Singapore Spreads the Wealth
(Bloomberg Opinion) -- Singaporeans may be in line for some good news. The central bank’s decision to transfer S$45 billion ($33 billion) to the island’s sovereign wealth fund could push back an increase in the consumption tax.
The Monetary Authority of Singapore said in a statement Wednesday that foreign-exchange reserves of S$404 billion are more than it needs to manage the local dollar against a basket of trading partners’ currencies. (The MAS uses the exchange rate rather than interest rates to keep inflation under control in the city-state’s small, open economy.)
In the central bank’s calculation, at least 65 percent of GDP in official reserves is required to conduct monetary policy and maintain financial stability. It’s currently holding 82 percent. Therefore, it’s giving S$45 billion to GIC Pte.
The exact firepower of the sovereign wealth fund is a secret. All that authorities have ever revealed is that the portfolio, which holds investments in a wide range of asset classes and instruments outside of Singapore, is “well over” $100 billion. Even in 1997, when neighboring Malaysia, Indonesia and Thailand were witnessing a meltdown in their exchange rates, the Singapore dollar held its ground. Speculators simply didn’t know how deep GIC’s pockets were.
Now those pockets will be padded with another $33 billion.
GIC is a long-term investor. Its mandate is to patiently earn the extra return the central bank can’t reach for without jeopardizing safety and liquidity (the foreign-exchange reserves are thought to be parked in low-yielding securities such as U.S. Treasuries). GIC’s reference portfolio, which reflects the risk that the government is prepared to tolerate, corresponds with a 20-year U.S. dollar-denominated nominal return of 5.7 percent. (On its actual portfolio, GIC last reported a nominal U.S. dollar return of 5.9 percent on a rolling 20-year basis, and a real rate of return, adjusted for global inflation, of 3.4 percent.)
In a world of permanently low inflation and interest rates, even a 4 percent U.S. dollar return, net of fees and expenses, can be considered decent. Assuming that’s what GIC expects to earn, transferring half of the gain to the government would mean an annual contribution of $660 million to the budget.
How significant is that $660 million, equivalent to about S$900 million? Consider the next increase in the island’s goods and services tax rate, last raised to 7 percent in 2007. The hike was widely expected to be announced last year, but Finance Minister Heng Swee Keat gave people a reprieve and said it would occur between 2021 and 2025; probably in the earlier part of that four-year window.
GST is expected to fetch the government S$11.69 billion in the current fiscal year. When the rate is eventually increased, depending on prevailing economic conditions, consumption will dip slightly or crater. Why take such a risk before it’s absolutely essential?
For the government, a 2-percentage-point tax increase that causes consumption to drop by, say, 15 percent isn’t a great way of raising S$1 billion of extra revenue – especially when 90 percent of that amount could come from a partial shifting of central bank reserves to the GIC.
If, in the process, Singaporeans are spared a GST increase by even a year or two, their wealth will rise permanently, and they’ll have their sovereign fund to thank for it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.
©2019 Bloomberg L.P.