Does Our Status as a Global Financial Center Benefit the Average Singaporean Business?

Sir, I understand that this motion—which seeks an increase of the limit on the face value of government debt to $1.5 trillion—is, despite its staggering headline number, somewhat routine. I had previously spoken on an analogous motion at the beginning of 2021,[1] where I stressed how government borrowing more need not be detrimental, especially if economic conditions are favorable, and if invested well in furtherance of our national objectives.

I stand by that position. Still, it is worthwhile looking at how the economic environment has evolved dramatically since, and what this could imply for this round of a proposed increase in the debt limit, and our implied interest burden.[2]

The economic environment then and now

As the world entered 2021, much of it was still teetering from the aftermath of the global recession brought about by the COVID-19 pandemic. Economic activity had plunged to a low of -3 percent in 2020, the lowest in half a century. Lockdowns were still routine in many countries, and unemployment rates remained very elevated: 6.6 percent globally, the highest since 1990, and surpassing that of both the Asian and global financial crises. Inflation was still very quiescent, averaging 1.5 percent worldwide.[3]

Owing to overall economic weakness, interest rates at the time remained remarkably low. This was what prompted my call to lock in the favorable borrowing rates, and to take advantage of the higher multiplier effects that would have been present then, to expand public investment in our hard and soft infrastructure, thereby stimulating growth.

This is no longer the case today. World inflation started to rise in 2021, rising to 3.2 percent, before peaking at an eye-watering 8 percent the year after. In Singapore, our cost of living took off in 2022 as well, reaching 7.5 percent in the third quarter—the highest since the 2008 financial crisis.

Thankfully, our economy has since rebounded. Today, the unemployment rate is around the historical averages of the past two decades, and while prices are still high—and real wages have yet to fully catch up—the inflation rate has stepped back down to 2 percent.

Three differences between borrowing then and now

It is in this renewed economic backdrop that I will offer three brief thoughts about the proposed increase in the debt limit. While I do not view these concerns as sufficient cause for objecting to the motion, it would nevertheless be useful to get some clarity on the matters raised.

First, the increase in the limit represents the highest increase over the most recent five instances. In November 2009, the increase was $70 billion, from original limit of $250 billion. The increments in April 2012, November 2016, and January 2021 steadily rose, amounting to $170, $200, and $270 billion. The present increase calls for $450 billion, a disproportionately larger two-thirds increase from the prior quantum.

The increase is also significant as a share of our economy. Between 1992 and 2021—a three-decade period that saw the limit revised six times—the share of debt to GDP has always hovered between 110 to 165 percent of output.[4] This round will bring the total burden to 225 percent.[5]

Even taking into account a generalized increase in price levels, and granted that the borrowing now enfolds both bills under the Local Treasury Bills Act (LTBA) and longer-duration bonds under the Government Securities Act (GSA), this is a sharp increase. After all, the limit for Treasury Bill increases had only been raised once in recent memory, by $10 billion in 2004.

Put another way, were we to take the debt limit from three years ago at face value, adjust that by inflation, and add in an inflation -adjusted T-Bill amount, we would only arrive at a revised limit of a little less than $1.1 trillion, rather than the $1.5 trillion being asked for today. Hence, while I appreciate that the debt issued are for market benchmarking and financial development purposes—and are constrained in terms of how the money raised may be spent—some explanation for this large discrepancy is warranted.

Second, given the contemporary interest rate environment, the yields we will need to pay will correspondingly be higher. The yield on 10-year Govies in January 2021 was a mere 1 percent. In early November, rates were closer to 2.8 percent. Similarly, short-term yields were less than half a percent then, compared to 2.7 percent now. On balance, the interest repayment burden is around three times higher than what it would have been a mere three years ago.

Would the government be able to explain how it plans to limit the fiscal impact of this elevated interest repayment stream? Perhaps the proceeds raised will be transferred to our sovereign wealth funds for management, in which case the hurdle rate will likely remain manageable, given how nominal returns have also moved up in the interim. Regardless, a narrower spread between SWF returns and borrowing costs will mean, at the least, less by way of surpluses to be returned to the Ministry of Finance. Hence, I believe it is valuable to have on record how the government plans to manage the interest differential, to reassure Singaporeans.

My third and final point has to do with whether the ultimate purpose of issuing such debt is actually being met. The stated objective of Singapore Government Securities (SGS) (Market Development) is to “develop the domestic debt market”.[6] But exactly how much our record issuances have translated into actual usable, investible funds for our companies remains questionable.

After all, domestic credit to the private sector—a standard and widely-used metric for gauging the depth of financial development—stood at around 130 percent of GDP in 2020, significantly lower than comparator economies such as Hong Kong, Japan, and South Korea.[7] The equity market capitalization share in Singapore has also languished relative to other global financial centers, such as those of stock exchanges in New York, Tokyo, Hong Kong, and London.[8]

What this means is that Singapore has succeeded more as an international financial center, rather than a globally-competitive financial market. Put another way, as much as we have succeeded in being an intermediary of global savings, little of it has made its way into our domestic economy.

Is this a problem? Not if you believe that a thriving financial industry will eventually trickle down to our workers and businesses. But if you worry about the credibility of trickle-down economics, and wonder if our vaunted status as a global financial hub has benefits to the common man, then you might justifiably question if the continued drive for expanding our debt limit to foster market development has borne much fruit, in terms of tangible improvements to the welfare of our people.

[1] Hansard (2021) 95(15): Jan 5.

[2] The two positions are far from contradictory. Indeed, had we gone ahead and issued more debt earlier, locking in the lower interest rates that were available at the time, our present challenges would be reduced. This is because government bonds are issued at a fixed, not floating rate. This is the case even if the fixed rate subsequently reverts to a floating rate. The advice is not dissimilar to how real estate advisors encourage those refinancing a house to do when rates are low, and to enjoy the significant (albeit temporary) reduction in mortgage payments, so long as the fixed costs of doing so a sufficiently low.

[3] Based on the simple average of median inflation among advanced and developing economies, where they were 0.3 and 2.7 percent, respectively. See IMF (2024), World Economic Outlook October 2024: Policy Pivot, Rising Threats, Washington, DC: International Monetary Fund.

[4] The shares are (years in parentheses): 118% (1992), 151% (1999), 129% (2004), 113% (2009), 133% (2012), 156% (2016), and 165% (2021). Output data rely on full-year, nominal GDP for the corresponding year, drawn from SingStat (2024), Gross Domestic Product At Current Prices, Singapore: Department of Statistics.

[5] Perhaps, instead of GDP, this should be normalized by the size of the SGS market. If so, it would be useful to know how the total debt issuance fares relative to the outstanding SGS pool, both historically, and for this current tranche.

[6] MAS (2024), SGS Bonds: Information for Individuals, Singapore: Monetary Authority of Singapore.

[7] The equivalent shares for 2023 in Hong Kong (248%), Japan (194%), and South Korea (176%) were significantly higher. See: https://data.worldbank.org/indicator/FS.AST.PRVT.GD.ZS?locations=SG-HK-KR-JP.  The data are similar for domestic credit by banks, although by this metric, Singapore fares slightly better than Japan. See: https://data.worldbank.org/indicator/FD.AST.PRVT.GD.ZS?locations=SG-KR-JP-HK.

[8] Market capitalization in these are about USD $23, $6.2, $4.5, and $4.4 trillion, respectively. In Singapore, it is $610 billion.