Loading ...
Sorry, an error occurred while loading the content.

10422Fwd: Interview with Dr Christopher BALDING on Singap ore’s SWFs – JULY 28, 2012

Expand Messages
  • Robert Ho
    Sep 22, 2013
      ---------- Forwarded message ----------
      From: Robert HO <robert.ic019@...>
      Date: 26 December 2012 11:14

      Subject: Interview with Dr Christopher BALDING on Singapore’s SWFs – JULY 28, 2012

      Interview with Dr Christopher Balding on Singapore’s SWFs

      New Asia Republic

      Temasek Holdings Press Conference. Left to Right: Simon Israel, Ho Ching, Leong Wai Leng

      Dr Christopher Balding is currently an Assistant Professor at the HSBC Business School, Peking University. He earned his Bachelor’s degree in International Affairs and Masters in International Economics respectively at The George Washington University, and subsequently obtained his PhD in Political Economics from the University of California. Earlier this year, he published a working paperentitled “A Brief Research Note on Temasek Holdings and Singapore: Mr. Madoff Goes to Singapore”. His research interests lie in the area of International and Political economics. He currently blogs atwww.baldingsworld.com.

      NAR: What is your opinion with regards as to where Sovereign Wealth Funds (SWF) should invest their funds, specifically should they be limited to investing abroad or be given flexibility to invest at home or/and abroad?

      Balding: From a financial perspective I see nothing wrong with sovereign wealth funds investing in their home markets. From a political stand point, it is very difficult to do so without creating extreme conflicts of interest. Let me give you a little background before answering your question.

      First, most SWFs do not have capital markets that can be considered investment destinations so for many especially newer funds, this is not a problem.

      Second, some SWFs have explicitly forbid domestic investment or tried to separate those functions. For instance, the China Investment Corporation (CIC) outside of its domestic holding arm which holds primarily their stake in the 4 major state banks forbids domestic investment. It should be noted however, that the CIC has purchased China focused ETF’s on US financial markets, subverting the intention of preventing domestic investment.

      Third, I believe it is reasonable on many levels that SWFs would want to invest domestically. The biggest problem is the potential for political influence or conflicts of interest. If we consider Singapore, Temasek is surrounded by conflicts of interest and politically influenced investments beginning with its senior leadership all the way to its portfolio companies. Only in Singapore would the head of the sovereign wealth fund being married to the prime minister not be considered a family run operation.

      The type of behavior occurs regularly in Middle Eastern SWF but it is recognized for what it is: control by the ruling family. SWF that want to invest in domestic market may want to consider allowing external fund managers to invest their funds domestically to avoid conflicts of interest. I have much less concern about international investment for most any SWF because of a variety of difficulties. For instance, Temasek is not going to be able to seriously influence Chinese government policy on their 4 major state banks.

      NAR: Whilst being an atypical SWF, what problems can arise if one of such like Temasek Holdings is allowed to invest at home?

      Balding: I actually believe that SWF should be able to invest at home but I also just as strongly believe that it can allow for major problems and real distortions if politics is not separated from profit.

      The primary problem is that investing at home without necessary safeguards can create very real conflicts of interest and politicization of investment. In fact, many sovereign wealth funds actually take steps to address this problem. The China Investment Corporation has a prohibition on domestic investment.

      Other sovereign wealth funds, allow investment domestically only under narrow circumstances like through external asset managers. Only in Singapore is the head of a SWF being married to the prime minister not considered a conflict of interest or a family appointment.

      In many Gulf sovereign wealth funds, the ruling family maintains control over the SWF, but everyone admits it is family controlled. Only in Singapore is a family member running a SWF not a family member or a conflict of interest. Furthermore, it creates very real conflicts of interest. One minister who was also the manager of a portfolio company of Temasek in an interview actually said that sometimes “I write letters to myself”. This has the clear impact of creating an unlevel playing field for firms. There is not restraint on regulation and favored investment.

      Editor’s NoteIn order to alleviate concerns of corporate governance at Temasek Holdings, New Asia Republic understands that Prime Minister Lee Hsien Loong’s wife Madam Ho Ching, as Executive Director, does not report directly to the Ministry of Finance. Instead, she is accountable to the Executive Committee which is answerable to the Board of Directors which in turn reports to the Ministry of Finance.

