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.