Monday, May 14, 2012

Professor Christopher Balding (Peking University): The Mess that is Singapore

by Christopher Balding

*The writer is a professor of business and economics at the HSBC Business School at the Peking University Graduate School. An expert in sovereign wealth funds, his writings have been published in such leading journals as the Review of International Economics, the Journal of Public Economic Theory, and the International Finance Review on such diverse topics as CDS pricing, the WTO, and the economics of adoption and abortion. His work has also been cited by a variety of media outlets including the Wall Street Journal and the Financial Times.

[Note] Lucky Tan's comment is appended at the end of this post.

Part 1: Explaining the Debt
TR Emeritus, May 12, 2012 (source)

Ever since my paper [note*] on Temasek and Singapore was covered in Mostly Economics writing a plea for “clarifications from Temasek and SG govt”, I have begun receiving emails and postings to either explain or defend something further. Today, I will focus on the questions pertaining to the debt side.


[note*] A Brief Research Note on Temasek Holdings and Singapore: Mr. Madoff Goes to Singapore by Christopher Balding, Feb 8, 2012 (here)

Financial data reported by Temasek Holdings and Singapore reveal problematic characteristics. First, Temasek reports an average annual return of 17% for 35 years despite Singaporean stock returns averaging less than 8% during this same time period. Given the range of stock market returns and its portfolio companies’ returns, it is highly improbably that Temasek has earned the returns claimed in its annual reports. Second, Singapore has become one of the most indebted countries in the world despite supposedly running large and sustained government surpluses. Given publicly available economic data on Singaporean finances, there is a minimum of $350 billion SGD or $275 billion USD unaccounted for from historical surpluses and financing operations. Third, given these results I find that for every $1 SGD in public borrowing, Singapore has received only 25 cents of publicly held Singaporean assets. Either financial returns have been drastically overstated or there are large unreported Singaporean controlled holdings.

The basic question numerous posters and email have raised is whether public Singaporean debt is actually attributable to state owned enterprises or the social security fund known as the Central Provident Fund? There is a short answer and a long answer. The short answer is that it doesn’t matter. Think of a company like GE. If GE Capital goes out and borrows money, there is still an increase in the total debt of GE the parent company. So whether it is the Central Provident Fund or the state owned enterprises, at the end of the day there is still a rapid increase in the total debt of Singapore.

The longer more detailed answer is even more unpalatable. While there is most definitely a significant portion of Singaporean public debt issued by the Central Provident Fund but guaranteed by Singapore, the important part is not who holds the debt, but rather what happened to the money that was borrowed. If the Singapore state issues debt, whether it is to a foreigner, a private citizen, or the Central Provident Fund, Singapore now has more funds that they must either spend or invest. That inflow from issuing debt does not just disappear.

Since 1990, the Singaporean government has realized cash flow from increasing borrowing of $250 Billion SGD. To add on to this, the Singaporean government has enjoyed public surpluses of $262 Billion SGD. Think about that for one minute: free cash flow into government coffers between additional borrowing and surpluses averaging more than 16% of GDP between 1991 and 2010. Since 1991 alone, without factoring in revenue from interest, accumulated cash flow from additional borrowing and government surpluses has totaled $512 Billion SGD.

To give you two numbers to help you wrap your head around that number, that is equal to 155% of 2011 Singaporean GDP or roughly equal to the combined assets of Temasek the the Government Investment Corporation of Singapore (The GIC does not publish assets under management but most estimates have it in the $250-300 billion USD range). The $500 billion dollar question then is: where did all this money go? In other words, how does the total increase in debt and the total government surpluses equal the estimated amount of assets under management? (It is also important to remember that this data only goes back to 1990, not the 1974 since Temasek inception).

Now let’s turn to where the money has gone. Here is a graph of the hypothetical growth of assets under management by government linked entities such as Temasek or the CPF.

If these free cash flows averaged annual growth of only 1%, assets would still amount to more than Temasek and the GIC combined. If annual growth was the GIC average of 7%, Singapore would still be sitting on more than $1 trillion SGD rather than the current estimate of around $500 billion. A 10% rate of return would leave Singapore with $1.4 trillion SGD. If public surpluses and borrowing were invested and returned even a balanced portfolio average, the current assets managed by public bodies in Singapore would truly be staggering.