      NAR: Temasek Holdings was initially designed to invest budget surpluses, so how did Singapore end up in a situation with high public debt?

      Balding: As has been pointed out, Singapore’s debt is somewhat atypical compared to other governments but just as importantly, that does not make the debt any less important or any less real. Singapore created bodies like the Central Provident Fund that mandated contributions by citizens where the government could easily borrow funds. This has a couple of major impacts.

      First, the government of Singapore essentially passed a law requiring it citizens to lend it money. I know of no other country where citizens are by law required to lend its government money.

      Second, the government of Singapore only profits when it earns money in excess of the guaranteed rate of return owed to its citizens. Otherwise, the government and taxpayers are subsidizing investment losses of Temasek and GIC. In recent history, there is little evidence that supports the idea that Singapore is earning a profitable rate of return able to guarantee the debt owed to bodies like the CPF. Net asset growth after accounting for increases in debt have hardly increased implying that Singapore is failing to earn a profitable rate of return that it needs to guarantee CPF holders.

      Third, Singaporean sovereign wealth funds like Temasek and GIC are bearing essentially no risk. Singaporean tax payers bear the risk of GIC/Temasek but do not share the benefits. If GIC and Temasek fare poorly or collapse, the Singaporean tax payer will have to bear the cost of guaranteeing the CPF. However, if GIC and Temasek do a good job the CPF debt holder earns 2.5-4%, then GIC enjoy the entire difference. This is a profoundly perverted structure where the people providing all capital and bear all the risk and enjoy none of the rewards.

      While Singapore instituted sound policy of requiring individuals to save for retirement, rather than allowing the government to borrow money from the CPF at low investment rates, there are many better alternatives. Let me give you two examples.

      First, Chile instituted a similar system where individuals payed into their account but the government opened up the investment system to external asset managers. Studies show that Chilean savers have fared quite well compared to other social security systems where savers earn a below market rate of return.

      Second, rather than forcing Singaporean savers to lend at a such a low rate but capturing the market gains for the state, make CPF account holders “equity” holders that receive a dividends about their investment. The state of Singapore through GIC/Temasek is a defacto asset manager for the Singaporean people who lend them the money either through debt or budget surpluses.

      It would be better financially for the Singaporean people, who guarantee their own debt anyway, to have a stake in the performance of the SWF’s.

      NAR: What are the socioeconomic consequences of a high public debt and budget surpluses, in the case of Singapore as your paper suggests? Why?

      Balding: As Singaporean debt is slightly different than other countries, it has some unique implications. Let me begin by saying that just because the debt has some different characteristics, does not make it any less real, less important, or less necessary to bring down.

      First, the Singaporean government is extracting public savings from its people in the form of enormous current account and government surpluses. By running such large and sustained government surpluses, the government is extracting savings from its own population.

      Second, by failing to run a balanced budget the government is failing to provide public services for its citizens. As has been demonstrated time and time again, though Singapore claims it is a low tax haven, many services which are government provided in other countries are paid for via fees in Singapore.

      Third, the government is capturing the financial reward of the risk taken by the people of Singapore. Let me give you an example. If a CPF holder invests $1,000 and GIC/Temasek can pay back the 2.5-4% debt Singapore incurs to borrow money from the CPF, the government captures the difference between 4% and 10% (for instance) even though it is the peoples money.

      However, if GIC/Temasek cannot pay back the debt, the government will go raise taxes on the CPF holder who invested his $1,000 asking him to subsidize the losses incurred by Temasek/GIC. If the people of Singapore are being asked to take the financial risk, they should enjoy the financial rewards. Fourth, Singapore is taking enormous financial risk.

      At a roughly 2:1 leverage ratio, Singapore is running significant risk. For instance, during the financial crises when Temasek incurred a 31% drop, there were probably days during this period when Singapore had more debt than assets. This seems like an unacceptably high level of risk to be running with national finances.

      NAR: Is it possible to reverse the current trend of high public debt in Singapore?

      Balding: In the foreseeable future, no. There is a very simple reason for that.

      Singaporean citizens are obligated by law to pay into CPF and the government of Singapore will borrow from the CPF and other sources. The government could easily reverse this trend by making CPF holders equity stake holders in GIC/Temasek rather than continuing to borrow but this would necessitate allowing Singaporean citizens greater voice in increase accountability which I see no evidence of the government changing.

