Singapore’s $1.76 trillion external debt. The economics behind this figure

Singapore’s $1.76 trillion external debt. The economics behind this figure

A recent article states that Singapore has a whopping $1.76 trillion of external debt, putting it on the top 20 countries list with highest foreign debt.  This triggers worries to its citizens, especially when it comes from a government that insists on reserve building. In this article, we shall have a brief look at how this debt amounted to such a high figure and is it an impending doom to a country that enjoys one of the highly successful economies in the world.

What is external debt?

External debt is defined as the total debt a country owes to its foreign creditors. This could be a foreign government, foreign corporation or internal corporation. These loans plus agreed interest must be paid in the currency in which the money was borrowed. For example, if it’s a loan from the USA, the loan is repaid in US dollars. If it’s Japan, the loan is repaid in Japanese Yen.

Who borrows so much?

External debt has to be paid by trading with the lender and making a profitable return in the process. Therefore, for a country with a weak economy that debt becomes difficult to clear. This is not the case with Singapore though. Much of the $1.76 trillion debt can be traced to debt liabilities in Singapore banking sector, a mirror of the country stature as an international financial hub.

Singapore is home to lots of companies’ regional headquarters. This comes to be as a result of the country political stability as well as transparency of the country’s commercial and financial laws. These companies borrow both from local lenders and non-resident investors to finance their operations which span across the Asian Pacific region. When this money flows in, it’s recorded as a borrowing or external liability. If you trace most of the funds, you will notice that it’s recycled by lending overseas. When this happens, such funds become part of Singapore external assets.

Out of this external debt, the government debt if $410b. Out of this, $270 is owed to Central Provident Fund. Of the remaining chunk, we cannot specify how much is from external lenders. Some international report says that Singapore has a high level of government debt. Such report induce varies opinion from financial experts given the fact that the government has been running a balanced budget in the recent past. When contacted by The Straits Times on the issue, the Ministry of Finance spokesman responded, “We would like to take this opportunity to assure you that the Singapore Government has a strong balance sheet that has well more than our liabilities. This means that taking into account our assets, we have no net debt.”

The above statement makes a lot of sense. From the government article on the subject, it’s vividly explain that it does not borrow to spend making the loan a liability rather it invest all the proceeds making them an asset. The income is make from the investments are more than enough to cover the total debt.

Why it’s necessary for the country to borrow

Let us break down external debt into layman’s language. You want to start a distributor business. There are ways to finance that with one being getting a loan. If it’s selling motorbikes you need to have many of any, them to be considering a distributor. Buying the motorbikes at wholesale means buying many, which is not cheap. Then there is the cost hiring workforce, rent, transport cost, license and so on. There is an old cliché; you spend money to make money. If you don’t have it, you get nothing. To repay the loan, you need to sell the motorbikes.

Once the business starts to run, it’s not wise to pay all the loan first. Another expense such employee payment, rent, bringing in another stock is highly prioritised. Therefore, you pay back the loan slowly. As stated earlier, there are many financial institution and companies in Singapore. To make profits, they and the government might need to borrow. Singapore is a first world country, and as it continues to grow, the debt will increase, but that does not put it in a bad financial position.

Loan with low interest

The government, especially in growing economies get loans at low-interest rates. This means even the modest returns will make up for the costs of borrowing. This external debt makes the least debt. Singapore government mostly borrow internally, in the form of Singapore Government Securities meaning we owe money to ourselves hence external debt is a negligible threat.

As per the external borrowing by the banks, you need not worry. All banks have a control on how much they can borrow. Any bank must have a reserve which is a certain amount of money the bank must have to pay out depositor and pay insurance. This reduces the chances of a bank collapsing.

Is there any reason to get worry by external debt?

Well, high external debt can be worrying regardless of who is doing it. This is especially when they gamble and end up borrowing more than they can handle. If a large business goes down, there is a rise in unemployment, and if not adaptation measures are taken, it leads to a series of repercussions. However, this is not something one can point out by just looking at the total external debt.

In most cases, high external debt becomes problematic when accompanied by other problems, e.g. a plunging currency. Third world countries also risk when taking high external debt. Why? To get the loan, the state needs to convert its volatile currency to a more stable currency such as US dollar or euros. In the future, if there is a spike in the converted currency, then there is need to raise more to pay back the lender. In our case, Singapore does not have to go through all that trouble so here is my piece of advice: easy tigers, we all got this under control. If still got doubts research to see the substantial investments made by local banks, GLCs and movement met. You will notice that there is a surplus saving which puts the country from a liability position to a net asset position.

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