A Brief Note About Singapore

For recent readers of this blog, most of my work has focused on China with a not insignificant part of that writing focused on the statistical discrepancies we see in Chinese data.  However, this type of statistical manipulation is by no means unique to China.  Other countries have similar problems with data manipulation resulting in very large financial discrepancies.

Despite a reputation for clear and technocratic government, there is significant evidence that Singapore public finances present large unreconcilable differences.  I have written about these irregularities previously and have completed an update to this working paper that compiles a more complete dataset.  For those unfamiliar with the financial irregularities in Singapore public finances, let me briefly provide some detail.

  1. Singapore owns two sovereign wealth funds the Government Investment Corporation of Singapore (GIC) and Temasek Holdings (Temasek). Singapore has never publicly disclosed the assets under management of GIC but has disclosed the long run rate of return.  Conversely, Singapore has disclosed the assets under management of Temasek and the long run rate of return.  GIC claims to have earned 7% in USD over the long run and Temasek claims to have earned 16% annually since inception in 1974.
  2. Singapore publicly declares its financial assets and liabilities in its annual budget per IMF national accounting regulations. We know, or should know, based upon official data what amount of financial assets Singapore and its sovereign wealth funds hold.  This helps us match in flows to the financial assets held.
  3. For many years Singapore has run large operational public surpluses. Since 1974 IMF defined operational surpluses in Singapore have totaled approximately $369 billion SGD or approximately $260 billion SGD at current exchange rates.
  4. Simultaneously, Singapore has become one of the world’s most indebted countries relative to GDP primarily by public borrowing in a complicated arrangement with its social security scheme the Central Provident Fund (CPF). In the arrangement, citizens pay in mandatory amounts supplemented with an employer contribution receiving a guaranteed rate of return between 2.5-4% for a total weighted return of about 3.5%.  The Singapore government then borrows these funds from the CPF providing the government with cash flow that it says it invests.  Total public debt stands at approximately $390 billion SGD or approximately 98% of GDP.
  5. The free cash flow from operational surpluses and borrowing since 1974, the year Temasek was founded, total $822 billion SGD or $580 billion SGD. It should be emphasized at this point, this is simply the sum of yearly free cash flow and does not account for investment returns or known costs such as currency or interest costs.
  6. It should be noted that Singapore claims that a significant portion of their operational surplus is not allowed by Singapore law to be spent. They argue instead that it is part of the national reserves that gets invested and should not be considered part of the yearly surplus.  While this is an accurate interpretation of Singaporean law there are a couple of factors to note.  First, it is included in national accounting as part of the operational surplus because the IMF considers land sales operational revenue not financial capital income.  Essentially, land is not a saved financial asset.  Second, regardless of how it is counted, land sales revenue becomes investment capital that should be invested and earn capital income.  To make a simple comparison, if a person created household spending rule that they would only spend the money they made in weekly salary but save all of their yearly bonus check, an analysis would still find their yearly savings was equal to their yearly bonus check.  The spending rule they created for themselves does not change the end result.  Also, how much they earn in future capital income is dependent upon how much they save now.  Money has to be spent or saved.  If it is not spent, then it must be saved.
  7. Including data on government debt interest rates and currency rates given the financial results reporting of GIC, we can now reconstruct the expected investment results of Singapore. In other words, we have yearly cash inflows, annual investment results, associated costs such as debt and currency changes, and balance sheets for ten years which allow us to compare the expected assets to the reported assets under management.
  8. By a range of plausible estimates on cash holdings allocation and the rates of return on cash holdings, the discrepancy between reported financial asset holdings and expected financial asset holdings ranges from $650-850 billion SGD or $459-600 billion USD. To provide some perspective on the discrepancy, the sum of free cash flow from net incurrence of liabilities and operational surpluses since 1974, the year Temasek was created, is $822 billion SGD.  In the most recent reporting period, Singapore financial assets of $834 billion SGD.  Given reported rates of return from GIC and Temasek of 7% in USD and 17% in SGD with debt interest costs significantly lower, this is a significant financial discrepancy.  Based upon the annual free cash inflow, this would provide Singapore a post cost rate of return of 0.1% annually.
  9. There are numerous additional irregularities that are too lengthy and detailed to mention in a blog post. I have compiled an extensive data set on financial asset holdings, public finances, and methodology that recreates their expected asset holdings against their reported holdings for those that wish to delve further into the matter.  I simply cannot come close to reconciling the $650-850 billion SGD difference between reported and expected assets based upon free cash flow and investment returns.

Note: The Excel data file for everything is here and the updated paper is here.