      NAR: Does your research suggest anything about the performance of state-owned companies which are responsible for 80% of the public debt?

      Balding: There is no evidence that most companies under the Temasek umbrella are top companies that are globally competitive. The most efficient companies expand overseas increasing their revenue, profitability, and returns. With a couple of exceptions, most companies under the Temasek umbrella remain dependent on the Singaporean market unable to significantly expand abroad.

      For sure there are a couple of examples, but most Temasek portfolio companies remain dependent on their home market unable to capture significant growth abroad. This indicates that Temasek companies are not the globally competitive, efficient profit machines they are portrayed as. There are many examples of failed foreign investments by Singaporean state linked entities under the Temasek umbrella.

      The most efficient companies expand internationally and increase profits and we do not generally see this with Temasek linked companies. In fact, earnings per share in most public Temasek portfolio companies is relatively flat over the past decade.

      NAR: Given that you do research on SWFs, how would you rate Temasek Holdings’ level of transparency?

      Balding: Temasek tries to portray itself as transparent but the level of detail it provides compared to other funds is minimal and designed to obfuscate. For instance, they provide headline information about their returns but when you compare their portfolio to their headline returns the numbers do not reconcile.

      When you then ask about the discrepancy they refuse to answer and point you back to their headline return number. Other funds that I worked with in research may book, arranged conference call interviews, invited me to view their office and trading operations, and described in detail their decision making process about deciding to outsource asset management services.

      NAR: In 2009, Temasek’s exposure to the subprime mortgage crisis resulted in a 31% decrease in its portfolio. Does it make Temasek Holdings’ claim of 17% return annually even harder to believe?

      Balding: I don’t think the sub-prime crisis makes the claims of 17% any more or less believable. I say that for two reasons.

      First, Temasek is nearly 40 years old, so the impact of one year of recent returns will have only a minimal impact on the long term rate of return.

      Second, global markets rebounded quite strongly after 2009, so unless Temasek was selling major portions at the bottom of the decline and then holding cash as market rebounded, Temasek most likely enjoyed the ride back up cancelling out at any returns. This is a highly unlikely scenario.

      In short, I doubt the sub-prime crisis had any real impact on Temasek’s long term performance.

      NAR: Temasek Holdings claims to have invested 72% of its portfolio in Asia, where 30% lies in Singapore. It also has exposures to the energy and resource sectors, and mature economies like Australia and New Zealand. Given this information, would that have made the claim of 17% returns annually more believable?

      Balding: This information doesn’t really change anything and there is a simple explanation why. Temasek has been in existence since 1974, nearly 40 years now. Furthermore, it has only been since about 2000, that Temasek really made sustained and regular investments outside of Singapore.

      Finally, it is just a law of mathematics that unless there are multiple years of enormously outsized returns, the long term rate of return won’t change much. For instance, if the long run rate of return is 17% over 38 years, even a bad year, won’t significantly move that 17% long run rate of return. To answer your question, I don’t think that information has a significant impact of my evaluation of the 17% returns claimed by Temasek.

      NAR: If Temasek Holdings alleges that its performance was to be true, would the current percentage of returns been within the margin to raise allegations of insider trading? What other implications are there of such a claim of 17% returns?

      Balding: If the 17% is true, though I doubt insider trading would raise it that much, I do believe that there are very real examples of the government favoring selected Temasek companies. By systematically favoring Temasek companies, the government of Singapore can significantly increase their profitability. Let me give you one simple example.

      The government of Singapore gave SingTel a $1.5 billion SGD payment for the loss of its monopoly in the late 1990’s. Considering that the government gave SingTel the monopoly, took it public, remains its biggest shareholder, appoints management, regulates it, and negotiates the contract, this would seem like a clear conflict of interest and unnecessary to pay Singtel $1.5 billion SGD for the loss of its monopoly.

      Time and time again, you can see the government favoring Temasek companies that would help it achieve growth rates if the 17% performance is true.

      New Asia Republic would like to extend its deepest gratitude to Dr Christopher Balding for the time he has taken to respond to our queries. Photo courtesy of Temasek Holdings.


