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Singa preserves principle of chronological fairness

Singa preserves principle of chronological fairness

Source: Business Times
Article Date: 06 Apr 2021
Author: Janice Heng & Lee Meixian

Though it marks a move towards borrowing, it is in line with the government's prevailing logic and maintain its long-running commitment to prudence.

In some other countries, the idea of borrowing to fund public expenditure might not raise many eyebrows. In ever-cautious Singapore, however, the government is taking pains to stress the prudence and long-term logic of its decision to issue bonds for the funding of "nationally significant infrastructure".

This approach, first announced in the Budget speech, has been formally set out in the Significant Infrastructure Government Loan Act (Singa), the Bill for which was introduced in Parliament on Monday.

For a government which has long warned against taking on debt, this might seem at first glance to be uncharacteristic. But a look at the specifics reveals Singa to be in line with the government's prevailing logic.

In the past, the government has warned against the approach of borrowing to fund present spending for immediate benefits, and leaving future generations to pick up the bill.

Though Singa marks a move towards borrowing, it preserves rather than abandons the principle of chronological fairness by seeking to better align the timing of expenditure with that of the benefits.

Without borrowing, the sums required for major infrastructure would have to be borne by the government of the day, for projects that will prove their worth only in future decades.

With Singa, such upfront development expenditure can be capitalised: converted into a stream of annual depreciation, over the useful life of the infrastructure.

In that sense, future generations are not being saddled with the burden of past profligacy, but instead paying for the benefits that they themselves are enjoying.

Borrowing via the issuance of bonds, rather than via bank loans, is also particularly appropriate for infrastructure financing, given the large sums and long timeframes involved.

Singa maintains the government's long-running commitment to prudence, too. The Act includes various safeguards, restricting the scope of the project types, and the size of the financial amounts involved.

The legislation specifies several criteria for what counts as "nationally significant infrastructure", including a minimum expected total project cost of S$4 billion, and an expected useful lifespan of at least 50 years.

To maintain financial discipline, Singa has a gross borrowing limit of S$90 billion, set in light of expected expenditure over the next 15 years.

In comparison, the limits for existing government securities and treasury bills - issued for market development and operational needs, not for government spending - are S$960 billion and S$105 billion, respectively.

Singa also has an annual interest threshold of S$5 billion. This means that if the total interest cost of existing loans under Singa exceeds S$5 billion in a given financial year, the government will not be able to raise more Singa loans the next year.

These caps can be changed to meet future needs. But to do so, the Act must be amended, meaning that the government of the day will have to go back to Parliament for approval.

Infrastructure bonds have been issued elsewhere - including in Europe, the United States, China, Japan, and South Korea - for years without such strict restrictions, in contrast to the tightly-scoped nature of Singa.

Given all of this, the government's move towards borrowing can perhaps be seen not so much a departure from earlier norms, but a strategy that preserves the principle of aligning costs and benefits over time, while maintaining that age-old commitment to prudence.


Singa infrastructure bonds seen soon, with strict safeguards

An important step has been taken to allow the Singapore government to issue new infrastructure bonds to fund major public projects, subject to a strict framework.

To ensure that proceeds are used responsibly and sustainably, the Significant Infrastructure Government Loan Act (Singa) will include legislative safeguards on qualifying projects and the amount of borrowings that can be raised.

Deputy Prime Minister and Minister for Finance Heng Swee Keat, who is also Coordinating Minister for Economic Policies, introduced the Bill for the Act in Parliament on Monday.

He said in a Facebook post that Singa will allow the government to finance "nationally significant infrastructure" that are critical for Singapore's long-term development, such as the Cross Island and Jurong Regional MRT Lines, and the Deep Tunnel Sewerage System. This will help spread the lumpy expenditure across the generations that will benefit.

"This is equitable across generations... With Singapore's AAA rating and the current market environment, we are likely to be able to do this at favourable interest rates," he said.

To qualify for Singa, infrastructure projects have to be owned and controlled by the government, and the total project cost should be at least S$4 billion. They should also be available for use for at least 50 years, and should support national productivity or Singapore's economic, environmental or social sustainability.

To ensure a sustainable debt level and interest burden for future generations, the Singa includes a gross borrowing limit of S$90 billion over the next 15 years. There will also be an annual interest threshold of S$5 billion, so that the government may not raise any more loans under the Singa if the total interest cost for existing loans has crossed S$5 billion in the previous financial year. This is to avoid imposing overly onerous financing costs on future generations, it said.

