The Untold Story of Singapore's Reserves

Chin C
August 17, 2023

Summary of a 3-part series by Channel News Asia covering PM Lee’s explanation about Singapore’s reserves

What makes up our reserves?
When do we use it?
Why is it important?
How is it managed?

And other important question we all have regarding the matter.

The purpose of the series was to alleviate uncertainties and clear misconceptions.

The purpose of this outline is to give you a quick summary of all the points discussed.

Truly beautiful explanations by PM Lee, if you have the time I recommend watching the full series here:
Part 1, Part 2, Part 3

Financial reserve
Financial assets, cash, shares, bonds, private equity, and other financial instruments
Land areas, fixed assets, buildings

Comprising six entities: MAS, GIC, CPF, JTC, HDB, and Temasek
The Singapore President has oversight and veto power over key names on the board and CEO.
Financial assets and land held by the five entities are are meant to converted, sold, pledged, or pawned if ever a need arises.

Idea was first floated by Mr. Lee Kuan Yew in 1984.
A white paper was put out in 1988 to implement the scheme.
A new legislation was written to amend the Constitution to provide for the elected president.
This provided a mechanism to protect the reserves while not paralysing the government.

Contingent draw on the reserves in 2008 during the global financial crisis. Guarantee on deposits with a contingent liability on reserves.
Peak measures in 2009 to see Singaporeans through the crisis.
Supplementary budgets in 2020 due to the COVID-19 pandemic.
Reserves used to preserve jobs and livelihoods without going into debt.
Singapore was able to purchase vaccines very early due to the reserves.
This ensure sufficient supply could be acquired without needing to resort to bargains which might reduce opportunities to acquire the much needed vaccines.

The National Reserves of Singapore accounts for one-fifth of government revenues (3.5% of GDP).
Its contribution to the government's revenues is equivalent to the corporate income tax and personal income tax revenues combined.
To replace the contribution of the reserves, corporate income tax would need to be doubled or personal income tax would need to be more than doubled.
The reserves are an important and fair contribution to the government's revenue and are sustainable because of the way the formula is designed.

The reserves need to be managed in an optimal way to achieve maximum returns.
To achieve that, investment income, including dividends and capital gains, should be used to determine the spending rule, not just interest income.
A spending rule was developed to stabilise the net investment income and is adjusted based on long-term expected returns.
The spending rule is vetted by people with integrity and knowledge and is fitted into the system of the CPA of the President.

Singapore's reserves are unique and have been built up over 50 years since Independence.
The reserves have enabled Singapore to maintain its "Garden of Eden" state and command respect internationally.
Singaporeans enjoy a "Singapore premium" because of the country's reputation and standard of living.
The reserves are a source of comfort and reassurance in times of need and have a responsibility to future generations.

The sustainability of the reserves is a challenge for Singapore's 4G leaders because of the slow growth of returns and growing spending needs.
The GST increase is one of the ways to address the challenge of growing spending needs.
The challenge is to make sure that Singaporeans understand the value and importance of the reserves and hold them as a great resource.

In the early years, the line between being a company and being the government was not as sharp as it is now and the government had to start many companies because no one else was.
Companies were started to fill gaps in the market and to promote growth in Singapore.
In 1974, all government companies were put under Temasek Holdings to rationalise their holdings and sell off non-viable companies.
Temasek Holdings was created to have a portfolio of diversified Singaporean companies in the Asian region and in the developed world.
GIC (Government Investment Corporation) was created in 1981 to manage Singapore's foreign reserves. GIC invests money for the Monetary Authority of Singapore (MAS) and the Ministry of Finance, and manages a major part of Singapore's financial reserves.

Temasek and GIC have different histories and roles.
Temasek manages Singaporean companies to promote growth and diversity in Singapore's economy.
GIC manages Singapore's foreign reserves to make them grow and protect them in downturns.
To grow Singapore's reserves, GIC invests money all over the world in various markets.
However, investments are not guaranteed to succeed and require judgment, risk-taking, and competent professionals.
The government's responsibility is to shield the GIC team from political pressures and interference so that they can do their job properly.

The GIC board does not go into individual investment decisions but sets the overall mandate, risk limits, and strategy.
The Temasek board appoints people who know what they are doing, puts them in charge, and trusts them to grow and prosper Singaporean companies without political interference.
The government has political accountability for Temasek and GIC but should appoint people who carry enough weight so that the markets and the GIC team know that the board makes decisions on behalf of the government.

The actual figure of Singapore's reserves is not published, and only a limited number of people know the full value.
The government wanted to avoid asking or receiving favours from government companies, so they created Temasek Holdings to operate commercially rationally and without political interference.
GIC works differently from other fund management companies because the board sets the mandate, strategy, and chooses key people, and other governance committees do the actual investments.
Singapore has asked themselves whether to have two GICs to compete with one another, but they concluded that building one team is hard enough.

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