The Abysmal Singapore, Temasek, and GIC Balance Sheet

Last Thursday, we analyzed the Singapore balance sheets for 2009 and 2011 arriving at an implied valuation for GIC. What really causes concern is that despite claims Temasek grew at 22% annually, Singapore Inc. managed only $30 billion SGD of net asset growth. The growth in assets on the Singapore, Inc. balance sheet was mostly offset by a rapid growth in debt. In other words, Singapore, Inc. was borrowing heavily to buy assets.

When you take a closer look at the the balance sheet things get even worse. Singapore Inc., Temasek, and GIC’s performance when placed against other broader indexes are quite poor. For instance, while the S&P 500 and Strait Times Index grew at 25% and 29% annually, Temasek grew at a less impressive 22%. However, that is only part of the story. Let’s look at this in a table to make things easier.

To make matters worse, total Singapore asset growth was a paltry 7% annually. However, if we strip out the growth in public debt during this time period, the picture begins to look down right worrying. In a period when global stock markets were booming at 25-30% annually, net asset growth at GIC and Temasek grew by a total (TOTAL) of 4.2%!!

Let me simplify. If you invested in $100 in the S&P 500 or the Strait Times Index on April 1, 2009, on April 1, 2011 you would have either $156 or $165. However, if you invested that same $100 in Singapore, Inc., you would have between $104 and $116 depending on which measure you prefer to use.

In an absolute best case scenario, Singapore, Inc. is not even coming close to matching market returns or even covering its cost of capital from borrowing CPF funds.

How you invest your money is your business. However, how your government invests your money is your business. We can only hope that the government of Singapore will be completely honest with its citizens and that people will demand answers for how their hundreds of billions of dollars are being invested.

The GIC and Temasek Endgame

The question I have gotten most often throughout my series on Singaporean public finances is: what does this mean for Singaporeans?  It certainly isn’t good but I doubt it is as bad as it could be. Let’s start with the bad news first.  Singaporean public finances display very worrying characteristics throughout their revenue, expenditure, and wealth accounts.  For instance, we still have no expenditure reporting that would account for the large surpluses and if the surpluses were invested, national wealth should be much higher.  However, as we continue to dig we get closer and closer to the truth.

Here is the official Singaporean government balance sheet as of March 2009 and here it is in March 2011.  The 2009 balance sheet lists assets of $615 billion SGD.  I know some of you are temped to say “Aha!”  The missing $500-600 billion SGD Prof. Balding is talking about.  However, take a closer look and you see that it simply confirms what we already know and what I have been saying.  There are three points.  First, the balance sheet list $118 billion SGD in cash we know is held at MAS.  So let’s take that out.  Second, we know that Temasek was listing $185 billion SGD in assets in its 2009 annual report.  So let’s take that out.  Third, that leaves us with a GIC value of $312 billion SGD that is pretty close to the estimates of $220-250 billion USD we have been assuming from different sources.  In other words, Singaporean government documents confirm what I have been saying.  We have an implicit estimate of the size of GIC.

However, if we now compare the 2009 balance sheet to the 2011 balance sheet, major problems emerge.  From March 2009 to March 2011, Temasek claims to have earned 22% annually and while GIC does not specifically break out their 2 year average, let’s assume quite conservatively that they averaged 5% in a period when global capital markets enjoyed good returns.  Given their collective assets of about $500 billion SGD in 2009, they should now manage around $620 billion SGD in 2011.

However, according to the 2011 Singaporean balance sheet, after stripping out the governments cash position which is virtually unchanged from 2009, their assets only total $580 billion SGD.  If we accept take Temasek’s asset valuations and returns, this would imply that GIC assets under management actually fell by nearly $10 billion SGD!!

Unfortunately, it only gets worse.  While the assets of the Singaporean government grew by $90 billion between 2009 and 2011 from $615 billion SGD to $705 billion SGD, Singaporean public debt grew by $60 billion SGD.  In other worse, despite supposedly having more than $500 billion SGD in assets under management and Temasek reporting an annualized 2 year return of 22%, net asset growth totaled only $30 billion or an annual return of 2.4%.  What makes this net asset growth of $30 billion all the more concerning, is that Singapore reports a total budget surplus in 2010 and 2011 of $40 billion!!  So how did a $40 billion SGD surplus turn into $30 billion SGD of net asset growth?