In Singapore: Truth is No Defense

A number of years ago when I had finished my manuscript for my book on sovereign wealth funds, I realized that there was potential legal risk arising from the litigious nature of the Singaporean government.  My publisher arranged to have a well known American lawyer with experience in Singapore on freedom of the press and defamation review the book.

When I met with him to review the manuscript in detail and make edits, he explained the legal standard for writing in Singapore.  It is frighteningly simple and draconian: truth is not a defense.  Everything I wrote in my book was fact checked multiple times by multiple people but as he emphasized in Singapore, it simply does not matter.

Yesterday in the damages portion of the lawsuit against Roy Ngerng by Prime Minister Lee Hsien Loong, the absurdity of this legal standard was on full display.  In response to the inquiry whether the facts on Mr. Ngerng’s blog were accurate the son of the first prime minister of Singapore responded “the quotes are factual but the article is not.”  Mr. Lee has presented no evidence to refute the facts, that even he does not dispute, or demonstrate how the facts presented by Mr. Ngerng are constructed to create a false narrative.  Mr. Lee refuses to even argue about the truth.  He later argued that “…there’s not point going through it again other than to aggravate damages.”

Put this dispute in perspective.  Mr. Lee is not disputing facts presented by Mr. Ngerng but rather that his feelings were hurt.  The problem the son of the first prime minister faces is that he cannot argue facts with Mr. Ngerng.  There is clear public evidence that the Lee family has personally benefited from the financial dealings of Temasek which could be presented in open court.  There is clear evidence that public Singaporean funds have been used to subsidize Temasek owned firms.  There is clear evidence that enormous discrepancies exist in Singaporean public finances.  $822 billion SGD in free cash flow over 40 years cannot earn 16% and 7% and be transformed into $834 billion.  These are facts.

It is only in the Kafkaesque world of the Singaporean system that facts are irrelevant.  $800 billion discrepancies mere inconveniences compared to the over sensitive feelings of pampered children.  I have always offered to come to Singapore and allow myself to be sued and this offer still stands.  It reveals the weakness of the sons position that he refuses to discuss facts but rather the sensitivity of his feelings.  If I could not argue on the merits, it makes sense to exclude truth as a defense.  Welcome to Singapore Mr. Ngerng.

Responding to Questions on Singaporean Finances

I was sent a couple of emails by people asking me to clarify some issues about various issues.  I have tried to directly address these issues and answer bigger questions from the Singapore government website “Factually”.  If there are other questions, I am more than happy to try and respond as I release information.

  1. What are “operational surpluses”?

Operational surplus are primarily tax and fee revenue minus operational expenditures like paying for civil servants and operational investments like buying computers.  Another way to think of an operational surplus would be revenue made from working at your job minus what you pay on rent and food.  Operational surplus accounts for the year to year operational revenue from economic activity minus the costs of running the government.

  1. Does “operational surpluses” include investment contributions or revenue?

Absolutely not.  There is no investment revenue included in the operational surplus.  Using the analogy of the household again, you may have income from a stock portfolio but that is counted as investment income and not operational income from working at your job.

  1. How do land sales count in operational surpluses?

The International Monetary Fund counts land sales as operational revenue while Singapore counts land sales as reserve/capital revenue.  As a matter of accounting for our purposes, it is better to count land sales revenue as operational revenue.  This is true because it does not come from historical savings but rather acts as additional revenue separate from financial asset investment income.

  1. Are GIC and Temasek counted on the public balance sheet?

GIC and Temasek are both Fifth Schedule corporations legally owned by the government and incorporated on the Singaporean balance sheet.  GIC and Temasek hold the same legal distinction.    This means that GIC and Temasek should be accounted for by Singapore the exact same way.  This means that if one is on the balance sheet, they both should be on the balance sheet.  If Temasek and GIC are not on the official Singaporean balance sheet, this means that there is another investment institution with $800 billion SGD in assets under management making it one of the worlds largest institutional investors.

  1. If there were a problem with Singaporean financial statements, would the IMF would correct this problem?

No.  The IMF collects data from its member countries and provides general guidelines but it does not act as an auditor to verify the data.  In fact, in IMF databases, most data is credited to the domestic statistical agency prepared in accordance with IMF accounting policies.  Consequently, Singaporean operational surpluses with the IMF are different than domestically reported numbers due to differences in accounting policies.  The primary issue being how land sales are credited.  Nor does the IMF review institutions like Temasek and GIC or audit their financial statements and returns.  In short, the IMF does not act as an auditor to correct financial accounting errors or discrepancies.

