Economists see lower Temasek, GIC returns denting govt coffers

Singapore

THE current brittle investment climate has weighed on Singapore's sovereign wealth fund GIC and state investor Temasek Holdings. This will in turn affect the government's coffers, observers told The Business Times.

They add that with both entities expecting the situation to drag on for years, there is a pressing need to review the role these contributions play in the fiscal budget.

Economists point out that GIC and Temasek have ridden on earlier economic boom and bust cycles, boosting their portfolios with high asset returns.

But the current low-growth, low-inflation and low-interest rates environment, which has its roots in the great financial crisis in 2009, is something the world has never seen before. Just last month, the International Monetary Fund lowered its 2017 global growth forecast by 0.1 percentage point to 3.4 per cent.

OCBC economist Selena Ling said: "And if that continues to be the case, all options are on the table for the Singapore government on how they can balance the Budget."

This is due to a constitutional provision to have these returns from GIC and Temasek contribute to the government's budget.

Starting from fiscal year 2016, their long-term expected real returns of assets, together with those at the central bank Monetary Authority of Singapore (MAS), will be part of the net investment returns (NIR) portion of the government's budget. The government can spend up to 50 per cent of this each year.

The rates of return are proposed by these three entities before each year to the government. Only if the president does not concur with the rates submitted, will the respective 20-year historical average rates of return be used to calculate how much the government can spend.

Historically, these assets form a significant part of the fiscal budget. At a historic high of S$14.7 billion in FY16, it is the single largest revenue contributor to the government's coffers.

But portfolios at GIC and Temasek have taken a hit recently, with their officials flagging lower returns in the years to come.

GIC said in late July that its annualised rate of return over global inflation over the past 20 years fell to 4 per cent in the year ended March 2016, from 4.9 per cent the year before. Its reference portfolio comprises a 65 per cent allocation in global equities and a 35 per cent allocation in global bonds.

This situation is set to continue. "GIC anticipates significantly lower and more volatile returns in the next 10 to 20 years," the fund said.

Temasek also said in early July that its net portfolio value shrank by 9.02 per cent to S$242 billion in 2016 - its first one-year negative return since 2009. About three-fifths of the state-investor's holdings are in listed assets.

Temasek's head of strategy Michael Buchanan had thus raised concerns of lower returns in the years ahead.

Edward Lee, head of Asean macro research at Standard Chartered, said that GIC's and Temasek's bleak assessments are guided by falling fixed-income yields, as central banks slash interest rates and engage in quantitative easing to stoke growth.

"We estimate that 25 per cent of global fixed income is currently yielding zero per cent or lower," he said.

But even with central banks' efforts, growth still seems elusive, which will place more pressure on GIC and Temasek's portfolios.

Economists say that exacerbating the situation is a lack of a clear growth engine for the world economy as China's growth slows down. Productivity levels are low too, while geopolitical tensions weaken investor sentiment.

Deputy Prime Minister Tharman Shanmugaratnam had also pointed out previously that structural realities mean that interest rates will remain low over the medium to long term. This is because labour forces in major economies are ageing and will save more. This results in a "stubborn gap" of savings surplus over investment, lowering interest rates.

Economists pointed out that should these concerns weigh on GIC and Temasek in the long run, fiscal prudence becomes an even trickier act to balance for the government.

Said Song Seng Wun, economist at CIMB: "Raising taxes, tapping reserves - these are all questions that touch on politics and the economy . . . if the NIR (net investment returns) becomes low, it will have an impact on the broader economy and tax rates."

Already, marginal tax rates for the top 5 per cent of income earners have been raised. The government has also tapped reserves for the first time in 2009 to help workers and firms.

Said Ms Ling: "There's no real sacred cow that cannot be slaughtered. Increasing the contribution rates of GIC, Temasek and MAS can also be considered."

But even as economists entertain these possibilities in balancing the Budget, they stress the importance of balancing expectations with the economic climate of the day. Only then can financial prudence be exercised.

Said ANZ economist Ng Weiwen: "It's true that the NIR buffer is going to be reduced because of the expected lower rates of returns. But this also means that the government has to adjust its expectations correspondingly, and then prioritising what kinds of fiscal spending and multipliers it wants to achieve."