The Business Times

Slide in assets value not a draw on reserves: Tharman

Instead, Constitution guards against actions that cause 'systemic erosion' of reserves

Lee U-Wen
Published Mon, Aug 4, 2014 · 10:00 PM
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[SINGAPORE] A decline in investment returns or a drop in the market value of assets in the course of market cycles is not considered a draw on past reserves, Deputy Prime Minister Tharman Shanmugaratnam said yesterday.

"Any strategy of investing the reserves for long-term returns must mean taking investment risk and will involve ups and downs in market value of the portfolio - not just from one year to another, but very frequently within the year."

The scenario of entering into liabilities that would lead to a "systematic and deliberate" drawdown of reserves should not be confused with the fluctuations in the value of the reserves due to market volatility and cycles, which Mr Tharman said occur all the time.

The Constitution guards against actions that lead to a "systematic erosion" of reserves, not the investment of reserves in order to gain long-term returns, which must involve investment risk and fluctuations in market value.

Mr Tharman said the only way to avoid fluctuations in the value of Singapore's reserves is to avoid taking investment risk, such as by investing all of the country's assets in cash-like instruments.

"However, this would mean accepting low returns over the long term, and indeed returns that would likely fall below the interest rates on SSGS (Special Singapore Government Securities) and even SGS (Singapore Government Securities) over the long term," he said in parliament.

Mr Tharman, who is also Finance Minister, made these points in response to queries from Non-Constituency MP Gerald Giam about Singapore's net assets and the limitations to use them.

Mr Tharman explained that the government's net assets, or its assets in excess of its liabilities, are the government's reserves as defined under the Constitution.

The bulk of the reserves are those accumulated by previous terms of government, also known as the past reserves. It is the past reserves that the Constitution seeks to safeguard, especially through the powers vested in the President, he said.

"The GIC's mandate is to take risks aimed at achieving long-term returns, in full knowledge that the government's portfolio will be exposed to market risks that could mean weak returns or even declines in value on a mark-to-market basis for a time, before cycles reverse and values rebound," he said.

GIC does not manage SSGS or CPF monies on its own, but rather a combined pool of government funds including a significant sum of unencumbered assets. "This is why the GIC's mandate is to take calculated investments risks aimed at achieving good, long-term returns on the government's funds, without regard to the government's liabilities."

Mr Tharman noted that while GIC has achieved good returns over the long term, there were years where its returns have been low or even negative.

The Global Financial Crisis led to a significant reduction in GIC's annualised five-year return ended March 2013 to just 0.5 per cent in nominal Singapore dollar terms. A year later, the five-year annualised return rebounded strongly to 8.2 per cent in Singapore dollar terms, and this volatility was also seen in comparable market portfolios, said Mr Tharman.

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