  1. Are debt servicing costs included in your estimates?

Absolutely.  I have built a database going back to 1974 of the cost of government debt.  Though the government of Singapore may claim otherwise, debt servicing costs are included in my estimates here and in previous estimates.

  1. What return assumptions are you making on the operational surplus and borrowing?

I assume that what the government of Singapore and its related entities are declaring is true.  For instance, GIC claims for all periods we know that it earned a 7% USD rate of return over 20 years.  That is the assumed rate of return on invested capital.  Furthermore, the government of Singapore declares large cash holdings with the Monetary Authority of Singapore.  Even if we match the cash holdings they publically declare with cash holdings earning a 0% rate of return, a conservative estimate, and all other funds were invested by GIC this would still leave a shortfall of $670 billion SGD even after debt servicing and currency losses.  In short, I am not assuming anything that the government of Singapore or its related entities have not already declared.

  1. What about the debt incurred by Singapore?

Most debt owed by Singapore is owed to CPF holders with the approximately other 40% in the public debt security market.  The important question about the debt owed by Singapore is where it has gone.  The government of Singapore outlines the two types of government debt, but more importantly is where this money has gone.  A review of their finances indicates that operational revenue covers operational and development expenditures.   Given this information, where is the cash flow raised from debt sales going?

The Largest Financial Discrepancies Ever?

Singapore public finances contain the largest unexplained financial discrepancies in human history.  That may sound like a grandiose rhetorical bombast, but it is completely and entirely accurate description of existing data.  Using nothing more complex that addition, subtraction, compounding interest, and official Singaporean public financial records, anyone can easily see that enormous discrepancies exist.

The financial irregularities in Singaporean financials are easy to spot when attempting to simply accept all their claims as true and valid.  It is a straightforward mathematical impossibility that all their claims about their finances are true.  Let us present the fundamentals of what Singapore is claiming.

  1. From 1974 to 2014, Singapore enjoyed operational surpluses totaling $369 billion SGD.
  2. From 1974 to 2014, Singapore increased public indebtedness from $5 billion SGD to approximately $388 billion SGD. Singapore claims that this was for investment purposes and given the operational surpluses, it had no need to be consumed via public expenditure.
  3. From 1974 to 2014, Singapore enjoyed total free cash flow from operational surplus and net liability incurrence, totaling $822 billion SGD.
  4. From 1974 to 2014, Temasek Holdings claimed an annualized 16% return beginning with a $374 million SGD portfolio value at inception.
  5. For most of its existence, the Government Investment Corporation of Singapore has claimed a long term annualized return of 7% in USD terms.
  6. The Singapore government lists financial assets of $834 billion SGD on its public balance sheet.

Those are the facts that the Singaporean government claims to be true.  Without knowing anything about finance or conducting in depth analysis everyone should find two claims by Singapore completely contradictory: if Singapore enjoyed such free cash flow of $822 billion SGD for 41 years, how can its claims to produce stellar to world beating investment returns be reconciled with their declaration of only $834 billion in financial assets?

Using conservative estimates that account for debt servicing costs, currency losses from USD returns, and matching existing declared government cash holdings with the assumption that cash earns no return, if we accept Temasek and GIC claims about their returns along with the declared financial assets on the public balance sheet there remains a $670 billion SGD or $499 billion USD discrepancy.  Using a slightly less conservative assumption on cash holdings produces a discrepancy, while still using the claims of the Singaporean government, of $848 billion SGD or $631 billion USD.

It must be strongly emphasized that these estimates are produced using official Singapore financial data and assuming that the claims of the Singapore government, Temasek, and GIC are true and accurate.  If the claims by the Singapore government and its related entities are to be believed, then enormous discrepancies exist what their declared assets are and what they should have.  It belies common sense that $822 billion SGD can be invested over 41 years and produce only $834 bilion SGD even after accounting for debt service and currency losses.

In the days and weeks ahead, I will be writing extensively on Singaporean public finances taking different parts of the data, entities, and key official involved to provide clear evidence of the discrepancy.  This will include a large amount of collected data which will be released for anyone to review.  This will include evidence of how key Singaporeans have benefited enormously from this flow of money, historical examples of financial impropriety, and raise serious questions about ongoing financial transfers.

Based upon all available evidence, while it may seem rhetorical flourish, all existing evidence indicates that Singapore is sitting on the largest unexplained discrepancies ever.

