The significance of a nation's financial obligations and possessions in determining its credit risk is a crucial factor.
In the world of finance, the concept of government net worth (assets minus liabilities) has emerged as a significant factor in determining a country's creditworthiness. This is particularly true for Singapore, a city-state that boasts a strong net worth position.
According to recent studies, global public assets are estimated to be three times the value of global GDP, with half consisting of commercial assets such as real estate and corporate holdings. In Singapore, this is evident as its assets are managed by independent institutions like Temasek and GIC, which are recognized for their robust governance and consistently high performance over many decades.
The significance of government net worth lies in its strong predictive power for borrowing costs and economic resilience compared to traditional metrics like gross debt-to-GDP ratios. Countries with stronger government net worth tend to have lower borrowing costs and recover faster from recessions, reflecting better fiscal sustainability and reduced sovereign risk.
This is evident in Singapore's case, as it maintains a triple-A credit rating despite having a higher gross government debt-to-GDP ratio than many other developed countries. The remaining half of the long-term real returns from Singapore's sovereign funds can be utilized for government expenditure, which is nearly equal to Singapore's corporate tax receipts.
Moreover, approximately one-fifth of Singapore's government expenditure is funded through investment returns from its sovereign funds. The average annual (non-tax) income generated by these funds amounts to 7% of GDP over the past five years.
The high level of gross debt in Singapore does not constrain its sovereign credit assessment by global rating agencies. The main country-specific fiscal factor affecting bond yields is government net worth (assets minus liabilities), rather than gross debt-to-GDP.
Adopting net worth-driven financial decision-making and oversight can help create greater fiscal space for policy-makers to achieve their strategic objectives. This approach challenges traditional public finance practices that emphasize debt and deficits but overlook the role of assets in determining fiscal health and sovereign risk.
Sustainable prosperity requires policy-makers to focus on better managing the public balance sheet and the level of net worth. In Singapore, half of the expected long-term real returns from its sovereign funds are reinvested to strengthen long-term financial stability.
Extensive portfolios of commercial assets, including real estate and state-owned enterprises, are often undervalued even in the official accounts of governments that produce a balance sheet. Good governance, strict fiscal discipline, and effective balance sheet management can help enhance a country's fiscal and economic position, even for those lacking natural resources.
In conclusion, the case of Singapore underscores the importance of government net worth in determining sovereign creditworthiness. By focusing on the net financial position of a government, rather than solely on debt levels, policy-makers can make more informed decisions that foster economic growth and financial stability.
- In light of recent studies, global public assets are estimated to be three times the value of global GDP, with half consisting of commercial assets like real estate and corporate holdings.
- The management of these assets in Singapore is handled by independent institutions like Temasek and GIC, which are recognized for their robust governance and high performance.
- The significance of government net worth lies in its strong predictive power for borrowing costs and economic resilience compared to traditional metrics like gross debt-to-GDP ratios.
- Approximately one-fifth of Singapore's government expenditure is funded through investment returns from its sovereign funds, with the average annual (non-tax) income generated by these funds amounting to 7% of GDP over the past five years.
- Adopting net worth-driven financial decision-making and oversight can help create greater fiscal space for policy-makers, challenging traditional public finance practices that emphasize debt and deficits.
- Sustainable prosperity requires policy-makers to focus on better managing the public balance sheet and the level of net worth, with half of the expected long-term real returns from Singapore's sovereign funds being reinvested to strengthen long-term financial stability.
- Good governance, strict fiscal discipline, and effective balance sheet management can help enhance a country's fiscal and economic position, even for those lacking natural resources, as shown by the case of Singapore.
