President Halimah to review Government’s proposed expected long-term real returns, in consultation with the CPA

In a Facebook posting on Sunday (8 December), President Halimah Yacob said that she has been briefed by Deputy Prime Minister Heng Swee Keat and officials from the Ministry of Finance (MOF) on “Government’s proposed expected long-term real returns on its assets”.

These estimations would be used to decide the amount of fund from the country’s past reserves that the Government will be able to tap for the upcoming Budget.

The meeting, which was held last week, was also attended by the Council of Presidential Advisers (CPA), President Halimah said.

“It has been a busy week, starting with a meeting with DPM Heng and officials from the Ministry of Finance. They briefed me and the CPA on the Government’s proposed expected long-term real returns on the relevant assets,” President Halimah wrote in her post.

She added that representatives from GIC, MAS and Temasek were also present to share their thoughts on the long-term market outlook.

“This process is an important one within our annual Budget cycle,” said the President.

She continued, “We examine the assumptions used in the projections carefully, as the expected return will be used to derive the amount the Government can spend from our past reserves under the Net Investment Returns framework.”

In case you’re not aware, under the Net Investment Return framework, the Government is able to take up to 50% of the expected long-term real returns on net assets invested by Temasek, GIC and MAS into the Budget. However, this can only be done after deducting liabilities like government bonds.

MOF explained on its website that by doing so, it makes sure that any tapping of the reserves will be done in a sustainable way, so the future governments will be given a steady stream of returns to support the Budget.

As for the three investment organisations, the Government’s assets are mainly handed by GIC, a professional fund management entity, which MOF regards as a “fairly conservative investor” in mainly public markets and, to a certain extent, alternative investments like real estate and private equity.

On the other hand, the Government also keeps deposits with MAS, Singapore’s central bank, which has its own assets as a statutory board on its balance sheet. A large amount of MAS’ portfolio is invested in liquid financial market instruments.

As for investment company Temasek Holding, the Government is its only equity shareholder and the company handles commercial principles to create and deliver sustainable long-term value.

Prior to the beginning of each financial year, GIC, MAS and Temasek will propose the expected long-term real rates of return after looking through the detailed study and assessments brought up by investment professionals within the three agencies. Additionally, external expert views are also obtained.

Following that, the MOF will review the methodologies used to propose the rates, and suggests the expected long-term real rates of return to be applied to the net assets invested by the three agencies.

It is only after that the President will be consulted, along with the CPA, before she decides if she agrees with the Government’s proposal or not.

In the case where the President and the Government can’t seem to agree in any of the expected rates of return, historical average rates of return from the last 20 years will be used as the benchmark to decide the amount that the Government can spend.

Explaining how the process will be carried out, MOF said on its website, “The 20-year-historical rate of return provides a neutral and pragmatic basis for resolving any dispute between the President and the Government, and avoids paralysing the government of the day.”

Going back to Madam Halimah’s post, she said that she and CPA has “good discussions with MOF and the investment entities on macroeconomic issues and the basis on which expected returns were derived”.

“I will review the Government’s proposal in consultation with the CPA,” she noted.

Given that Singapore’s General Election will most likely take place next year, there is a high chance that the Budget will be beefed up in order to make voters happy. But since the government had already spent a sum on the bicentennial handouts and the Merderka generation package, and taking consideration of the poor economic outcome, it would have to ensure it has the finances to provide another round of handouts without being seen as being imprudent with the country’s finances.

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