As was noted in the original paper, this implies one of two things: 1) the returns are fictitious and there has been a lot of money lost OR 2) there are enormous unreported holdings controlled by Singaporean public entities. You simply cannot explain $500 billion SGD in surpluses and increased indebtedness without asking where that money has gone. As of right now, there is no record of public Singaporean assets to match what we would expect to find. Show me additional assets that should be there. Temasek and GIC don’t have them. Where is the missing money? If it wasn’t spent, and there is no public record of that, then it should be a financial asset under public Singaporean control.

As a last point, if these surpluses and additional borrowing even matched the rate the CPF pays out to Singaporean citizens of 4% would equal approximately $750 billion SGD. This is 50% more than the estimated holdings of Temasek and the GIC. Unless someone can find hundreds of billions of unreported Singaporean public assets, we should assume this money has gone to money heaven.

Next time, I will describe exactly how the Central Provident Fund plays in to all this and why Singaporean should be worried…..very very worried.


Part 2: Explaining the role of CPF
TR Emeritus, May 13, 2012 (source)

In our last post, I gave a short and a long answer to questions about the importance of who owns the debt. The short answer is that it doesn’t matter who the government of Singapore owes money to, it still owes money to them. Some readers and posters said that if the Central Provident Fund (Singaporean social security) owns the debt issued by the Singaporean government, then it doesn’t really matter. Let’s examine that question in greater detail.
The CPF collects mandatory contributions from Singaporean citizens and pays a statutory rate of return to its account holders currently ranging from 2.5% to 4% depending on the type of account. The contributions are intended to be used for old age income support and health care among other basic services. The CPF holds $185 billion SGD of investment assets under management but also $185 billion SGD in liabilities in the form of member accounts with a net surplus $1.9 billion. In other words, there is only a small amount of net assets under management at the CPF.

According to CPF financial statements, 95% of CPF investment assets are “special issues of Singapore Government securities”. In other words, the CPF is the primary purchaser of the debt issued by the government of Singapore.

The CPF is then part of a large circle that takes money from the citizens pays them interest and lends it to the government Singapore matching the interests rates between the two rather closely. This leads to three important and inescapable conclusions:

1. The CPF has minimal net assets under management and cannot really add to our search for missing assets. In other words, the CPF cannot add to our understanding of where we might find large amounts of net public assets.

2. Singaporean citizens have provided enormous free cash flow to the Singaporean government in the form of structural budget surpluses and large amounts of lending. As I said in the last post, from 1991 to 2010 alone the sum of budget surpluses and net lending totaled $512 billion SGD.

3. All roads still lead to the Singaporean government. The enormous volume of free cash flow in the form of budget surpluses and increased borrowing flowed through Singaporean government finances and was under their management.

Returning to the question I posed in the previous post, if the Singaporean government enjoyed free cash flow from budget surpluses and borrowing totaling $512 billion SGD between 1991 and 2002, where did the money go?

To be clear there is no public record of expenditures by the Singaporean government to account for the $512 billion SGD in free cash flow since 1991. Nor is there as public record of assets held by Temasek, GIC, or other public body in large enough amount to account for such a large discrepancy. Remember if this $512 billion earned the 7% GIC claims to have earned there should be more than $1 trillion in assets.

The reason the CPF matters and should concern Singaporeans is simple. The government of Singapore is borrowing money from its citizens through the CPF payed 2.5-4% and investing that money in other assets through GIC and Temasek hoping to earn a higher return. Publicly, GIC and Temasek claimed to have earned 7% and 17% since inception meaning they are earning a comfortable spread above the 2.5-4% they must pay for those funds. If Temasek and GIC earn less than the 2.5-4% they pay to the CPF, the government must essentially subsidize the losses to keep the CPF whole.

According to the data published by Temasek and the best estimates of GIC, they hold around $500 billion SGD essentially matching the $512 billion SGD in budget surpluses and increased borrowing or a total return of about 0%. This leads to two frightening conclusions:

1. While estimated GIC and Temasek assets essentially produce a 0% nominal return, when factoring in inflation, this produces real investment losses of about 35%!!

2. The government of Singapore has essentially been subsidizing GIC and Temasek losses by paying their implied obligations to the CPF even though the they have not earned a rate of return sufficient to cover the cost of debt capital. In other words, the government of Singapore is subsidizing GIC and Temasek losses to the amount of the rate of return earned by GIC or Temasek minus the 4% it pays to CPF account holders. Financial losses attributable to GIC and Temasek but covered by the government of Singapore, significantly increase the risk of CPF deposits.

