Christopher Balding on Singapore: The Importance of Economic Capture and Government Surpluses

Christopher Balding

Balding's World, June 20, 2012 (source)


In my last couple of posts, we covered the concepts of economic capture, the size, and duration of the government budget surpluses. In short, the government of Singapore is capturing an enormous piece of economic activity rather than allowing its people to enjoy the fruits of their labors. While this economic capture of financial resources by the government manifests itself in the lowest rates of spending on health and education it also matters for a much more obvious reason, which I will cover today.

Temasek was formed in 1974 and claims that to date it has earned an averaged annualized rate of return of 17%. Given that it manages $193 billion SGD as of its last annual report ending March 31, 2011, this would imply that it began operation with a one time investment of approximately $550 million SGD. Temasek has stated that it began operation with $375 million SGD which given measurement error, is a very plausible number. So far, the numbers come close to matching up.

We then need to ask, where Temasek got this $375-550 million SGD to begin its investment portfolio. Well according to the Singapore Ministry of Finance and the IMF, from 1969 to 1973, the government managed a total accumulated surplus of….(wait for it), $551 million SGD. These are numbers I like to see as they match up quite closely.

However, if we add in GIC numbers, everything begins to fall apart. As I have already covered in previous posts, we actually know pretty closely how much GIC manages. In March 2011, with Temasek declaring its holding at $193 billion SGD and the government holding cash of $125 billion SGD, the balance sheet reveals a GIC upper bound estimate of $387 billion SGD, pretty close to outside estimates.

So if GIC earned is 7% annually as it claims since 1981, this would imply that GIC began operation with a one time investment of approximately $50 billion SGD. Well according to the Singaporean MOF, from 1974 to 1981, Singapore ran accumulated budget surpluses of $2.5 billion SGD. This tells us that Singapore must have been adding to GIC’s capital base kind of like normal people put money in a savings account or in their CPF and earn interest.

So since we know that Singapore must have been adding to GIC capital through the years, lets consider how much of the budget surplus would need to be placed into GIC to arrive at $387 billion SGD. If the government of Singapore did nothing more than place its operational surpluses into GIC and earn the 7% it claims, it could have stopped saving from its operational surpluses in 1998. Let me put that another way, if all the Singapore government did was place its operational surpluses in GIC and earn 7%, then it should have only need to invest through 1998. The more than $150 billion SGD that is recorded as operational surplus from 1999 onwards cannot be accounted for if GIC is earning the rate of return it claims.

What makes this even more concerning is that not only was the government running enormous surpluses that do not appear to have earned the rate of return claimed by GIC, but it was also borrowing enormous sums of money. Singapore now has a debt to GDP ratio of approximately 100% or $331 billion SGD. If this money was being invested as it was borrowed, then the sums under management at GIC should be staggering. From previous posts, it should be in the trillions.

So let me explain why economic capture, government surpluses, and low spending levels matter. The only plausible conclusion is that large amounts of money are un accounted for in some manner. The most likely explanation is that investment returns are not equal to GIC and Temasek claims. In other words, the economic capture through structural surpluses via the lowest levels of spending in the world, were being used to cover up investment losses.

If GIC was earning what it claimed, then Singapore debt levels should be much smaller and operational surpluses would have been much smaller. The numbers simply cannot be reconciled.

If GIC and Temasek returns are what they claim, then the government should have no problem presenting financial data to support their claims including yearly transfers. If they refuse to provide this data, this should concern Singaporeans and financial markets who depend on the transparency and reliability of the data provided by the government.

The government has captured the financial resources of its people to cover financial mismanagement. By running surpluses at the expense of its health and education budget, it has been able to hide its own financial failures.


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What we know so far

Christopher Balding

July 2, 2012 (source)

Before we get back to analyzing the made up finances of the Singaporean government, GIC, and Temasek, I thought this would be a good place to stop and go back over what we know for a fact.

1. The government of Singapore has an official balance sheet as of March 31, 2011 listing $705 billion SGD of assets and of that $125 billion SGD is in cash.

2. Temasek at the same time lists assets of $193 billion SGD.

3. Given the government cash holdings and the value of Temasek, this would provide a GIC valuation of $387 billion SGD. This is close to other outside estimates of GIC.

4. Given outstanding debt of $359 billion SGD, Singapore sits on “shareholder” equity of $346 billion SGD.

5. Since 1974, Singaporean debt has gone up by $326 billion SGD.

6. Since 1974, Singapore has run operational surpluses of $279 billion according to the IMF.

7. Temasek claims to have earned 17% annually since 1974.

8. GIC claims to have earned 7% in USD over the past 20 years.

9. Despite receiving $605 billion SGD in borrowing and surpluses AND claiming to earn 7-17% since 1974, Singapore only claims $705 billion SGD in assets!!

10. If we accept their surpluses and borrowing as accurate and their balance sheet as accurate, this would imply the government of Singapore they earned .004% since 1974 rather than the 7-17% they claim.

Now that is some creative accounting. Who says Singapore doesn’t have creative industries? Too bad they are the wrong kind.

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*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, he has 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 as been cited by a variety of media outlets including the Wall Street Journal and the Financial Times. Prof Balding received his PhD from the University of California, Irvine and worked in private equity prior to entering academia.