The key question for Singaporean when considering what will happen is very simple: what are the assets compared to their liabilities.  According to the Singaporean government, assets as of March 2011 are nearly twice as large as liabilities.  However of the $700 billion SGD in assets, less than $300 billion of this is in quoted securities.  Another $290 billion SGD is in unlisted securities and government stock.  As banks will tell you, trying to sell unlisted, illiquid securites to raise funds can be difficult.  In other words, while the assets appear to be comfortable enough to pay the debt, primarily to CPF account holders, given their reliance on unlisted securities and government stock on their balance sheet, is slightly worrisome.

The last point to keep in mind is that we are no closer to finding the amount of money thatshould be controlled by Singapore.  Given nearly 30 continuous years of budget surpluses and enormous levels of borrowing, the question should be instead, why is there so little in the bank?  There is still by the most conservative estimate, $500 billion SGD missing from Singaporean public finances.  We still need to find this money.

To sum up, if the primary question is can Singapore continue to meet its obligations to CPF account holders than there appears to be a very low risk of default.  Since most Singaporeans are worried about their own money, I would say there currently appears little reason to worry the government will defaults on its obligations.  Though given the amount of unlisted securities we cannot rule out that there is a more risk.  However, if the question is more broadly focused on Singaporean public finances, the more we discover the more worrying the picture becomes.

Update: I would like to sincerely thank Kenneth Jeyaretnam Secretary General of the Singaporean Reform Party for sending me the 2009 and 2011 balance sheet.  These were immensely helpful in writing this post and better understanding Singaporean finances and arriving at an implicit value of GIC.

The Mess that is Singapore: Part IV How big is the GIC or the $500 billion Question

Since I began writing about different aspects about how unreliable Singaporean, Temasek, and GIC data is, I have received many questions about how reliable my data and calculations are in claiming what I am claiming.  As virtually all of my data comes from the Singaporean Ministry of Finance, either directly or by way of the IMF, most critics instead quickly realized that was a futile battle and instead chose to focus on the argument that “since GIC hasn’t released its assets under management, there is no way of knowing the truth so we should just give up.”  Let’s examine this argument in greater detail or as I like to call it, the $500 billion question.

Let’s begin by saying at the beginning that GIC and the government of Singapore have never publicly commented on the value of assets under management.  The only official comment made is that GIC manages “well over US$100 billion.”  However, rather than passively accepting this official statement, let’s see if we can’t get closer to the truth.

In July 2011, the highly respected Monitor Group estimated GIC’s assets under management (AUM) at $220 billion USD.  However, the Monitor Group borrowed their estimate (which they cited as such) from the United States government report entitled “2011 Investment Climate Statement — Singapore“.  The US Department of State writes:

“GIC, Singapore’s largest SWF with an estimated $220 billion in assets, does not invest domestically. GIC manages Singapore’s international investments, which are generally passive (non-controlling) investments in publicly-traded entities. Its investment is entirely overseas, with the United States as its top destination, accounting for 36 percent of GIC’s portfolio as of March 2010.”

In other words, the United States government estimates that GIC holds $220 billion USD AUM as of March 2011.  This is also in the broad range of other GIC estimates which have gone as high as $300 billion USD.

I want to address one issue about how estimates are made about what GIC or other sovereign wealth funds who protect their AUM values.  Most developed capital markets have strict disclosure requirements and excellent data collection services that allow for high quality estimates of who owns what.  This allows much better estimates of what sovereign wealth funds hold than is generally believed.  For instance, in the United States any entity that acquires more than 5% of a public companies equity is required to publicly disclose its holding.  This requirement also holds for those holding the stake on behalf of others and they must list the true owner.   Furthermore, given the amount of data available for companies, their holding companies, and who owns smaller levels of assets, it is possible to arrive at a much closer estimate for the AUM of GIC than believed.

Now however, lets consider the other side.  If the US government estimates GIC to hold about $220 billion USD or $280 billion SGD, how big a difference is that to how big GIC should be?  Well, as I have previously noted, if we just assume that the combined surpluses and increases in borrowing of the Singaporean government earned the 7% claimed by GIC, then Singapore should control at the end of 2011 about $1.1 trillion SGD.