Any future changes to the gross borrowing limit or annual interest threshold will require the government of the day to pass a new Bill in Parliament to amend the Singa. This will hold the government accountable if it wants to borrow beyond the prescribed limits.

Economists and analysts The Business Times spoke to generally found the safeguards to be prudent. Selena Ling, OCBC Bank's chief economist and head of treasury research and strategy, said that the need to pass a new Bill to amend the gross borrowing limit and/or annual interest limit should help to allay any market concerns about sovereign debt financing.

Bonds under the Singa will be issued as a new category of Singapore government securities, to be named SGS (Infrastructure), while the current SGS issuances will be renamed SGS (Market Development). Both categories will rank pari passu for them to be priced along the same yield curve. The same tax and regulatory treatment would also apply to both categories.

As at Monday, 15-year, 20-year and 30-year SGS bonds were yielding between 2.05 and 2.09 per cent. SGS (Infrastructure) bonds are expected to match them in yields. The first issuance of infrastructure bonds is expected to take place in the fourth quarter of this year. The Singa framework will also include green bonds, and the first issue of sovereign green bonds is expected next year.

Ms Ling pointed out that with global and domestic sovereign bond yields rising on the back of reflation concerns, it could cost the government more to finance its projects compared to currently. She noted that since the Budget announcement of the Singa, the 10-year SGS bond yield has played catch-up to its 10-year US Treasury counterpart.

"Given that the Biden administration is planning another US$2.2 trillion in its infrastructure package in addition to the recent US$1.9 trillion fiscal stimulus package, there may be upside risk for US Treasury bond yields, especially for the longer tenors, and there may be spillover effects into other government bond markets, including the SGS market."

Bank of America Securities Asean economist Mohamed Faiz Nagutha said, however, that from a historical perspective, interest rates remain low, so the effort by the government to push out the Singa is still a "timely" one that should benefit the economy, as the cost of borrowing should be more than met by the direct and indirect returns to the economy from these projects.

"We continue to believe that Singapore's fiscal footing will remain extremely robust, even taking the Singa into account," he said.

Dexter Tan, senior fixed income analyst at Bondsupermart.com, also expects the Federal Reserve to keep interest rates low by continuing with its pace of purchasing US Treasury and mortgage-backed securities.

The government had borrowed to finance major infrastructure in the past. It had borrowed in the 1970s and 1980s to finance a hump in development expenditure for its first MRT lines and Changi Airport Terminal 1 and 2. By the 1990s, it no longer had to as the country was growing rapidly, and rising revenues could pay for infrastructure needs in full, and also generate some surplus.

But a steep hump in development expenditure is coming up again for the next decade, mainly due to new railway, major highway and climate change adaptation projects. Ms Ling said it could also stem from Singapore's fiscal situation being "relatively tight" after two straight years of fiscal deficit and significant tapping of past reserves to fund the Covid-19 support measures since 2020.

"In addition, the planned GST hike from 7 per cent to 9 per cent has also been pushed out by at least a year due to the pandemic, as it would have been untenable to do it when the Singapore economy is still suffering an uneven recovery and the local labour market conditions remain soft," she said.

Currently, without Singa, major infrastructure is financed using government revenues and current reserves, which are fully expensed off upfront in the annual budget. With Singa, upfront development expenditure will be converted into a stream of annual depreciation over the useful life of the infrastructure, to better match the timing of benefits with the timing of spending.

"After charging smoothed-out development expenditure (ie depreciation) and financing costs to the annual budget, we will still have to have an overall balanced budget over each term of government," said the Ministry of Finance (MOF).

Ms Ling expects healthy demand for the bonds from long-term investors such as insurance companies and pension funds looking for longer-term asset-liability matching opportunities, thanks to the bonds' high quality sovereign backing and advantageous yield differentials. Market feedback to MOF had indicated strong investor demand for longer tenor bonds, like the 30-year SGS.

"The holistic management of both the SGS (Infrastructure) and SGS (Market Development) bonds by the central bank should also reassure investors that there would not be supply indigestion when the first issuance of SGS (Infrastructure) comes to market in Q4 2021," she said.

Parliament will debate the Bill at the second reading in May.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.

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