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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is an FT contributing editor
Singapore is a poster child for fiscal prudence. It almost always runs a budget surplus, and its constitution virtually prohibits borrowing to pay for current spending. All three major credit rating agencies assign it triple-A ratings, and the IMF judges its sovereign debt risks to be low.
But the country also has a whopping ratio of debt to gross domestic product — around 170 per cent. By the end of the year it will be the third most indebted nation on the planet. Are there lessons to take from the country’s approach to debt? If so, they come from understanding how it has arisen.
First, the Monetary Authority of Singapore has intervened frequently to prevent the Singaporean dollar from appreciating relative to the basket of currencies against which it is managed, selling Singaporean dollars for foreign currency. As with Switzerland, the result has been burgeoning foreign exchange reserves, far more than the government’s estimate of what they need to maintain their peg. The government’s solution to this reserve glut has been to issue close to 40 per cent of GDP in non-marketable debt to the central bank.
Second, the social security system is configured in a manner bound to drive up government liabilities. Residents and their employers are compelled to contribute a significant portion of their salaries to the Central Provident Fund, from which they can draw money to pay for healthcare, housing and retirement. All CPF receipts are passed back to the government in return for non-tradable government debt certificates, which amount to over 90 per cent of GDP.
Third, the government understands the importance of maintaining a liquid bond market. In the west we’ve come to regard bond markets simply as the only venues large enough to satisfy government borrowing needs rather than public goods in themselves. But absent deep debt capital markets, companies have little option but to channel all their financing needs through the banking system. In the wake of the 1997 Asian financial crisis, Singapore acted to ensure that companies could raise funds in capital markets rather than tie their collective fortunes to a small group of financial institutions. Bonds and bills sold into the market add close to 40 per cent to the debt-to-GDP ratio.
Given a constitutional prohibition on using borrowing to fund day-to-day spending, receipts from debt sales are passed over to be managed by GIC, the government’s wholly-owned fund manager, and invested in global stocks, bonds, infrastructure and private equity. The result is that Singapore’s balance sheet looks more like a hedge fund than a sovereign. And despite significant short-term volatility, this has worked well for them over the medium-term. YeeFarn Phua, a director of sovereign ratings at S&P Global, estimates that the government has amassed a liquid portfolio worth more than $1tn — twice the level of GDP.
A final source of indebtedness comes from debt-financing strategic local infrastructure. Despite nosebleed-level gross government debt metrics, parliament authorised in 2021 the issuance of S$90bn of bonds — around 20 per cent of GDP at the time — to finance projects like tidal walls and subway systems.
Debt-fuelled asset purchases and investment by the public sector don’t always end well. In the UK, Woking council’s leveraged acquisition of a concentrated portfolio of commercial properties didn’t save it from issuing a section 114 bankruptcy notice last year. Arguably, it hastened it. And in 2009, state-backed conglomerate Dubai World needed bailing-out and restructuring after running into problems. But these look more like incompetence than bad luck.
The Singaporean state has been rewarded for absorbing market risk in the form of a dividend — worth over three percentage point of GDP — which is often large enough to flip increasingly persistent primary budget deficits into overall budget surpluses.
Fiscal rules can be a useful check on explosive debt dynamics. Six of the seven sets of fiscal rules deployed by UK governments since 2010, for instance, have referenced debt stock. But such a check would have barred the kind of investment that has enriched and developed Singapore. The experience of the city state shows that higher debt issuance is a poor measure of fiscal space. Concerns that markets may revolt if tapped for investment capital have not been borne out.
In any economy starved of investment, government has a role to play without fear of bond market vigilantism.