S&P Looks at Temasek Part II

The S&P criteria for evaluating investment holding companies (IHC’s) has the potential to move Temasek from a AAA rated credit firm to Greece as the headlines have noted.  While this headline does accurately capture the potential impact, too many have focused on the outcome and a misreading of the its implication and not enough effort focusing on how the proposed methodology arrives at the new rating.  In fact, the potential outcome of the S&P proposal rests on much more technical reasons than a sudden belief that Temasek is a low credit quality firm.

The biggest proposed change is the importance S&P gives to liquidity in their risk assessment of IHC’s noting that “we propose to give a greater weight to our assessment of asset liquidity than to our assessments of asset diversity and asset credit quality.”   S&P stresses the importance of liquidity “…because the ability to sell assets quickly is the ultimate source of debt repayment if an IHC cannot refinance maturing debt.  Our assessment reflects how quickly we expect the entity can liquidate assets at a reasonable price.”

There are solid financial reasons, especially for a firm like Temasek, to accept higher liquidity risk by holding lower liquidity assets.  Studies have found that asset liquidity is valued so that financial firms, such as hedge funds, willing to hold lower liquidity assets receive a premium for bearing that risk.  University endowments have targeted lower liquidity investments given longer investment time horizons and the ability to sell at their discretion.

The second major proposal is to use “spot prices” rather than some “average price over n trading days – to value listed assets.”  Related to but also distinctly different from liquidity, this focuses on what price could assets be sold to cover debt payments.  This debate has raged for how banks should value their loan portfolios in what is typically called “mark to market” by valuing a bond or loan at the market price the bank could expect to sell it at or at some other less potentially volatile rate such as a long term average or expected stream of cash flow basis.

There is reasonable and straightforward logic as to why spot prices should not be used.  Let’s use a simple scenario to illustrate why.  Assume the market price of an asset declines and a financial institution reaches a level where they have to sell the asset to cover their debt payment.  When they sell an asset this further depresses the market price potentially causing other firms to be forced to sell.  It is also possible to recreate this scenario in reverse when prices are going up.  Fundamentally, there is a solid argument that using market prices can increase volatility.  It should be strongly emphasized that reasonable people have reasonable disagreements on this very tricky issue.

While these two concepts need to be considered separately, they also need to be considered jointly.   S&P is proposing that we ask the following about credit risk as it pertains to IHC’s: if an IHC needs to sell assets to repay a debt, how easily can it sell its financial assets and at what price?

How do these concepts apply to Temasek specifically?  Temasek can reasonably be considered a somewhat less liquid IHC for two reasons.  First, Temasek asset holdings are relatively concentrated.  Temasek holdings are concentrated with significant stakes in key firms like Singapore Telecom, DBS, Standard and Chartered, and China Construction Bank.  As one article noted, approximately 50% of Temasek assets are concentrated in ten firms.  If Temasek needed to sell some of these stakes, given the large size of the holdings, this would reduce the liquidity by pushing down the price if Temasek needed to sell a significant amount or if the market found out Temasek was selling a sizable block.  Also, if Temasek ever needed to sell its entire stake in a major holding, this would significantly reduce companies with the ability to finance large acquisitions.

Compare this to Norges Bank Investment Management (NBIM) which manages the Norwegian sovereign wealth fund.  They have limited themselves to 2% of outstanding equity of any company they hold.  While this essentially turns them into an index fund as they hold 1-2% of most every listed company, this also means that they remain very liquid.  NBIM is able to easily sell stakes in entire companies in relatively short periods of time or in many companies when needed.  In short, there is elevated liquidity risk due to the concentration of Temasek’s portfolio.

Second, there is what I will term political liquidity risk.  Look at the major holdings in Temasek’s portfolio and you will see politically strategic firms like Singapore Telecom, DBS, and Singapore Airlines.  Those are for all practical purposes completely illiquid investments where Temasek depends on dividend cash flow for debt repayment.  Removing firms from the Temasek portfolio that are for all practical purposes illiquid, reduces Temasek liquidity to cover debt repayment even further.  The S&P concern over liquidity risk has a significant impact when focusing on Temasek.

Turning to the question of what price Temasek might be able to secure for its assets under different market conditions returns us to the issue of asset concentration and political risk.  Not only is the Temasek portfolio concentrated within its portfolio, it is concentrated by industry and geography with an increasing allocation to higher risk assets like financial and natural resource firms.  For example, three of the top four holdings are in financial firms and Temasek remains closely linked to Singapore and surrounding countries.  This implies a high degree of correlation among their holdings.  If the market is declining, then Temasek would need to price any significant asset sale at an even larger discount.  Conversely, in a rising market Temasek might be able to extract a sizable premium for one of its strategic stakes.  However, given the concern about debt coverage from asset sales, we should focus on down markets and again there is cause for concern.  There would be significant pricing pressures on any significant asset sales by Temasek.

