Why does Singapore have such a high external debt of US$1.76 trillion?

By Chris Kuan

The article, “World’s top 20 nations with the highest external debt” says Singapore has US$1.76b of external debts which of course resulted in comments expressing shock, awe and beggar belief. “How in this world, Singapore has 1.76 trillion debt when the govt has always emphasized on prudence, saving and reserve building?” is one of the less hysterical or funny. I would have ignored it if it weren’t friends who requested a comment.

Those so inclined to “whack the government” or indulge in nightmare fantasies of impending economic doom and financial Armageddon visited on our little nation – the advise is: easy tigers, easy. Have some common sense.

External debt generally relates to the total amount of debt owed by residents to non-residents. Residents include individuals, local companies, foreign companies resident in Singapore, the government and its agencies.

In terms of government debt, the total amount is a tad over S$410b of which close to S$270b is owed to Central Provident Fund (CPF), a captive investor. So we know at least that amount cannot be owed to non-residents. Of the remaining S$140b, we do not know how much is owed to non-residents but given requirements imposed on banks and insurance companies to hold local regulatory capital and liquidity and the general shortage of long term fixed income investments in the overall context of a high savings rate, I would say the proportion of government debt held by non-residents is small (quite like Japan even given its high level of government debt which is the reason it did not have a debt crisis like Greece whose debts is actually smaller than Japan’s).

So how come Singapore owed so much to non-residents? The answer is because Singapore is a major financial center and a business hub. Foreign companies operating from Singapore as regional headquarters used the political stability of our nation, transparency of our commercial and financial laws, favourable tax regime and not least the high sovereign credit rating to issue debt targeted at both local and foreign investors. That is to say, they borrow from both resident and non-resident investors to finance their operations and projects across the Asian Pacific region.

Furthermore, the large number of foreign banks lend to borrowers in the Asia Pacific region and accept wholesale, interbank or corporate deposits from the same region. Additionally, the major private banking and wealth management business gathered funds from rich individuals and families from the region, which are then deposited in banks or invested in various assets, most of them foreign.

Therefore given the massive amount of funds flowing from outside Singapore into resident companies and banks in Singapore, it is not surprising at all that Singapore’ external debt is so high. The vast majority, if not all of the funds, would have flown out when the resident companies and banks make investments and loans to finance the region. This explains why the total external debt is many times larger than Singapore’s Gross Domestic Product (GDP) – we are financing the other economies as well.

In any case, given Singapore’s status as a major financial center and business hub, it is spurious to look at total external debt alone without giving consideration to the net external position which includes assets. Given the large overseas investments made by the government, GLCs and local banks and the surplus savings, that should be a net asset position.