Timely to diversify Singapore's funding sources for major infrastructure

AMID a slowing global economy and trade tensions between the world's two giant nations that could worsen the slump, the Singapore government's decision to guard the city state's reserves and instead borrow to partly fund "lumpy" and long-term infrastructure investments is perfectly timed.

The recent Budget announcement by Finance Minister Heng Swee Keat on the government's plan to add debt to the financing mix for long-term projects like Changi East and the Cross-Island MRT line, the benefits of which span multiple generations, is in itself not new and represents a follow through or reiteration of last year's Budget.

The backdrop, however, has changed much since then.

The external uncertainties that abound - the potential knock-on effects from the rise of American protectionism to the widening cracks in China's economy and uncertainty over how much the growth of the world's second largest economy could slow - are stoking a deep fear in the financial markets. Another protracted concern is the risk of a hard Brexit.

The decision to fund a "significantly" rising infrastructure bill with debt was made also because pressure for more social spending is piling on, particularly given Singapore's rapidly ageing society; the latter will be funded by recurrent revenue. It is sensible and financially prudent to tap a small proportion of debt financing for long-term projects. This is, in fact, standard public-finance practice around the world, particularly to match the assets with liabilities.

For strategic infrastructure projects, the government will also consider providing guarantees for the loans to reduce borrowing costs. This is one way to tap the city state's reserves without quite drawing on them. In fact, some economists have suggested that the government consider tapping private-sector financing to complement the government's infrastructure delivery.

Potentially, one sweet spin-off from diversifying the government's funding sources is a livelier domestic capital market and commercial lending space.

One commentator added that Singapore's focus on sustainable development could provide opportunities for more green, social and environmental loan products both in the form of equity, capital markets or commercial loan products. This could enhance the city state's position as a hub for the development of these products.

The local bond market could see more activity. Statutory boards - namely the Housing & Development Board (HDB), the Land Transport Authority (LTA) and the Public Utilities Board - have already been tapping the local debt market to finance public housing, rail and water infrastructure. Analysts expect the bond market to deepen, with potentially more longer-dated bonds, such as the likes of a rare 40-year debt paper issued by LTA last year, which was upsized from S$1 billion to S$1.5 billion following strong investor response.

Raising funds through the capital markets will also raise transparency and accountability of such infrastructure projects, while encouraging issuers to strengthen their systems and processes in, for example, risk management, reporting and treasury.

Truth is, not all countries that pick this route can do so from a "good place" without the spectre of a rising debt load hurting their credit profile. Singapore is able to mix things up at the balance sheet level, thanks to a structurally robust fiscal position, including healthy reserves and its vaunted net-creditor status. Another big plus is that it is one of fewer than 10 sovereigns in the world endowed with a long-term triple A rating by international rating agencies.

Indeed, debt isn't always a bad thing.