There are two final points worth mentioning. First, we continue to search for enormous amounts of missing assets. For instance, it has been suggested that GIC and Temasek have not produced accurate accounts that would reconcile the difference. Given that there is a minimum of $500 billion SGD in missing assets, I am very skeptical that this is simply due to sloppy accounting. However, the fundamental point is to focus on locating in public records the missing assets. There needs to be a bare minimum of $500 billion SGD in unreported assets to begin to bridge the gap between what exists and what should exist.

Second, due to the length of this post, I only covered the CPF today and could not cover the Monetary Authority of Singapore and its foreign reserves. In the next post on Monday, I will analyze the MAS. Needless to say, it doesn’t in anyway change the analysis.


Part 3: Explaining the role of the Monetary Authority of Singapore
The Balding Blog, May 14, 2012 (source)

Part 1 and 2 of this series of Singaporean public finances focused where the cash from the increased indebtedness has gone and the role of the Central Provident Fund in providing a low cost easy access source of funds for the government of Singapore. Since I answered most questions about the CPF in Part 2, people started asking about the Monetary Authority of Singapore (MAS) and its $300 billion SGD in foreign reserves.

The short answer is that the existence of $300 billion in foreign reserves held by the MAS does not change the analysis in anyway. Let me explain why.

Countries normally have three sources by which they can raise revenue or increase wealth. Taxes in all their forms, borrowing, and using foreign exchange. We have already discussed the fact that the government of Singapore has run a large long term public surplus and increased borrowing rapidly totaling $512 billion SGD since 1990.

However, another source of government wealth is foreign reserves which grow generally due to current account or trade surpluses. Foreign reserves are normally controlled by the central bank, in this case the Monetary Authority of Singapore (MAS).

Since 1980, Singapore due primarily to its currency management policies has run a structural trade surplus averaging 10.2% of GDP. To provide some perspective on this number, over the same time period the oil exporting countries Saudi Arabia and the United Arab Emirates averaged only 4% and 9.7% respectively. The current account surplus peaked in 2006 at an astounding 25.4% of GDP. To prevent the currency from appreciating rapidly due to the large and sustained current account surplus, the central bank (the Monetary Authority of Singapore or MAS) buys large amounts of foreign currency. These currency purchases designed to minimize appreciation pressures then become foreign reserves.

To provide some hard numbers, since 1980 Singapore has run an accumulated current account surplus of $353 billion USD. If this number was converted into SGD based on the year the surplus was incurred, this would translate into $556 billion SGD. Including the current account surplus has a number of implications for our analysis of Singaporean public finances and the foreign reserve assets held by MAS.

First, the source of the MAS foreign reserves are totally and completely separate from the other revenue sources under discussion. The existence of $300 billion SGD in reserves given the long term current account surplus is no surprise and is distinct from government surpluses or borrowing. In other words, the existence of $300 billion SGD in foreign exchange reserves cannot add to our knowledge when searching for missing funds.

Second, the MAS foreign reserves have been fully funded and paid for by the near constant current account surplus run by Singapore since 1980. Even in the year between 1980 and 1987 when Singapore was running trade deficits, the foreign exchange reserves grew from $6.5 billion USD to $15 billion USD or $13.9 billion SGD to $31.6 billion SGD based upon exchange rates at the time.

Third, given the level of foreign exchange reserves and historical current account surplus, the numbers appear quite plausible at their current levels with also the distinct possibility to have funded additional investments in GIC or Temasek. We do not expect all of a current account surplus to be translated into foreign exchange reserves as there are many things that influence this such as a moderately but steadily appreciating currency or liquidity operations. In other words, given the $353 billion USD cumulative current account surplus since 1980, the $237 billion USD in foreign reserves is quite plausible and also leaves significant room for significant investments in Temasek or GIC. It is important to emphasize that not all current account surpluses are translated into foreign reserves, however there is a close correlation between them.

The fundamental point that is being made here is this: the MAS foreign reserve assets have already been paid for from the current account surplus due to managed currency operations. Furthermore, given the numbers while we do not have access to the data, it is quite plausible that transfers were made from MAS to GIC for investment purposes. Finally, the MAS foreign reserve assets as sole and separate from government surpluses and borrowing, cannot add to the discrepancy in assets that should exist and the estimated assets believed to exist.

