MAS warns of slowdown while gifting $33b to GIC

The Singaporean central bank has shifted a healthy slice of its reserves to the sovereign wealth fund, ahead of an expected economic slowdown amid slowing global trade.
MAS warns of slowdown while gifting $33b to GIC

Singapore’s central bank governor has just warned that the world could be set to experience of the worst economic periods since 2008’s global financial crisis. 

The city state’s central bank is responding in part by handing over S$45 billion ($33.2 billion) of its foreign reserves to Singapore's sovereign wealth fund GIC. 

The shift in assets would be “for investment on a longer-term basis with expected higher returns,” said Ravi Menon, the managing director of the Monetary Authority of Singapore (MAS), in a speech discussing the central bank’s annual report on Thursday. 

Ravi Menon

Global trade volumes fell two quarters in a row and the last time this happened was 10 years ago, the governor said in prepared remarks. “This consecutive two quarters of contraction in world trade is rare,” he added. As part of the speech Menon cautioned that the outlook for the global economy has “deteriorated in recent months”.

By shifting some of its reserves, the MAS is giving the government some liquidity to bolster the economy through investment or spending if needed.

The capital transfer suggests the central bank may be looking to achieve higher returns through private markets and unlisted assets. These are the kind of investments that GIC is well suited to making, with its large in-house team and long experience of doing direct deals.

GIC's portfolio stands at about $390 billion, and the fund said it generated an annualised real return of 3.4% in the 20 years to March 31, 2018. That was a step down from its average rolling 20-year return which had been fluctuating around 4%, before declining below that level over the past two years, the fund said.  

For its part, the MAS typically allocates its assets to public bond and equity securities and is eyeing factor-based investing, the central bank told AsianInvestor in March. In addition, it said in November it would place up to $5 billion with private equity and infrastructure fund managers.

The MAS had S$404 billion in its official foreign reserves as of April, while its return on investments on these assets was a tidy S$26.2 billion ($19.3 billion) in the 2018-2019 fiscal year, which ended on March 31.

That total was equivalent to more than 80% of Singapore’s GDP. The bank has internally assessed that the island would need reserves equivalent to at least 65% of GDP to act as a buffer against global economic shocks.


While the MAS may want to gain higher returns on its capital by handing to the sophisticated sovereign wealth fund, it may prove challenging for GIC to invest such a large sum quickly.  

"Managing a larger base is always a challenge," said Chua Hak Bin, a senior economist with Maybank Kim Eng in Singapore and a former GIC consultant. Historically, the sovereign fund has been long fixed-income "which have done quite well," he said. 

In addition, GIC – like many other market observers – has its own concerns about the market outlook.

“The potential reward for risk-taking is not particularly favourable,” a GIC spokesman told AsianInvestor by email earlier this month. “Broadly speaking, we have been concerned about the high uncertainty in the global investment environment, compounded by elevated market valuations and low volatility, especially in developed markets.” 

The US-China trade tensions are a concern. “Even with a globally diversified portfolio, we are watching the developments on the trade front closely,” the spokesman said.

Supply chains between the US and China are very integrated nowadays, he added, so any trade tariffs can have broader consequences even across countries not directly affected by them.

Those concerns have affected GIC's recent approach to investing, said Chua. "GIC has adopted a more cautious strategy given the rising global uncertainty and US-China trade war," he told AsianInvestor

That caution makes sense, given export-dependent Singapore's particular vulnerability to the fallout of an escalating trade war. 

The Lion City is set to be hardest hit among the major Southeast Asian economies by US-China tariffs, said an early-June report by the Institute of Chartered Accountants in England and Wales and financial forecasting firm Oxford Economics.


Indeed, the MAS's Menon referred to these concerns in his speech.  

“We are now in the throes of a trade [and technology] war, and all three engines have indeed stalled,” he noted, referring to manufacturing, trade, and investment.

He said the three main reasons for this are an ebb in the global electronics manufacturing cycle, lagging effects from China’s deleveraging drive that began in 2015 to 2016, plus the ongoing trade conflict between the US and China.

Asia is a key hub in the global electronics supply chain. The region possesses major component makers and mobile phone manufacturers in Taiwan, South Korea, China and Vietnam. But the industry has struggled following a tepid consumer response to Apple’s latest iPhone launches, and this was exacerbated by action by the US against Chinese tech companies ZTE and recently Huawei.

Singapore looks set to feel the consequences of this, and the broader tariffs that the US and China have been imposing on each other's goods. Menon said the MAS is reviewing the city state's GDP growth forecast for this year and won’t rule out an “off-cycle monetary easing", according to Reuters.

It had already narrowed the forecast fairly recently from an earlier estimate of 1.5%-3.5%. Menon has previously warned of the economic damage that can be done by trade protectionism.

Analysts at Singapore's OCBC Bank told clients in a note that they expect MAS to revise its GDP forecast downwards to 0.5%-1.5% or 1%-2%. “There is a real risk of deeper and more widespread disruptions to global/regional supply chains,” the note said.

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