Friday, July 20, 2012

A Singaporean Mystery

I was alerted to something quite interesting a few days ago by warrior 231 – there appears to be hole in the Singapore government accounts, a fairly substantial one.

The one man crusader pursuing this issue is Christopher Balding, Associate Professor at Peking University’s HSBC Business School. Here’s a sampling from his blog:

The Importance of Economic Capture and Government Surpluses

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

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

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

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

For more reading, hit this link.

This is pretty explosive stuff…and this is just the tip of the iceberg. I’ve run through the numbers myself, and I can’t reconcile them either.

Consider that the Singapore government has been running an operational budget surplus in all but six out of the last forty-odd years. The accumulated cash surplus is on the order of SGD305 billion (from 1974-2011).

At the same time, Singapore has issued and accumulated a debt load on the order of SGD354 billion during the same period, equivalent to 108% of GDP (approximately half of that is non-tradable notes issued to CPF). Only a very small portion of the accumulated cash surplus and debt raising can be accounted for as seed money for Temasek. In addition, the government currently holds a cash balance of SGD160 billion, 90% of which is earning zero interest at the Monetary Authority of Singapore (MAS).

Put that all together and there appears to be SGD300-400 billion that isn’t accounted for.

I disagree with Prof Balding on one score – GIC, or the Government of Singapore Investment Corporation, by all accounts manages Singapore’s international reserves. Since forex reserves aren’t properly speaking government “assets” and generally not treated as such (by anybody), they don’t belong in the analysis nor would they be included as part of the government’s balance sheet. In any case, the claimed returns for GIC and growth in international reserves match up pretty well, if you take into account occasional MAS intervention in the foreign exchange markets.

(Digression: if Singapore’s accumulation of reserves is due in greater part to GIC’s efforts more than MAS intervention as implied here, that suggests MAS intervenes much, much less than it is commonly accused of and charges of Singapore currency manipulation hold even less water).

But excluding GIC numbers from the overall government numbers makes the money hole even bigger than that claimed by Prof Balding.

All these give rise to some troubling questions:

  1. How can these monies be accounted for?
  2. Beyond that simple question, why does Singapore continue to accumulate debt at a rate faster than nominal GDP growth? I understand the mechanism used to provide CPF members a steady, guaranteed return, but that only accounts for half of the debt issuance. What about the other half? And why, if Temasek is earning an average 17% return, are CPF members only getting 2.5%-4%?
  3. If the excess debt issuance is being used to fund Temasek investments, their portfolio ought to be running into the trillions by now. If it is, why the discrepancy? If it isn’t, where is it going to?
  4. Why is the government sitting on SGD160 billion in cash? That’s equivalent to 50% of Singapore’s GDP, and a hugely inefficient way to handle savings. In fact, it makes debt issuance completely unnecessary. The non-CPF portion can be retired pretty much tomorrow. I understand the desire to create a sovereign benchmark for private debt issuance, but issuing debt equal to 50% of GDP is overkill. And given the cash backing for this debt, you can’t discount the hypothesis that the yield for Singapore’s tradable government debt is seriously distorted, and won’t serve much use as a benchmark for the riskiness of private debt anyway.
  5. The only thing I can think of to explain this is because MAS uses an exchange rate target instead of a more conventional interest rate or money supply target with the result that it doesn’t conduct domestic open market operations, government debt as opposed to central bank debt is used as the primary instrument for reducing excess domestic liquidity. That’s a possibility considering short term T-bills form 16% of total government debt (in Malaysia by contrast, T-bills are less than 0.5% of the total). But that implies a division of responsibility for monetary policy among two different government agencies, which doesn’t make a whole lot of sense either.
  6. If both private and public sectors are saving (and they are), then in an open economy either the economy is running below capacity or capital has to be exported. But if the private sector is saving (and the domestic savings rate is in excess of 30%), it doesn’t make economic sense for the public sector to save as well.
  7. In fact, looking at the Singapore government’s expenditure patterns, it makes even less sense, because the operational savings are achieved by a systematic under-provision of public goods. Among developed economies, Singapore spends less as a ratio to GDP on pretty much everything, including healthcare and education.

All in all, lots of questions and precious little answers. If anybody has better information or input into this issue, feel free to comment.

Singapore’s governance is often held up as a model for the rest of the developing world. There’s certainly truth in that, but their fetish for government fiscal probity appears to my eyes to be largely at the expense of the people the government is ostensibly working for. I’ve never been one for conspiracy theories but, ironies of ironies, greater transparency is called for here.


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    1. My research indicates that the Singapore Ministry of Finance (MOF) and the Monetary Authority of Singapore (MAS) have not commented on the posts in Prof Balding's blog.

      One possible means of elucidation is to direct your enquiries to the MAS and wait for them to reply.

      Another way is to post your thesis, with references to Balding's blog, in any international economics journal and wait for responses.

      Warrior 231, from his posts on the Rockybru blog, seems to have conceived an atavistic, if not visceral, dislike of Singapore - much of it clothed in crude and racist language. That's his problem.

      What surprises me is the fact that the hard-headed analysts at the credit rating agencies have persisted in maintaining Singapore's triple-A sovereign credit ratings, with pass-ons to bonds issued by Temasek Holdings.

      The IMF too, in it's country evaluation of Singapore's finances and economy, has not thrown up any red flags.

      Bear in mind too that the exact size of Singapore's reserves has never been officially disclosed; it may even be a state secret. On a crude basis, it could be the sum of MAS-disclosed forex reserves plus the size (unknown) of GIC's portfolio.

      The rock-solid Singapore Dollar also presumes a hefty amount of backing. That's another topic for another day.

  2. maybe singapore got GOLD BAR inside

  3. @Gaius,

    From the credit perspective, there's little to worry about, hence the AAA rating. Given that the public portion of the outstanding debt is fully backed by cash in the government's account at MAS (point 4 above), there's zero fear of a default. That's not the same thing as saying that all the proceeds are accounted for. The rating agencies only care about the likelihood of default - as long as there are liquid assets to pay off the debt, they don't give a fig about what you do.

    Same thing with the IMF - the evaluation is based on ability to cover external debt, since the IMF will have to carry the can in the event of balance of payments difficulties.

    It's not the same perspective from the point of view of Singaporean citizens.

    @Living Seed,

    Actually, I do believe that MAS' holdings of gold are publicly disclosed. It's also included in the valuation of official reserves.