      --
      >>>>>>>>>>  TO HELP ME, COMPLETE THESE STATEMENTS, THANKS:  http://roberthorequestforstatements.blogspot.com/

      My wife, an accountant, then a manager in an MNC drawing a 5-figure salary before she retired, can confirm that I write the Truth in all these.  <<<<<<<<<<

      RH:   LKY LHL WKS ELECTION RIGGINGS EMAILED TO ALMOST ENTIRE GOVT:
      http://i-came-i-saw-i-solved-it.blogspot.com/2010/06/lky-lhl-wks-election-riggings-emailed.html

      ME ON VIDEO DESCRIBING lky lhl wks NUMEROUS ELECTION RIGGINGS + PoBoB and CCTV Ideas:
      http://i-came-i-saw-i-solved-it.blogspot.com/search/label/%22A%20Video%20RH%20on%20LKY%20LHL%20WKS%20cheating%20elections%20%2B%20PoBoB%20and%20CCTV%20Ideas%22

      http://www.youtube.com/watch?v=jQCab3QZbBk

      MY ACQUAINTANCE, MR DAVID DUCLOS, A FORMER POLICE INSPECTOR, AND HIS LAWYER FRIEND, EYEWITNESSED LEE KUAN YEW RIGGING THE 1997 CHENG SAN GRC ELECTION.  READ MORE AT MY BLOG ENTITLED "I CAME, I SAW, I SOLVED IT" : 

      b.  SWORN EXHIBIT IN SUPPORT OF AFFIDAVIT:

      c.  SOME LEGAL PRINCIPLES ON WHICH I GROUND MY CASE:

      d.  THE PATTERN OF CRIMINAL WRONGDOINGS THAT PROVES MY CASE;

      e.  3rd EMAIL TO UK PM FOR OBSTRUCTING, PERVERTING JUSTICE:

      LEE Kuan Yew, LEE Hsien Loong, Tony TAN, HO Ching corruptions and theft of billions:

      "THE PRIMAL FEAR OF A SUPERIOR MIND"



      --
      >>>>>>>>>>  TO HELP ME, COMPLETE THESE STATEMENTS, THANKS:  http://roberthorequestforstatements.blogspot.com/

      My wife, an accountant, then a manager in an MNC drawing a 5-figure salary before she retired, can confirm that I write the Truth in all these.  <<<<<<<<<<

      RH:   LKY LHL WKS ELECTION RIGGINGS EMAILED TO ALMOST ENTIRE GOVT:
      http://i-came-i-saw-i-solved-it.blogspot.com/2010/06/lky-lhl-wks-election-riggings-emailed.html

      ME ON VIDEO DESCRIBING lky lhl wks NUMEROUS ELECTION RIGGINGS + PoBoB and CCTV Ideas:
      http://i-came-i-saw-i-solved-it.blogspot.com/search/label/%22A%20Video%20RH%20on%20LKY%20LHL%20WKS%20cheating%20elections%20%2B%20PoBoB%20and%20CCTV%20Ideas%22

      http://www.youtube.com/watch?v=jQCab3QZbBk

      MY ACQUAINTANCE, MR DAVID DUCLOS, A FORMER POLICE INSPECTOR, AND HIS LAWYER FRIEND, EYEWITNESSED LEE KUAN YEW RIGGING THE 1997 CHENG SAN GRC ELECTION.  READ MORE AT MY BLOG ENTITLED "I CAME, I SAW, I SOLVED IT" : 

      b.  SWORN EXHIBIT IN SUPPORT OF AFFIDAVIT:

      c.  SOME LEGAL PRINCIPLES ON WHICH I GROUND MY CASE:

      d.  THE PATTERN OF CRIMINAL WRONGDOINGS THAT PROVES MY CASE;

      e.  3rd EMAIL TO UK PM FOR OBSTRUCTING, PERVERTING JUSTICE:

      LEE Kuan Yew, LEE Hsien Loong, Tony TAN, HO Ching corruptions and theft of billions:

      "POWERFUL POLITICIANS WHO CANNOT CREATE, INVENT, SOLVE PROBLEMS AND CHANGE THE WORLD CAN ONLY TAKE SATISFACTION BLOCKING, DEGRADING, THOSE WHO CAN."
    • Show all 2 messages in this topic