SINGA Explained – Singapore is Getting in Debt to Make Even More Money

One of the most important and yet least covered topics in Singapore’s latest 2021 budget announcement was SINGA – Government Loans Act for Major Infrastructure – meaning that for the first time in about 40 years, the government Singaporean will borrow money to finance some of its projects.

In other words, Singapore is on the verge of incurring massive debt – up to S $ 90 billion, or roughly 20% of its GDP.

“Debt” is a dirty and scary swear word that in recent years has been linked to financial woes across the world – but, oddly enough, in the small city-state, that’s not. Let me explain why.

The Singapore government is prohibited by law from borrowing money to finance recurring budget spending (such as social spending). This is a wise policy preventing the populist swelling seen in the West, where competing political camps have continued for decades to buy votes by pledging ever larger donations, which often had to be financed by endless loans. de facto bankruptcy of several countries, which were only saved by a massive rescue program, following the 2008 crisis).

In the meantime, Singapore has done the opposite.

The government is obligated to manage balanced budgets (except for deep crises like the current pandemic) and typically accumulates large surpluses during each five-year term. These savings are then transferred to past reserves, which are managed for profit. Before the pandemic, the 20-year nominal annualized rate of return on GICs was 5.5% (in other words, the company manages to almost triple its assets every 20 years).

Image Credit: GIC

While the full size of Singapore’s reserves is not known (as CPG holdings figures are not publicly available), the estimated range is around S $ 700 billion to S $ 1 trillion – returns on which provide more than 20% of the government’s annual revenue (is $ 20 billion in 2021).

Over the past decades, the government has financed its main investments within budgetary means. However, as reserves have grown, interest rates have fallen around the world, which has lowered borrowing costs. Yields on 10-year Singapore government bonds were previously around 4% per year in the early 2000s, compared to just 1.25% today.

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As a result, it would be much more costly for the Singapore government to liquidate its reserves or use current income to finance large infrastructure projects than through borrowing. The cost of using the money that would otherwise end up in reserves is 4-5% (the return the GIC can expect to earn on average over the long term), compared to the 1-2% the government pays into the reserve. bond markets. While for almost all countries the cost of borrowing is a loss, for Singapore it is simply an opportunity cost lower than using the current reserve currency. It is less expensive.

Thanks to decades of profitable savings and investments, getting into debt isn’t a necessity – it’s an opportunity.

With SINGA, the government will be able to spend an additional $ 90 billion over a 15-year period, investing in already planned and needed infrastructure projects, without reducing its recurrent budgetary outlays and allowing a faster return of the economy. money taken for Covid- 19 relief from reserves.

Furthermore, the additional spending is expected to provide an additional boost of 1 to 2% of GDP (which could be even larger with multiplier effects, as money flows through the economy) per year. All this very cheaply.

In other words, with just one law, the Singapore government is able to accomplish several things:

  1. Protect reserves and return Covid-19 relief money faster.
  2. Secure funding for major infrastructure projects over the next 15 years without having to cut annual expenses or divert money from other causes.
  3. Provide additional stimulus to the economy in a world beset by the consequences of the pandemic.
  4. All this at a cost less than the use of money from its annual budgets, thanks to decades of profitable investment of its vast reserves.

As the rest of the planet plunges into the explosion in debt due to Covid-19, which has prompted some to print money to fund barely sustainable spending levels just to avoid economic collapse, the city -Asian state is in an enviable position to have the freedom to borrow not to save itself from disaster, but rather to secure a better future through low interest rates.

Every crisis is an opportunity and with SINGA, Singapore is positioning itself to make the most of it.

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Jothi Venkat

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