Singapore

IN a surprise move, Temasek Holdings from 2017 will be contributing more to the government's coffers as it gets included in the Net Investment Returns (NIR) framework. It has been contributing about S$2 billion of dividends on average in the last five years.

Singapore will include the total expected returns from Temasek Holdings in its NIR framework, said Tharman Shanmugaratnam, Deputy Prime Minister and Finance Minister, on Monday.

The current NIR framework - implemented in 2009 - permitted the government to spend up to 50 per cent of the expected long-term real returns on its net assets managed by GIC, and the Monetary Authority of Singapore (MAS). It was a significant change from the old Net Investment Income framework, under which the government could only spend from actual investment income, comprising dividends and interest, he said. The new NIR framework, in contrast, allows the government to spend based on expected long-term returns, including both realised and unrealised capital gains, he said.

Mr Tharman said that Temasek's inclusion in the NIR framework was deferred in 2008. One reason was that there were no established methodologies for projecting the long-term expected real return on its portfolio. This is in light of Temasek's investment approach of taking concentrated stakes and making direct investments.

"Second, Temasek's investment strategy was still evolving, having begun to invest in more geographies and sectors since 2002," he added. So the government proceeded with GIC and MAS first, he said.

The net investment returns contribution (NIRC) - the portion of the returns from the reserves managed by GIC and the MAS and the dividends from Temasek Holdings - was S$8.55 billion for FY14 (revised estimate) and S$8.94 billion for FY15 (expected). Temasek declared about S$2 billion of dividends per year on average in the last five years, said spokesman Jeffrey Fang.

"We are now ready for our spending rule to be based on the total expected returns of all three investment entities, including Temasek," said Mr Tharman.

The government has been working with Temasek to develop an approach to project its expected long-term returns, taking into account the nature of its investment portfolio, although its equity-only portfolio will continue to be more volatile and subject to more pronounced investment cycles than the MAS and GIC portfolios, he said.

"Including Temasek in this framework would enable us to spend based on its total expected returns, including realised and unrealised capital gains, and not just actual dividends paid by Temasek to the government," said Mr Tharman. "The move will bolster our fiscal resources at a time when we have to fund long-term critical infrastructure and develop the human talent and capabilities to secure our future." The question is how much more will Temasek contribute under the NIR framework and whether it might change its investment strategy.

Mr Tharman said that the change to the higher income tax rates is expected to raise additional revenue of S$400 million a year when it comes into effect in 2017. Temasek, as well as the projected S$400 million from the higher income taxes, will provide additional revenues equal to about one per cent of gross domestic product (GDP) annually for the Budget over the next five years, he said. The 2014 GDP was S$380.6 billion, and one per cent would be S$3.8 billion. Based on 2014 GDP value, Temasek could be contributing S$3.4 billion under the NIR framework, BT estimates.

"At this stage, it is not possible to estimate the exact amount of additional NIRC that we will be able to take onto the Budget as a result of placing Temasek on the NIR framework," said a Ministry of Finance spokesman.

"We are still in the process of preparing for the necessary amendments to the Constitution later this year, and the Temasek Board has yet to certify the expected long-term rate of return for Temasek," said the spokesman.

Mr Fang said that the NIR framework will not result in any change to Temasek's investment strategy. "The investment strategy of Temasek is the responsibility of Temasek's board and management. Temasek will continue to focus on delivering sustainable returns over the long term," he said.

"Honestly, it comes as a surprise - getting an extra boost to the fiscal coffers," said DBS Bank senior economist Irvin Seah. The talk had been that the government might tweak the percentage that it can tap from the NIRC, he said.

OCBC Bank economist Selena Ling said that the inclusion of Temasek under the NIR framework is unlikely to see it change its investment strategy. "In principle, likely no - but it really depends on the assumptions of what is the long-term expected real return," she said. "Of course, it is also plausible that a future government whose mindset is less fiscally prudent to potentially exert pressure on Temasek to review its projection methodology in order to extract higher dividend contributions," she added.

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