S'pore fiscal reserves act as buffer to deficits

Republic's credit rating unlikely to be hurt in the short term by lower returns from Temasek and GIC: Moody's

Lower returns from Singapore investment firms Temasek Holdings and GIC are unlikely to hurt the country's credit rating in the short term, said ratings agency Moody's.

This is because Singapore's strong fiscal reserves will act as a buffer even when the chips are down, while stringent drawdown rules limit the impact on the reserves.

Last month, Temasek reported that its portfolio value declined 9.02 per cent as at March 31 compared with last year, the first fall since the financial crisis in 2009.

Soon after, GIC reported a dip in its returns. The 20-year annualised real rate of return - its most important benchmark - was 4 per cent for the financial year ended March 31, down from the 4.9 per cent in the previous year.

The sovereign wealth fund also warned of tougher times ahead, noting global growth prospects were moderate while low interest rates will weigh on investment yields.

Moody's agreed with the prognosis of weaker returns, noting that a Chinese slowdown and Brexit could drag returns lower.

SUFFICIENT BUFFERS

We do not consider one-off fiscal slippages, stemming from a short- term fall in returns, to be credit negative. This is because Singapore has sufficient fiscal buffers to withstand such deficits over the near to medium term.

MOODY'S

But it added that the falling returns are unlikely to hurt the Government's budget, at least in the short to medium term.

GIC and Temasek, along with the Monetary Authority of Singapore (MAS), contribute to the country's budget through a scheme called Net Investment Returns (NIR). Under the NIR framework, the Government can spend up to half of the long-term, expected real returns, including capital gains, from relevant assets of GIC, MAS and Temasek.

"We do not consider one-off fiscal slippages, stemming from a short- term fall in returns, to be credit negative. This is because Singapore has sufficient fiscal buffers to withstand such deficits over the near to medium term," said Moody's.

"We would view lower returns as credit negative if they resulted in persistent fiscal deficits, creation of debt, or an erosion of accumulated reserves - all of which would mark a departure from historical trends."

At the same time, even if the investment returns for Temasek and GIC were to fall, they are likely to decline gradually, said Moody's.

A version of this article appeared in the print edition of The Straits Times on August 18, 2016, with the headline 'S'pore fiscal reserves act as buffer to deficits'. Print Edition | Subscribe