We still need to find significant amounts of unreported assets.


Part 4: How big is the GIC or the $500 billion question (here)

The GIC and Temasek endgame, by Christopher Balding (here)

The Abysmal Singapore, Temasek, and GIC Balance Sheet, by Christopher Balding (here)

Singapore, Inc.: Just When You Thought it Couldn’t Get Any Worse, by Christopher Balding (here)


Comment by Lucky Tan (source)

Christopher Balding is a professor in Peking University, HSBC Business School [Link]. You can read his article in full but I’ll summarize it as usual so there is clarity on the issues and questions he asked:

The Mess that is Singapore: Part I Explaining the Debt

1. Most of the public debt issued by Singapore govt consists of money borrowed from the CPF Funds of Singaporeans.

2. Since 1990, the Singapore govt borrowed $250B and has another $262B in budget surpluses, giving a total of of more than $500B.

3. GIC + Temasek do not publish their assets but it is estimated to be roughly $500B.

4. Even if they return 1%, they should have significantly more money and if returns are 7% as widely believed, the money should have been doubled.

5. What happened to the money? Is it lost or hidden?

The simple answer to this question is, the Singapore govt has never published the total assets of the GIC so we don’t know. There is no reason yet to believe anything sinister is going on. Former President Ong tried to get a full list of the assets but was told it is not a simple task. Over the years, there were reports of GIC investing in real estate, commercial properties around the world and those have to be revalued. It’s not a mess as Christopher Baling alarmingly claimed but a lack of information.

In his next posting, The Mess that is Singapore: Part II Explaining the Role of the CPF:

“The reason the CPF matters and should concern Singaporeans is simple. The government of Singapore is borrowing money from its citizens through the CPF payed 2.5-4% and investing that money in other assets through GIC and Temasek hoping to earn a higher return. Publicly, GIC and Temasek claimed to have earned 7% and 17% since inception meaning they are earning a comfortable spread above the 2.5-4% they must pay for those funds. If Temasek and GIC earn less than the 2.5-4% they pay to the CPF, the government must essentially subsidize the losses to keep the CPF whole.”

This issue has been discussed on my blog. If GIC makes above 2.5% (-4%), it keeps the excess returns. If it makes less than 2.5%, how does it pay the debt owed to CPF/Singaporeans? They would have to collect more taxes or print money to monetize the debt. The other way is to kick the can down the road by delaying CPF withdrawals. Countries build up reserves to guard against crisis and financial instability. However, GIC and Temasek’s fund are invested in various risk bearing assets that will be affected by crisis – the last crisis they lost $50B. To fund the deficit in the budget due to the jobs credit in the last crisis roughly $4.5B of reserves was used. The size of the reserves are far bigger than what is needed to cushion against crisis – remember if the crisis is very big e.g. local bank failures, etc it is best not to use reserves created from borrowings from CPF to do it.

My main objection to the whole system is the fix returns for CPF account holders who at the end of the day bear the risk if there are investment losses and inflation but get none of the excess returns. The 2nd problem is even basic information on the total assets is not made public by the GIC. Third issue is the size, you can’t just keep building and controlling it because a large part of it is paid for by ordinary Singapore taking up high debts for housing. There has to be a limit beyond which the surplus should be used to benefit Singaporeans in more direct ways rather than go into reserves controlled by a small group of elites.

Our contribution to the CPF is extremely high but retirement is still a worry for Singaporeans. This is caused by 2 things – low fixed returns on CPF money and use of CPF for expensive public housing. Both results in flow of money to the GIC to build up govt coffers and causes major retirement problems for ordinary Singaporeans. Many Singaporeans accept the system as it is thinking they can always monetize the homes for retirement (overseas?), it makes the system all the more vulnerable as housing prices get linked to Singapore’s ability to retire for poor and lower middle income Singaporeans. The whole system passes the risk to Singaporeans who are already shouldering plenty of risks due to the healthcare system and the lack of social safety nets.

Lucky Tan

* Lucky Tan is an avid online blogger since 2005. He likes to study the thoughts of Singapore leaders and the laws of Singapore. He blogs at

Related: Is Madoff in the House? (here)

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