SINGAPORE - The Government's net assets, that it relies on to back the interest rates paid on CPF savings, are Singapore's reserves, said Deputy Prime Minister Tharman Shanmugaratnam on Monday.
And the bulk of it is made up of past reserves, accumulated during previous terms of government.
But this does not mean that the Government has drawn down on past reserves as defined by the Constitution when it relies on its buffer of net assets to meet the obligations on its liabilities, including its commitments on Special Singapore Government Securities (SSGS), in years when investment returns had been weak.
CPF savings are invested by the CPF Board in SSGS, and that is the link between SSGS and CPF interest rates.
Mr Tharman, who is also Finance Minister, said this in response to a question from non-constituency MP Gerald Giam, who wanted to know if the Government had tapped into past reserves to pay the guaranteed interest on Central Provident Fund savings. Approval from the President is required to use these funds.
In eight of the past 20 years, said Mr Tharman, the GIC's investment returns had fallen below the interest guaranteed on CPF savings, and the Government has had to rely on its net assets to make up for the shortfall.
The Government's net assets, and Singapore's reserves, had therefore reduced in these years.
But what goes into determining whether there is a likely draw on past reserves, is whether the Government has entered into liabilities that are sustainable, and will not result in a systematic erosion of the reserves, said Mr Tharman.
Giving an example of such a scenario of erosion, he said that this would have happened if the Government had set interest rates on the SSGS, issued to the CPF Board to back CPF interest rates, at "artificially high levels".
If these levels were "above what can reasonably be expected to be earned in investment returns on the Government's funds over the long-term", it would result in the reserves being run down "systematically and deliberately".
But a fall in the value of Singapore's reserves in the course of investing it for long-term returns, should not be mistaken for the same thing.
Said Mr Tharman: "The scenario of entering into liabilities that will lead to a systematic and deliberate drawdown of reserves should not be confused with the fluctuation in the value of the reserves due to market volatility and cycles that happen all the time."
He noted that any strategy of long-term investing will mean taking investment risks, and will therefore involve ups and downs in the market value of the portfolio.
The only way to avoid such fluctuations, said Mr Tharman, is to avoid taking investment risk by choosing safer instruments.
But this will mean accepting low returns over the long-term, which would "likely fall below" the interest rates on SSGS and even Singapore Government Securities over the long-term, he said.
He also noted that what the Constitution guards against is "profligate spending".
The Constitution, said Mr Tharman, allows the President to state and gazette his opinion if he considers that the Government had entered into liabilities that will likely draw down Past Reserves.
"The President has not been put in a position where he has had to state such an opinion," said Mr Tharman, adding that CPF interest rates are pegged to market-related rates.