There would also be pricing pressure due to potential political risk.  Let’s assume for one moment that Temasek decides to sell a significant stake Singapore Telecom, DBS, or Singapore Airlines.  Given the long historical record, key personnel through each firm, and political significance, any buyer would be enormously concerned about undue influence exercised after the sale.  The same could also be said about most Asian holdings for instance in China Construction Bank or Bank of China.  The Chinese government would most likely have a strong opinion about Temasek selling its holding to anyone else.  Political risk is likely to impact the final sales price and not positively.

The primary risks the S&P is proposing to increase in its credit model for IHC’s are the ability to sell and the price it will receive for selling.  I believe there is a fair and reasonable case to be made that when Temasek is narrowly analyzed against these two criteria, it does have an elevated risk level.  There is good reason to have some concern over liquidity and asset pricing risk should it need to sell assets to cover debt repayment.

As noted at the beginning of this article, while the S&P frameworks does raise the risk profile of Temasek, it is important to note the reasons why.  Their reasoning focus on specific and technical issues and not due to a new belief in the underlying quality of Temasek assets.

Note:  Part III will cover the Temasek response, whether they should be considered as risky as Greece, and other bigger picture issues.

S&P Looks at Temasek and Sovereign Wealth Funds Part I

Somehow I missed the November release of the credit ratings agency S&P asking for comments on its proposal for updating standards of investment holding companies (IHC) and government related entities (GRE).  This is both a somewhat technical exercise and discussion by credit ratings agencies that takes place to reassess their standards for evaluating credit risk but also has very tangible impact on Singaporeans and can be explained in ways that make sense.

Before beginning to analyze the proposed S&P standards and Temasek’s response, let me try and provide some background to better understand the overall situation.

  1. S&P is one of the three major global credit ratings agencies along with Moody’s and Fitch.  Their market dominance stems primarily from their oligopolist position conferred by the US government within the American market.  Less than 10 credit rating agencies in the United States are recognized as “nationally recognized statistical reporting agency” which allows a privileged position for instance in rating investment grade debt held by a large variety of institutions.  The big three are estimated to control approximately 95% of the credit rating market in the United States which they leverage into dominant positions throughout the world.
  2. S&P, in putting forth generalized standards, is trying to create a clear, transparent, framework that they can use to compare different companies rather than make every analysis unique.  To take a simple scenario, they might state that companies with a debt to equity ratio of greater than 3:1 will receive a B rating while a company under than will receive an A.  Framework standard sacrifice detail and uniqueness, which individual analysts will provide later when researching companies, for broad standards than can be applied throughout the world.
  3. The broad framework standards used by every credit ratings agency can be used to disguise the true risk.  Frameworks to assess credit risk are generally solid guidelines but like all rules can be used to manipulate the overall system.  During the global financial crisis, many mortgage linked products met the technical guidelines to receive a high rating even if it clearly masked the true level of risk for that financial instrument.  Guidelines laid forth by ratings agencies should be considered fallible frameworks that attempt to capture common risk factors but they absolutely should not be considered final and perfect assessments of individual risk.
  4. Credit rating agencies are riddled with group think and conflicts of interests, but at the same time historical data reveals a very clear relationship between defaults and ratings.  The riskier the rating the higher the probability of default (PDF).  Credit ratings are imperfect by any measure with a systematic downward risk bias, but they should be ignored at your peril.  There is a strong relationship between both initial rating and adjusted rating and default probability.
  5. Credit ratings rarely change so consequently, there is a lot more interest in the framework or the rules that allow firms to receive top credit ratings.  Unlike credit default swaps (CDS) which trade daily and can be used to predict default probability, bond ratings typically go years without a ratings change so the initial rules of the game matter a lot more.  According to S&P, the last time it changed its IHC framework was May 2004 when it was entitled “Rating Methodology For European Investment Holding And Operating Holding Companies.”  The “European” in the title should giveaway how outdated the S&P framework is.
  6. Every firm that does not receive the rating they feel they deserve will loudly protest that there are factors unique to their situation that the ratings body is not accurately weighing.  Most of the time, but definitely not always, firms arguments that the ratings agencies fail to accurately understand their industry or firm are poor attempts to gain a better ratings.  Credit ratings by the large agencies on average accurately assess the credit risk associated with firm issued debt.  If anything, credit ratings agencies on average understate rather than overstating the risk associated with debt products.
  7. S&P in its framework creation rarely deals with the type of issues I raise such as accounting or corporate governance problems but rather on much narrower concerns focused on whether debt can be repaid and potential stress concerns.  For instance, two issue which S&P raises which may seem technical are liquidity and mark to market vs. trailing average over some period.  Again, these are broader framework issues narrowly focused on repayment rather than the specific corporate concerns.

