The three Singapore investment entities will not be made to take on more risk even if their returns are dragged down by persistently slow global growth, Deputy Prime Minister and Finance Minister Tharman Shanmugaratnam told Parliament yesterday.
If Temasek Holdings, GIC and the Monetary Authority of Singapore (MAS) end up contributing less to the national coffers on the back of a lacklustre world economy, the Government will have to cope by either adjusting its spending or finding alternative forms of revenue, said Mr Tharman.
He was responding to queries from MPs during a debate about an amendment to the Constitution, to include Temasek in the Net Investment Returns (NIR) framework.
NIR - A quick look
Q What is the Net Investment Returns (NIR) framework?
A The NIR framework is part of the way the Government frames its financial accounts and essentially determines the maximum amount of money it can draw from its investment entities. Introduced in 2009, it allows the Government to spend up to 50 per cent of long-term expected real returns generated from assets managed by GIC, the Monetary Authority of Singapore and now, Temasek Holdings.
Q What does "long-term expected real returns" mean?
A In the context of NIR, it means a rate of return that is compounded and averaged out over 20 years. This allows the rate to smooth out the better returns in the good years and the lower returns, when the markets are bad. Also, the rate will include both realised and unrealised investment gains. GIC, MAS and Temasek will look at market conditions and adjust their long-term expected real return rates annually.
Q Why is Temasek being included in the NIR framework now?
A The inclusion of Temasek comes as the Government steps up its investment on infrastructure, human capital and healthcare.
Overall government spending is projected to reach about 19 per cent to 19.5 per cent of gross domestic product, on average, over the next five years, Deputy Prime Minister Tharman Shanmugaratnam said during his Budget speech earlier this year . Including Temasek's contribution will add to Singapore's fiscal resources as spending needs rise. It will push NIR contribution to Singapore's Budget from 2 per cent to about 3 per cent, on average, over the next five years.
Q What are the key concerns?
A MPs and members of the public have questioned whether the Government is pulling its last fiscal lever to fund its ever-increasing spending.
Some also wonder if Temasek is now forced to alter its investment strategies in order to sustain a certain return rate to fund government expenses. In response, Mr Tharman said there is no contribution target for GIC, MAS and Temasek, and Singapore will continue to maintain its fiscal prudence.
Wong Wei Han
The framework, set up in 2009, allows the Government to spend up to half of the long-term expected investment returns on the net assets managed by MAS and GIC.
The amendment allows the Government to apply the framework to Temasek as well. The move to include Temasek in the NIR framework was first announced by Mr Tharman in February, when he set out this year's Budget.
MPs expressed concerns over the move, though the amendment passed unanimously among the 73 MPs present during voting in Parliament yesterday.
Temasek's inclusion in the framework might put pressure on the investment firm to deliver results, said Nominated MP Randolph Tan.
Temasek has "proven itself more than up to the task" in handling risks associated with fluctuating global economic conditions, but there are no guarantees this state of affairs would continue, he said.
"The question should also be asked as to whether there could come a time when the decision we make today becomes a burden on Temasek to deliver results."
Workers' Party MP Pritam Singh (Aljunied GRC) said his party supported the amendment but asked if the Government might face a cash shortage if Temasek's actual returns do not match its long-term expected returns. In response, Mr Tharman said strong safeguards ensure that Temasek's contributions to the Budget will remain sustainable. These include retaining at least 50 per cent of real returns in the reserves, and spending only investment returns on the Government's net assets, not total assets, to ensure that enough is available to cover debt servicing costs.
Ms Foo Mee Har (West Coast GRC) and Mr Liang Eng Hwa (Holland-Bukit Timah GRC) asked if the Government could provide more details on how Temasek's long-term expected returns are calculated, given that its portfolio is relatively more volatile compared with those of GIC and MAS.
Mr Tharman said the process is reviewed annually and "shaped by a sense of realism about the risks in the investment world". It is based on views from seasoned professionals and experts, who "seek not to be swayed by short-term sentiment".
He also reiterated that Temasek's inclusion will not change its investment strategies: "The NIR framework does not set a target rate of return for the investment entities.
"They have to be faithful to their mandates, and their mandates particularly in the case of Temasek and GIC are to invest for the long term, aim to grow the value of their assets over the long term and to ride out the short-term cycles."