Wednesday, 9 September 2015

How Singapore keeps its AAA credit rating: Ho Ching

Prudent reserves management and saving for future are key reasons, says Ho Ching
By Chia Yan Min, Economics Correspondent, The Straits Times, 8 Sep 2015

The management of Singapore's reserves helps ensure fair allocation between generations while maintaining the Republic's position among the world's few triple-A credit-rated countries, Temasek Holdings chief executive Ho Ching said yesterday morning.

Ms Ho explained in a Facebook post how the country manages its reserves, and noted that a portion of the earnings and returns can be spent on the present generation, while the rest is set aside for the future. Over the past week of election campaigning, some opposition candidates have proposed that Singapore draw on more of its reserves to fund higher social spending.

Up to half of the returns from investing past reserves may be used for current government spending under the Singapore Constitution, Ms Ho said in her Facebook post.

The Constitution was amended in 1991 to require each successive government to live within its means, spending only what they have earned during their term of office.

Past reserves saved up by previous generations and governments before the most recent elections can be spent only with the approval of the President.

Proceeds from land sales are also locked up as past reserves, Ms Ho noted.

Most other governments treat land sale proceeds as revenue to be spent, including island economies like Hong Kong.

The International Monetary Fund also treats land sales as part of government revenue for spending.

"We in Singapore treat land sale monies like some prudent countries treat their oil revenues, a heritage asset transformed from one physical a financial form, and save them up in their sovereign wealth funds," she added.

Ms Ho likened the management of Singapore's reserves to a grandfather protecting savings and the interest earned for future generations. His children then have to decide whether to also save all the interest they earn for future generations yet unborn, or to spend part of it on present needs each year.

The Monetary Authority of Singapore, GIC and Temasek Holdings are the three key financial institutions of Singapore.

The returns from these three entities and other investments, such as interest from bonds, totalled $8.6 billion last year.
This helped to fund the $8 billion Pioneer Generation Package, Ms Ho said.

"It is very fitting that the returns from past savings and reserves are used this way to provide for our pioneer generation," she added.

"It also gives meaning to those of us working in these institutions, past and present as well as future."

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S&P affirms Temasek's top AAA credit rating
By Yasmine Yahya, Assistant Money Editor, The Straits Times, 9 Sep 2015

Ratings agency Standard & Poor's has affirmed Temasek Holdings' top AAA credit rating and stable outlook, citing its consistent record of generating positive returns from a sizeable, high-quality and liquid investment portfolio.

The strong rating on Temasek's long-term corporate credit takes into account S&P's view that there is an "extremely high" likelihood that Temasek would receive "extraordinary support" from the Singapore Government if necessary.

But even disregarding government support, Temasek still garners a standalone credit profile of "aaa", which reflects its excellent business risk profile and minimal financial risk profile, S&P said.

Temasek's stable outlook, meanwhile, reflects S&P's opinion that, despite recent acquisitions, there is a low likelihood of a marked deterioration in its financial risk profile over the next 12 to 24 months. This is due to the company's "excellent financial flexibility", anchored on minimal debt and robust cash flow generation, S&P said.

"The outlook also factors in our expectation that the company will further improve its information flow and disclosure standards, and our opinion that there will be no change to ongoing and extraordinary government support."

S&P would lower the rating on Temasek if it took on a lot of debt, for example, or if Singapore's sovereign debt rating - also AAA - was slashed.

IG market strategist Bernard Aw said this is unlikely to happen in the near future. "Furthermore, Temasek is in a very strong financial position, and has a record of limited debt. It has been in a net cash position since 2004," he noted.

Temasek grew its net portfolio value by $43 billion to a record $266 billion for the year ended March 31.

S&P said Temasek's latest large acquisitions, such as stakes in A.S. Watson and Olam International, reflect two key trends in its investment strategy. These enhance exposure to consumer-based industries and growing middle classes in developing markets. The acquisitions will also improve returns through investments in unlisted assets.

Late last year, S&P proposed an overhaul of the way it rates investment holding companies such as Temasek.

It drew a strongly worded response from Temasek, which noted that the "confusing" proposal lumps Singapore together with countries such as Greece, which is battling a debt crisis. S&P has not made further announcements on the proposal, and its latest assessment of Temasek was based on its existing framework.

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Singapore 'has lean govt, lighter tax burden'
Impact on economy compares well to that of most other developed nations: Temasek chief
By Chia Yan Min, Economics Correspondent, The Straits Times, 9 Sep 2015

Singapore has a "lean government" which imposes a much lighter tax burden on the economy than most other developed countries, Temasek Holdings chief executive Ho Ching said yesterday.

In a series of Facebook posts about the government Budget, Ms Ho also said Singapore cannot be "careless or wasteful" and must continue to allocate its Budget and guard its reserves judiciously, especially since government spending is expected to rise.

The governments of most developed economies collect an average of over 30 per cent of their gross domestic product (GDP) in taxes, said Ms Ho.

Scandinavian countries like Denmark have high tax burdens of almost 50 per cent, and even Norway, with its sovereign wealth fund from oil and gas, has a tax burden of over 40 per cent, she noted.

In comparison, the Singapore Government collected about 15 per cent of the country's GDP in taxes between 2009 and last year.

This percentage was higher - at about 20 per cent - before 2000, but has fallen since because the economy grew faster than government revenues and expenditures over the past 15 years, said Ms Ho.

"Looks like (the Singapore Government) is a pretty lean government with a much lighter tax burden than most other developed economies, no?"

Ms Ho, the wife of Prime Minister Lee Hsien Loong, generally keeps a fairly low profile but has made several public statements via Facebook during the election campaign.

She also put up a Facebook post about the management of Singapore's reserves on Monday.

Government Budget surpluses go into the reserves, she noted in her posts yesterday. The Government ran a Budget surplus of about 3 per cent from 1997 to 1999, "as there were small amounts of special transfers and top-ups for those years". The surplus fell to about zero to 1 per cent from 2000 to last year.

Singapore is likely to see smaller surpluses in future, given rising government expenditures and its competitive tax structure, Ms Ho said. This means reserves will also be accumulated at a slower rate.

"If we don't want to see higher tax burdens, we should not be careless or wasteful in our spending. (This is) as important for Government as for all of us as a people."

In her series of posts, Ms Ho also pointed out two "special categories" in the Singapore Budget not usually found in the budgets of other governments - special transfers and top-ups, as well as net investment income/net investment returns (NIR) contributions.

Net investment income refers to real cashflow into the government coffers. It includes actual dividends received, such as from Temasek Holdings, and also interest and dividends received by the Government from investing its reserves through GIC in bonds, shares and so on.

The NIR framework, which allows the Government to draw from investment entities' expected rather than actual returns, means contributions to the national coffers are less volatile, unlike actual dividends from realised profits. It also provides leeway for the Government to "lean against the wind", by spending more during downturns and saving more in good times, she added.

While the NIR approach offers advantages, estimates of expected returns must be used with caution since "it's not cash in the bank".

"The long-term expected return is an estimated number, which is dependent on various assumptions and scenarios. These include economic growth and inflation assumptions in the various major economies, which may or may not come true," said Ms Ho.

"There may also be temptation to fudge such estimates and overspend, especially if we do not take our role with absolute seriousness as stewards for past, present and future generations."

Special transfers and top-ups include items such as multi-year funding for GST credits for lower-income families, and the Pioneer Generation Package.

Setting aside these funds "ensures we do not create unfunded entitlement programmes and spend beyond our means", said Ms Ho.

"This also ensures that promises made by one particular government do not burden future governments, and more importantly do not burden future generations of taxpayers, like what we often see around the world."

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