So as not to turn this into an excessively lengthy post, I am going to limit this post to the broader framework and background surrounding this issue.  This is a very important issue that has very real ramifications for Temasek, Singapore, and everyday Singaporeans.  I want to make sure the background and broader issues are understood so that when I turn to analyzing S&P’s proposal and the Temasek argument, everyone is aware of what is unfolding.

This may seem somewhat technical and boring but let me assure you it is vitally important and will be very important.

Between Apathy and Risk

I admire Roy Ngerng.  I admire Roy Ngerng not for what he said, though I generally agree with what he said.  I admire Roy Ngerng because he spoke out willing to accept the risks of speaking the truth.  Much of the time when I write about Singapore, I feel like a fraud because I am not generally in harms way when writing about the enormous financial discrepancies.  Roy Ngerng who faces much greater risk than I do has accepted that risk and calling.

Though I generally do not read comments on my work, I happened to browse through the comments section at TRemeritus.com a few months back and a reader asked me to write about specific issue that has haunted me ever since.  To paraphrase with my interpretation, what will rouse Singaporeans from their apathy in determining their course as free men and women with God given rights?

The English philosopher John Stuart Mill stated that “Bad men need nothing more to compass their ends, than that good men should look on and do nothing.”  People make calculations on the risks of speaking out and too often decide to remain silent, allowing bad men to compass their ends.  This attitude of cynicism and self interest permeates views about those who accept risks.  One Chinese youth was quoted as saying people don’t do things for ideals.  The world is a sad and lonely place when people do not hold ideals and the people that do are considered lunatics.

I do not believe it is my place to advise Singaporeans who to vote for or what specific policies you should implement.  However, I strongly believe you should demand transparency, openness, and accountability from any government of your choosing.  I strongly believe you have the right to criticize your government or any other government without fear of retribution.  I strongly believe Singapore and Asia need more men and women like Roy Ngerng who are willing to accept the risks of speaking truth regardless of consequence.

Too often we think of doing the right thing as earning reward and benefits when frequently the reality is the complete opposite.  Doing right may earn scorn, derision, and retribution.  During my five years in Asia, I have met many wonderful people and found them insightful and  thoughtful.  I have however found too many people unwilling to stand up for what they believe is right.  Consumers and citizens are more informed now than ever before and instead leadership creates fear and infantilizes them insisting “you wouldn’t understand.”

Roy Ngerng has met his fundraising objective of paying for the fine, but go further by attending the Return our CPF meeting at Hong Lim park on June 7th.  Maybe I will come as just an innocent bystander to observe the proceedings. There is nothing about CPF, Temasek, GIC, or Singaporean finances that I can say that will make people stand up and make their voice heard.  The bigger question is whether the good men and women of Singapore will stand by and do nothing.

Brief Specific Points on the CPF (as I have already written much on the topic):

1.  There is no interest rate guarantee.  As I have long noted, there is no guarantee because you cannot guarantee yourself.  The government guarantees CPF funds and Singaporean tax payers are the funders of the government.  The Singaporean tax payer is “guaranteeing” itself.  This is the equivalent of buying life insurance from yourself and promising to put the payment in a separate account so that based upon your expected death, there will be the same amount for your children.  If there are ever problems with CPF and Singapore government finances, guess who will be footing the bill for this guarantee?  Singapore taxpayers will be paying for their own guarantee.  If something goes wrong and you have to bail yourself out, that is not a guarantee.

2.  If the government via any means is legally mandating citizens provide it revenue: that is a tax.  The CPF is a significant form of wealth taxation on Singaporeans. In the MOF response, they state that they keep all funds above the “guaranteed” rate meaning they are imposing an implicit form of taxation.  A government simply cannot pass a law requiring citizens that confiscates money and not call it a tax.

3.  Please raise your hand if you would rather have the guaranteed CPF rate of 2.5% (a total weighted 3.67% based upon all CPF funds) or the unguaranteed GIC rate of return of 6.5% in USD terms?  What about the 16% of Temasek primarily holding historical Singaporean state owned firms?  Anyone? Anyone?

