The economic impact is a complex topic which needs a book to explain, but I will just talk about the moral hazard.

You see, when you are in the US system, you run the country for 4 years and you don’t give a damn about what will happen to the next President. Only when a government believes that they will serve the country for the long term, do they have a long term plan.

Most importantly, Singapore is not the US. In fact, I discussed in this article that the US dominates the world through the Dollar and they will defend this dominance at all costs.

Have you wondered why with all the political and military tensions, and the crashing of stock markets, the gold price is stagnating at its current level despite the US having printed trillions of dollars?

Gold price is not moving up despite expectation

Singapore does not have such a luxury. The fact that you can still buy your daily necessities at a reasonable price today is because of our prudent monetary policy. (This is a topic for another day)

Never let a good crisis go to waste

According to this article, Singapore withdrew $49 billion from its reserves to fund the Budget during the Global Financial Crisis.  Now, Singapore has withdrawn more than double this. Is this too much or unnecessary? I don’t know. Maybe the government has seen something that we don’t see.

But if we take a step back, we will realize that the world was already very fragile before the coronavirus hit us. Having a decade of low-interest-rate environments, there are many “zombie companies” who are heavily indebted but not generating positive cash flows. However, these companies occupy precious resources and human talents in our society, which can be otherwise used for a better, healthier economy.

For example, in the US, senior management officials are more interested in inflating their company’s share prices than allocating the budget for productivity and innovation. Back at home, companies are pouring their earnings into the property market instead of expanding the business.

I still recall the shock when I heard Popular bookstore went into the property business many years ago (they are already delisted now). By now, a lot more companies have done the same: SPH, Singpost, Keppel, etc. And the gradual decline of their share prices over the years shows that not only the value of the companies was destroyed, but the Singapore market as a whole.

Singapore, one of the “Four Asian Tigers”, has lost its shine in the financial market in this decade. Some years ago, I wrote an article alerting that delisting will become a new norm in Singapore’s stock market. For good or bad, many companies have left SGX. You have SMRT, KeppelLand, OSIM, Super, Breadtalk, and most recent Perennial Real Estate delisting offer.

In a recent article about REITs, I pointed out that the Singapore REITs index has outperformed the Straits Times Index over the past few years and this is nothing to be proud of. Is the S&P 500 dominated by REITs performance? Is the Shanghai composite index dominated by REITs performance?

Since the 1990s, Japan has used taxpayer’s money to continue supporting failing companies. They printed enormous amounts of money, keeping interest rates low for decades, and look where they are today. When I was young, “made in Japan”, Japanese cartoons and pop music were the “in” thing, I doubt the new generation have any clue about these. Today, the Bank of Japan is the largest shareholder of Japan’s stock market. And yes, Japan has one of the most established REITs markets in the world too.

Winston Churchill famously said,

Never let a good crisis go to waste.

Singapore has this “two-key system” of protecting past reserves, Singapore also has the Government Security Act to prevent imprudent borrowing. But the coronavirus changed everything. I am no economic expert and I understand the tough decisions that the policymakers have to make. All I hope is that with hundreds of billions of dollars on hand, the government not only tries to survive the crisis but also takes the opportunity to reboot Singapore’s economy.

What do you say? How do you think the budget can be wisely spent? Leave your comment below.

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About the Author

Ivan Guan is the author of the popular book "FIRE Your Retirement". He is an independent financial adviser with more than a decade of knowledge and experience in providing financial advisory services to both individuals and businesses. He specializes in investment planning and portfolio management for early retirement. His blog provides practical financial tips, strategies and resources to help people achieve financial freedom. Follow his Telegram Channel to join the FIRE community.
The views and opinions expressed in this article are those of the author. This does not reflect the official position of any agency, organization, employer or company. Refer to full disclaimers here.

