7. Why does Singapore have a high debt-to-GDP ratio despite running budget surpluses in the past? Do the debts mean that our CPF monies are not safe?
Singapore has no net debt. Its large gross debt position is due to the issuance of government securities. However, the Government’s assets substantially exceed these debts.
This can be seen from the fact that the Government has significant net investment returns that can be spent on the Budget each year. Under the Constitution, the Government is able to spend from the Net Investment Returns only if it enjoys a positive net asset position. In other words, if the Government’s assets fall short of its liabilities, there can be no contribution from the investment returns on reserves in the Government Budget.
After deducting all the Government’s liabilities (including CPF monies), the remaining net assets produce significant returns. The Net Investment Returns Contribution (NIRC) is about $7 billion; it should be further noted that the NIRC only comprises up to 50% of the returns earned on the reserves.
The Government’s strong net asset position also illustrates why CPF monies are safe. To underscore this, the Government fully guarantees the bonds that CPF monies are invested in.
8. Why does Singapore need to issue so much debt anyway?
Singapore has a unique system. We do not borrow to fund the Government Budget, as the Constitution as well as the Government Securities Act prevents us from doing so. Furthermore, the Government is required to run a balanced budget over every term of government, which is about 4 to 5 years. Government debt issuances are therefore invested and not spent on the Budget.
The two types of Government debt securities are issued for reasons unrelated to the Government’s fiscal needs:
a) Singapore Government Securities (SGS) are marketable debt instruments issued for purposes of developing Singapore's debt markets. The principal objectives of SGS issuance are to: i) build a liquid SGS market to provide a risk-free benchmark against which other private debt securities are priced off; ii) foster the growth of an active secondary market both for cash transactions and derivatives, to enable efficient risk management; and iii) encourage issuers and investors, both domestic and international, to participate in the Singapore bond market. As at December 2011, SGS stock is valued at S$79 billion, while the stock of Treasury-Bills is valued at S$59 billion.
b) Special Singapore Government Securities (SSGS) are non-tradable bonds issued specifically to the Central Provident Fund (CPF) Board, Singapore’s national pension fund. Singaporeans’ CPF monies are invested in these special securities which are fully guaranteed by the Government. The securities earn for the CPF Board a coupon rate that is pegged to CPF interest rates that members receive. As at December 2011, SSGS stock is valued at S$216 billion.
The issuance of Government debt is solely for the above two purposes. As explained in item 5 and in Q11 on MOF’s website [http://app.mof.gov.sg/reserves_sectionone.aspx]
, the proceeds from the issuance of debt cannot be used to improve the investment performance of GIC or Temasek.