4.  As I have noted before, as a matter of prudence, I support raising the guaranteed requirement.  However, to achieve those ends it would be better to let Singaporeans share the benefits of the GIC and Temasek through any number of various proposals, rather than make it that much harder to meet the minimum standard.  Temasek is comprised primarily of historically state owned firms and GIC, by the governments own admission, is comprised of public investment capital.  The people of Singapore should share this bounty rather than being forced into indenbtured servitude.

Subsidizing Profits, SMRT, and Temasek

In 2008 during the global financial crisis, United States politicians debated whether bailing out failing banks would set the precedent of ‘privatizing profits and socializing losses’.  Economists call this problem “moral hazard” when companies are not forced to recognize their risks and consequently accept higher risks knowing a third party will absorb their losses.  While the debate rages about whether major US and international banks privatized the profits and socialized the losses, this is standard practice with many Singaporean and specifically Temasek owned companies.

SMRT is probably the best example of this practice within Singapore.  As I have noted elsewhere,   SMRT and other Temasek firms enjoy tremendous privileges that other foreign or even other Singapore firms simply do not enjoy.  For many year, the Singaporean government has paid for the capital that that SMRT uses everyday.  The tunnels, the rail lines, the subway cars, and buses that SMRT uses everyday have been purchased by the Singaporean tax payer.

The financial effect is simple.  SMRT as a publicly listed company and a portfolio company owned by Temasek makes money only because of the generosity of the government and the Singapore tax payer.  Despite having recently declared a $62 million SGD net profit for the year, SMRT depends heavily on the gifts of the Singapore tax payer through gifted buses and other infrastructure.  If SMRT had to make principal and interest payments on the buses alone, it would require yearly payments of $150 million SGD.  The financial effect is this: SMRT profit is entirely attributable to subsidies given to it by the Singaporean tax payer and not high quality management at Temasek.  Put another way, Temasek and its senior executive are only able to declare a profit for SMRT because the Singapore government gives it money.

There are three more philosophical reasons this matter.  First, most people appreciate and respect the success of other when gained through skill, talent, and hard work but resent unfairly gained benefits.  This is why few people complain about companies like Apple or Google, they make a good product and compete with others.  SMRT has not achieved its profitability due to providing a top quality product against fair competition, but through political manipulation and public bailouts.

Second, SMRT is socializing the risk and privatizing the profits.  When losses are incurred it is the Singapore tax payer that suffers but when profits received, it is the executive of Temasek that enjoys the benefit.  SMRT is placing the risk on the tax payer but capturing the benefit for itself.  While individuals or firms taking individual or corporate risk should be allowed to keep those profits private or socialize risk and profits, it is truly objectionable to socialize the risk but privatize the profits.

Third, the true financial and economic cost of SMRT and related infrastructure is not being recognized.  As one economist noted, if something cannot go on forever it will stop.  Singapore, SMRT, and Temasek cannot maintain a loss making firm dependent on regular bail outs to report profits or eventually it will stop.  By hiding the true cost of ownership, maintenance, and investment, the government is attempting to protect its Temasek owned asset rather than the tax payer.

Mass and public transport is a notoriously difficult and generally loss making industry.  It is however, morally reprehensible to pretend that a company is making money and use tax payer money to create  profits for the investments of family members.  The people of Singapore are being defrauded by bearing the risk of investment but seeing none of the profits.

Note: This piece was prompted by a post in the TREmeritus.com last week asking whether SMRT was a public or private company.

Deutsche Bank Suspends Employee for MAS Contact

Deutsche Bank has suspended an employee for “improper communication” with the Monetary Authority of Singapore.  This comes after a wide ranging investigation by large investment banks into suspected employee rigging of the foreign exchange market.

There are a couple of interesting aspects to this case.  First, according to the article, Deutsche Bank informed MAS of this decision and reasons behind this decision, but MAS has so far opted not to disclose this to the public.  Given that the other central bank notified of potentially improper behavior, the Bank of England, “suspended a staff member” and hired an outside law firm to conduct a full investigation, it is troubling that MAS has so far avoided any disclosure of this event or outside investigation.

Second, as Deutsche Bank suspended the employee for “improper communication” with MAS, this implies some type of unethical behavior by MAS or an employee of MAS.  The report does not say that the employee passed on sensitive information to other DB employees, other banks or traders.  While MAS may be faultless, it is likely given what is known so far that there is some improper behavior by MAS or an employee of MAS.

Third, given that MAS has announced its investigation of potential foreign exchange market manipulation, it presents a clear conflict of interest to both be investigating and the investigated.  I have absolutely no sympathy for banks or traders that attempt to manipulate market prices, however, I harbor similar levels of disdain for bodies that investigate themselves and find themselves clean.

