Where I will be tomorrow…

Tomorrow I am speaking in Bangkok at the 20th Anniversary of the Thai Securities and Exchange Commission.  The conference is called “Asia: The Dynamic Capital Market Frontier” which could not be more true.

There are a lot of great speakers including Sir Howard Davies adviser to the Government Investment Corporation of Singapore, former Filipino Finance Minister, and current Vice Chairman of Credit Suisse Asia Pacific Jose Isidro Camacho, and current Secretary General of the Thai Securities and Exchange Commission Dr. Vorapol Socatiyanurak.

I am giving a talk entitled “Innovations on Sovereign Wealth Funds for National Development”.  I will be posting my speech and slides later.

The $158 billion Singapore Budget Accounting Fraud: Part I

In the past decade, we have become all to used to corporate accounting scandals.  Respected companies like Olympus, Lehman Brothers, AIG, and the most notorious fraudster Bernie Madoff have all been caught blatantly manipulating accounting statements dating back many years.  As a result of their behavior, those responsible lost their jobs or went to prison.

What happens when arguably the largest accounting restatement in the history of human existence due to fraudulent accounting practice takes place in the Singaporean government?  Nothing.  Absolutely nothing.  No Singaporean public official to the best of my knowledge has even commented on a $158 billion SGD accounting restatement of Singaporean public finances.

We have been working with official Singaporean general and operational budget revenue, expenditure, and surpluses.  The general and operational data comes from both Statistics Singapore and the International Monetary Fund.  The results of each type of government surplus while all different, all produce generally similar numbers regardless of source.

Table 1-Singapore Cumulative Surpluses September 2011

As we can see in Table 1, the Singaporean surpluses from all sources while quite large produce broadly similar numbers with a low of $225-300 billion SGD since 1990 whether we take our numbers from Statistics Singapore or the IMF September 2011 World Economic Outlook or their International Financial Statistics databases.

However, in April 2012 the government of Singapore restated its public finance statistics going back to 1990.  Given the history and size of the restatement it would probably go back further and increase even more, but the IMF World Economic Outlook only provides Singaporean public finance data back to 1990.  The restatement of Singaporean public finances was not small, short, or insignificant in anyway.

Table 2—Cumulative Surpluses April 2012

Between September 2011 and April 2012, the government of Singapore restated its public finances raising it cumulative surplus from 1990 to 2010 from $271 billion SGD to $429 billion SGD.  Through an unannounced accounting restatement which Statistics Singapore data does not reflect, the cumulative surplus between 1990 and 2002 increased from $189 billion SGD to $311 billion SGD.  In other words, due to an accounting restatement of its own public finances, Singapore increased the size of its budget surplus by $158 billion SGD.

While a restatement increasing the size of the Singaporean surplus may at first seem like a good thing, it is in fact not a good thing.  The last Singaporean balance sheet listed $705 billion SGD in assets but also $359 billion SGD in debt giving it only $346 billion SGD in net assets.  In other words, through the investment magic of Temasek Holdings and GIC, Singapore managed to turn $428 billion SGD in government surpluses into $346 billion SGD in net equity.  The larger the surpluses in Singapore means the larger the losses and discrepancies in Temasek and GIC.

This restatement as a couple implications.  First, given the historical length and size of the accounting restatement, the government should be held accountable to provide detailed information about restated items.  $158 billion SGD restatements destroy any credibility and demand a public explanation.  Second, those responsible at the highest levels should be held accountable for accounting manipulation dating back more than twenty years.  $158 billion SGD is not an accounting rounding error.   A restatement of $158 billion is a deliberate manipulation.  Third, given the restatement, there is absolutely no way Temasek and GIC claims of long term returns can be considered accurate.  $428 billion SGD in surpluses does not turn into $346 billion in net equity by earning 7-17% over more than twenty years.

For a government who claims to value accountability and transparency, its attempt to cover up a restatement of $158 billion SGD or approximately 50% of GDP is appalling.  At what point does a restatement become worthy of a public statement by the government: $300 billion, $500 billion, $1 trillion?  If Singapore was a company, people would deservedly have lost their jobs.  Only in Singapore is a $158 billion SGD accounting fraud standard operating procedure.

Next week, I will detail the accounting restatement, provide examples of how accounting was manipulated by the government, and how this impacts the returns claimed by Temasek and GIC.

How Big Should Singapore, Inc. Be?

In the last post, we demonstrated clearly that the while GIC and Temasek manage an impressive amount of financial assets, given the amount of borrowing and government surpluses the amounts under management are a lot less impressive.  Singaporean data indicates that operational surpluses and public borrowing from 1974 to 2011 totaled between $645-701 billion SGD.  Consequently, trumpeting that you now manage $705 billion SGD doesn’t seem like much of an accomplishment.  So how much should GIC and Temasek manage given their stated rates of return of 7% USD and 17% SGD respectively?

  1. Temasek states on the website that they began operation with $374 million SGD in 1974.  Given their claimed 17% annualized rate of return since inception, this would come close but not actually produce their stated assets under management.
  2. From 1971 to 1973, the Singapore government ran operational surpluses of $337 million SGD.  From 1970 to 1973, the Singapore government ran operational surpluses of $418 million SGD.
  3. The only problem with these facts is that if Temasek began with $374 million SGD as it claims 1974 and earned 17% annually every year until 2011 when it managed $193 billion SGD, it would have had to either put in additional capital or earn 18.4%.
  4. $374 million SGD compounded at 17% annually from 1974 to 2011 would yield only $146 billion SGD rather than the $193 billion SGD.
  5. However, if we do nothing more than allow the operational surplus from 1974 of $166 million SGD to be invested in Temasek and compound at 17% annually, this produces $201 billion close to the amount claimed by Temasek.  To show you how close, if we change the annualized interest rate to 16.9% we realize a 2011 value of Temasek of $194 billion.
  6. Turning to GIC we need to make two assumptions.  First, let’s assume that all operational government surpluses and borrowing after 1974 was accumulated and then invested in GIC when it began operation in 1981.  As needs to be stressed, cash flow from surpluses and borrowing have to go somewhere.  As they were not spent according to government records, that means they had to be invested.  Second, because GIC provides returns in USD, let’s assume that the free cash flow from operational surpluses and borrowing were converted into USD in the year they happened but does not earn interest until the following year.  This makes the results conservative.
  7. If government surpluses were converted into USD the year of the surplus and did not begin earning interest until the following year, growing at 7% annually this would amount to $404 billion USD as of 2011.
  8. If government net liability incurrence were converted into USD the year of the borrowing and did not begin earning interest until the following year, growing at 7% annually this would amount to $597 billion USD as of 2011.
  9. The government states that “No Government borrowings are for spending… All borrowing proceeds are therefore invested.”  These are their words not mine.  Thus borrowed money should have grown at 7% annually producing nearly $600 billion USD.
  10. That means that if GIC earned 7% annually in USD since 1981 investing all operational surpluses and additional borrowing, they should manage $1 trillion USD or $1.26 trillion SGD at current rates.
  11. Combined, Temasek and GIC should manage $1.46 trillion SGD.  Given the most recent government balance sheet listing $705 billion SGD of assets, this would imply a discrepancy of approximately $740 billion SGD.

Using government of Singapore numbers and investment policy statements there is a $760 billion SGD discrepancy in financial accounts.  How long can these differences be ignored?

Note:  For anyone interested, you can download the spreadsheet with the numbers used in this post here.


What We Know So Far

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.

On Thursday, I will explain how they go about hiding the money.