  • Hi Ivan, thank you for sharing your views and concerns.
    $100 billion seem so much. However, looking at the US that is now doing unlimited quantitative easing, this may still not be too bad. As many governments are doing quantitative easing, we could hope for a global depreciation of currencies leading to stable exchange rates. At least, that is to be hopped for Singapore as the country is so much dependant on international trade.
    Also, it may be that the government expect that during a crisis, Singaporean will rather hold on to the money that is given to them through the quantitative easing rather than spends it. Thus, the currency demand/supply levels would be maintained (at least in the short-run), and help to escape the crisis. Nonetheless, sooner or later, quantitative easing will have repercussions. I often feel that printing money is like a time bomb. It is providing a (very) short-term solution, which, as you mentioned, can be good in the context of short-term president mandates, but in the long-run, it is often damaging the economy.
    You wrote that the Singapore government cannot spend funds that they raised through security debt. As a layman, I was wondering what is the rationale behind it, and how this is affecting the lending rating of the government.

    • Hi, Emma

      Thank you for your comment. There is a fundamental difference between Singapore using reserve and the US using quantitative easing. Using reserve is like depleting your own bank account; while quantitative easing is creating new money through debt.

      As why the Singapore government cannot spend funds that they raised through security debt, it is stipulated in the country’s Constitution and the Government Securities Act. It was a prudent policy to protect the country from abuse of power and I appreciate whoever drafted it in the past.

  • Thank you for providing your views Ivan. You brought up a good point “Never let a crisis go to waste.” . I think we should provide support to our growing local SMEs to keep them going eg. through some of the crowdfunding opportunities available. This would not only help them grow but also provide them chance to upgrade or enable them to do R&Ds to upskill and increase productivity, as what our government is encouraging businesses to do currently during this pandemic. This ought to be the approach for businesses in the long run, to plan and target on growing.
    Another good point mentioned is where companies should focus on their core business and excel in it first and then maintain their value first before venturing out to explore other viable options and not only think of revenue via branching out into real estate. Where their core business can’t even survive in the long run, then they are not doing what they exist for in the first place and this is risky for any company.

    • Hi Ivan,
      Singapore looks to be managing the covid disease well since being a small island, it is easier to quarantine compared to places like say USA, India or Indonesia. But WHO says the crises is far from over and I agree. Our economy is heavily dependent on trade and our survival on imports. This is one reason why printing and devaluing our currency is bad. If our global neighbours are still embroiled in the battle with the disease, we will ultimately be affected by less foreign investments, lower tourism etc. And just like how central bank lending has a money multiplier effect, unemployment and lower disposable income will have a multiplied negative effect on the economy as well. I do not have the details of the 100b distribution but i suspect the majority will not be simple handouts, but to jump-start the economy in the coming months ahead. As you mention, its a complex topic and ever-changing. More importantly singapore businessmen like to ‘follow the money’ when the govt gives subsidees (childcare centres, adult learning funds) hence the actual plan needs to be carefully administered to maximise the effects of the fiscal injections. We can only wait and see.

      • Hi, Jon

        You are right about the problem. Many handouts in the past were abused. There were so many scams claiming PIC scheme (Productivity and Innovation Credit Scheme) and all the money was wasted. Singapore is such a small country so it should be easier to manage fiscal policies, unlike the US and China. I really hope the money can be used effectively instead of benefiting the “smart” businessman.

  • Hi Ivan, do you have a breakdown of the 100 billion dollar spending? Or are the info provided for the public in details? Pardon my ignorance on this. As a layman, I am curious where did the money gone to? Yes, we have JSS, SIRS, Covid pay-out etc but they can’t possibly make up to 100 billion.

    On the need to spend, I am also having the impression that perhaps the govt know something which we don’t. However, it still bothered me that what are we suppose to expect from this 100 billion dollar spending?

  • This article seems like an attempt at adding as many varied topics together to seem intelligent – two lines quoting monetary policy, a famous quote from a historical personality, a myriad of one-off country examples – not to mention a couple fo links from years back (read further click bait). I would think it would be benefecial to stick to the promise of an articles headline, because that is what people have come to read about.

    • Hi, Jane

      Thank you for your comment.

      The purpose of the article is to trigger more discussion on this topic even though I do have my own opinion about it. If you ask me, I think there is more moral hazard if we continue to move down this path. When you face difficulty, how motivated can you be if you know that you have a rich family and you always have something to fall back?

      But many people comment on policymaking at the bare surface level without realizing that everything is intertwined. And it is indeed a complex subject that requires you have a thorough understanding of varied topics mentioned. That is why I bring all these topics up and hope to receive some more constructive opinions.

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