Why listen to me though, I am just an academic and a quack according to the Singaporean powers that be.


Recent Academic Work on Temasek

A few days ago I received a copy of a paper appearing in the journal World Economics from Friedrich Wu a professor at the Nanyang Technological University in Singapore about his recent research on Temasek.  Now before I talk about the paper, I want to emphasize something.  I had never seen this paper before a couple of days ago, never corresponded with Dr. Wu before the other day, or provided any input on the paper.

To most in Singapore who know about Temasek, much of the material will be familiar with a significant portion of the material covered.  The strengths of this paper, and worth reading to even the knowledgeable Singaporean reader, are its analysis of the shift in investment strategy prior to the 2008 global financial crisis and the subsequent changes in their capital allocation.   The paper notes among other things that:

“The GFC highlighted Temasek’s overexposure to the financial services sector. This could have prompted it to decrease the share of its holdings in this industry from 40% in 2008 to 31% in 2013… Standard & Poor’s, however, insists that Temasek is still overexposed to financial services.”

The paper also notes the relatively higher level of political risk Temasek accepts.  Not only is Temasek filled with PAP party favorites and relatives, but its investments are increasingly tied to political questions.  The recent failure of the Indonesian bank take over which the Indonesian government tied to opening up the Singaporean banking market, something the Singaporean government refused, fail to assuage foreign governments that Temasek is a purely commercial government owned enterprise.  Though Temasek appears to have gotten a good deal in its purchase of Watson’s Drug from Hong Kong tycoon Li Ka-Shing, it won’t comfort Singaporean’s to others to note that Mr. Li said in a press conference that “the transaction wasn’t based solely on pricing…”.

Prof. Wu even mentions me fairly writing about my work that “As Temasek is not required to file its audited financial statements with the public registry, there are no concrete means of ascertaining the validity of either Temasek’s TSR claims or Balding’s argument.”  I think is an entirely fair statement to make because until Temasek actually reveals information about its financials and returns, we cannot make a definitive assessment of the truth of their claims.  I believe very strongly that the overwhelming evidence supports the idea that Temasek has not and continues to misrepresent its long term returns and financial health, but that we cannot know with absolute certainty at the moment.

I believe there are two fundamental problems, which to this date neither Temasek nor anyone defending them, have been able to address.  First, Temasek is claiming long term annual returns which are double what virtually every stock market in the world has earned.  Add that up since 1974, the year of Temasek’s inception, and the differences are just enormous.  Let’s begin by looking at Figure 1 which plots major stock markets and Singapore stock returns since 1974.

As you can see, most stock markets have returned pretty similar annualized rates of return which average out to 7-8% annually.  Hong Kong with its own rapid expansion and then the inflow from Chinese listings is the outlier, coming in at 9% annually since 1974.  Now let’s put it into perspective, just how large a difference Temsek is claiming below in Figure 2.

Temasek is claiming not that they did a little better than every major stock market, and the Singaporean index, since 1974 but that they simple obliterated it.  According to Temasek they beat indexes every year by a factor of about 2 to 1, which over 40 years adds up to Temasek beating global stock by a factor of nearly 20.   This is truly astounding performance and Temasek should just start giving investment lessons to Warren Buffet and every other investor in the world.

The second major problem is the large public surpluses and investment capital from CPF that has flowed through the Singaporean public purse.  Since 1974 Singapore in adding up operational government surpluses and investment capital from CPF, received more than $700 billion SGD in total yearly inflows.  Temasek and GIC claim they have earned 16% in SGD terms and 7% in USD terms over the long run.  Astoundingly, the Singapore balance sheet as of March 31, 2012 listed only $765 billion in assets.

The discrepancy between the financial assets Singapore has and should have based on the inflows it received, is enormous.  If GIC and Temasek are earning what they are claiming, even after subtracting out currency losses and interest on CPF capital to savers, Singapore should have approximately double the financial assets it lists on its balance sheet.  This is not unique financial theory but simply the laws of mathematics and the public data provided by the Singapore government.  Surpluses do not disappear and investment capital from CPF has to go somewhere.


I am sure that Temasek senior management thinks I am a quack.  However, this merely pushes me on because I know that they could prove me wrong and embarrass me easily by proving me wrong with minimal data releases.  They have chosen not to because, as I strongly suspect, they know that the evidence supports my version of events, even if imperfectly, much more than their version.  I have offered time and time again to publish a full retraction and apology to the Singaporean government, Temasek, and the Singaporean people if Temasek can provide data that proves I am wrong.  They have not.


You be the judge of what they believe that means.