If we accept Temasek statements of AUM of $193 billion SGD and begin with the US governments estimate for GIC of $280 billion SGD, this would give us $473 billion SGD AUM or less than half of what Singapore should have in these two entities.

Let’s begin by trying to put the size of the difference between the estimate and what GIC should be in perspective.  If GIC was big enough to make Singaporean holdings approach our $1.1 trillion SGD target, that would mean it has more than $900 billion SGD of assets under management.  Put another way, to match the size it should be, GIC needs to have three times as many assets under management as its current estimates.  Not 3% bigger, not 30% bigger, but 300% bigger than the current estimates.

Because a number like $900 billion SGD is almost to abstract to comprehend, let me provide a small list of comparisons to help.  The $900 billion SGD GIC should have in AUM is roughly equal to:

1.  The combined wealth of the worlds top 25 billionaires according to Forbes.

2.  $170,000 SGD for every man, woman, and child in Singapore.

3.  The worlds 38th largest financial institution ahead of such well known banks banks as Standard Chartered.

4.  Three times Singaporean GDP.

5.  Three times the amount of assets of DBS Bank.

6.  The worlds largest sovereign wealth fund and 26% bigger than the next biggest the Norwegian Government Pension Fund and twice the size of Gulf Funds like the Abu Dhabi Investment Authority.

While we do not have a complete list of what the GIC holds, ask yourself which scenario seems more likely(or which you prefer): the GIC has secretly become the largest sovereign wealth fund in the world and one of the largest financial institutions in the world without leaving a noticeable footprint in global markets of its size or that GIC is not as big as it needs to be to make the numbers of Singaporean surpluses and debt reconcile?  In the latter scenario, where are the missing assets if GIC is not managing them?

One last point, if GIC really is as big as it should be, does it benefit the Singaporean people to have no public disclosure or oversight over their $1.1 trillion SGD in public assets?  These assets belong to the people and managers should be accountable to the people for managing their money.  No investor turns over money to a wealth manager without demanding accountability, transparency, and regular reports.  Unfortunately, everyone knows what happens when basic rules for money management are not followed.

Singapore: Only country with Govt surplus in list of highest debt to GDP ratio

As an economist you are trained to try and spot patterns.  Most things that we observe in life fall in to very predictable patterns.  It is when we spot anomalies or things that don’t make sense that interest us most.  Take a look at this table and ask your self which of these countries is not like the other countries?

When ranking countries with the highest debt to GDP ratios, Singapore ranks just beneath Iraq and just above Belgium.  However, what makes Singapore’s debt level so amazing, is that it averaged a government surplus of nearly 9% since 1990.  In fact it is the only country on this list to average a surplus.  Somehow Singapore has magically run a surplus but also become one of the most indebted countries in the world!!  Now that is some magic accounting.

This again returns us to the question of where the surplus funds have gone?  Coffee anyone?

Comparing Temasek’s Performance in Two Pictures

I have gotten emails asking if I can simplify some of the points I have been trying to make, so I have decided to try putting up pictures that capture some of these points.  Hopefully, a picture will be worth a thousand words.

The first figure is a comparison of the FTSE Strait Times Index and the MSCI Singapore equity indexes since 1974.  The MSCI is slightly lower owing probably to differences in how it is calculated and being based on more stocks while the FTSE focuses on the bigger companies.  As you can clearly see, they are very closely correlated.

Our next picture is the same exact picture, except this time I have added the returns that Temasek claims to have earned over the same time period.  Given that Temasek has been a large investor on the Singaporean exchange, owning at times more than 25% of the Singaporean stock market, they should be closely related.

As one can clearly see, Temasek performs much better than even the stock market in its home country of which it is the major investor.  In fact, much MUCH better.  Is it technically possible Temasek earned this return?  Yes.  Is it probable?  No.

Maybe Temasek could begin investing my money if they are that good?  Maybe someone in Singapore would like to invite me for coffee to discuss?

Note: Because Temasek does not break out its returns year by year, I assumed that it earned 17% every year.  While this will change the year to year valuations, it does not impact the final valuation.

The Mess that is Singapore: Part III Explaining the Role of the Monetary Authority of Singapore

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.

The Mess that is Singapore: Part II Explaining the Role of the CPF

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.

The Mess that is Singapore Part 1: Explaining the Debt

Ever since my paper 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.

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.

Growth in Free Cash Flow

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.