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The Mess that is Singapore: Part II Explaining the Role of the CPF

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  • christopherbalding
    http://christopherbalding.com/ The Mess that is Singapore: Part II Explaining the Role of the
    Message 1 of 1 , May 11, 2012

    The Mess that is Singapore: Part II Explaining the Role of the CPF

    Posted on May 10, 2012

    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 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.

    ---------- Forwarded message ----------
    From: Robert HO <robert.ic019@...>
    Date: 12 May 2012 09:23

    Subject: HSBC Professor proves that LIE KY 2A1B nepots probably stole hundreds of billions unaccounted for

    The Mess that is Singapore Part 1: Explaining the Debt

     May 12th, 2012 |  Author: Contributions

    Ever since my paper on Temasek and Singapore was covered in Mostly Economics writing a plea for “clarifications from Temasek and SG govt”, I have begun receiving emails and postings to either explain or defend something further.  Today, I will focus on the questions pertaining to the debt side.

    The basic question numerous posters and email have raised is whether public Singaporean debt is actually attributable to state owned enterprises or the social security fund known as the Central Provident Fund?  There is a short answer and a long answer.  The short answer is that it doesn’t matter.  Think of a company like GE.  If GE Capital goes out and borrows money, there is still an increase in the total debt of GE the parent company.  So whether it is the Central Provident Fund or the state owned enterprises, at the end of the day there is still a rapid increase in the total debt of Singapore.

    The longer more detailed answer is even more unpalatable.  While there is most definitely a significant portion of Singaporean public debt issued by the Central Provident Fund but guaranteed by Singapore, the important part is not who holds the debt, but rather whathappened to the money that was borrowed.   If the Singapore state issues debt, whether it is to a foreigner, a private citizen, or the Central Provident Fund, Singapore now has more funds that they must either spend or invest.  That inflow from issuing debt does not just disappear.

    Since 1990, the Singaporean government has realized cash flow from increasing borrowing of $250 Billion SGD.  To add on to this, the Singaporean government has enjoyed public surpluses of $262 Billion SGD.  Think about that for one minute: free cash flow into government coffers between additional borrowing and surpluses averaging more than 16% of GDP between 1991 and 2010.  Since 1991 alone, without factoring in revenue from interest, accumulated cash flow from additional borrowing and government surpluses has totaled $512 Billion SGD.

    To give you two numbers to help you wrap your head around that number, that is equal to 155% of 2011 Singaporean GDP or roughly equal to the combined assets of Temasek the the Government Investment Corporation of Singapore (The GIC does not publish assets under management but most estimates have it in the $250-300 billion USD range).  The $500 billion dollar question then is: where did all this money go?  In other words, how does the total increase in debt and the total government surpluses equal the estimated amount of assets under management?  (It is also important to remember that this data only goes back to 1990, not the 1974 since Temasek inception).

    Now let’s turn to where the money has gone.  Here is a graph of the hypothetical growth of assets under management by government linked entities such as Temasek or the CPF.

    If these free cash flows averaged annual growth of only 1%, assets would still amount to more than Temasek and the GIC combined.  If annual growth was the GIC average of 7%, Singapore would still be sitting on more than $1 trillion SGD rather than the current estimate of around $500 billion.  A 10% rate of return would leave Singapore with $1.4 trillion SGD.  If public surpluses and borrowing were invested and returned even a balanced portfolio average, the current assets managed by public bodies in Singapore would truly be staggering.

    As was noted in the original paper, this implies one of two things:  1) the returns are fictitious and there has been a lot of money lost OR 2) there are enormous unreported holdings controlled by Singaporean public entities.  You simply cannot explain $500 billion SGD in surpluses and increased indebtedness without asking where that money has gone.  As of right now, there is no record of public Singaporean assets to match what we would expect to find.  Show me additional assets that should be there.  Temasek and GIC don’t have them.  Where is the missing money?  If it wasn’t spent, and there is no public record of that, then it should be a financial asset under public Singaporean control

    As a last point, if these surpluses and additional borrowing even matched the rate the CPF pays out to Singaporean citizens of 4% would equal approximately $750 billion SGD.  This is 50% more than the estimated holdings of Temasek and the GIC.  Unless someone can find hundreds of billions of unreported Singaporean public assets, we should assume this money has gone to money heaven.

    Next time, I will describe exactly how the Central Provident Fund plays in to all this and why Singaporean should be worried…..very very  worried.


    Christopher Balding

    *The writer is a professor of business and economics at the HSBC Business School at the Peking University Graduate School. An expert in sovereign wealth funds, his writings have been published in such leading journals as the Review of International Economics, the Journal of Public Economic Theory, and the International Finance Review on such diverse topics as CDS pricing, the WTO, and the economics of adoption and abortion.  His work has also been cited by a variety of media outlets including the Wall Street Journal and the Financial Times.

     Posted in EconomicsOpinion

    4 Responses to “The Mess that is Singapore Part 1: Explaining the Debt”

    ---------- Forwarded message ----------
    From: Robert HO <robert.ic019@...>
    Date: 30 April 2012 11:27

    Subject: FACT: LIE KY 2A1B nepots repeatedly rigged elections to continue in power and $; FACT: They have beaten political detainees to death, jailed them 32 years; CONCLUSION: THEY DOUBTLESS STOLE THESE $Bs

    RH:  FACT:  LIE KY 2A1B nepots repeatedly rigged elections to continue in power and $;  FACT:  They have beaten political detainees to death, jailed them 32 years;  CONCLUSION:  THEY DOUBTLESS STOLE THESE $Bs [you mean to say they have rigged elections, beaten opponents to death, jailed them decades but when it comes to money, they suddenly become honest and refrained from stealing even a cent?  When both LIE KY and 2A1B have corruptly accepted 15% illegal discounts on luxury condos?  Click on this].

    ---------- Forwarded message ----------
    From: Robert HO <robert.ic019@...>
    Date: 19 April 2012 12:30

    Subject: Fwd: Proofs in pdf document report by HSBC that LIE KY 2A1B famiLEEs etc have stolen some US$275b [S$350b] unaccounted for

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    File name: SSRN-id2001343. ;   Size: 798K

    A Brief Research Note on Temasek Holdings and Singapore: Mr. Madoff Goes to Singapore

    Christopher Balding 

    HSBC School of Business

    February 8, 2012

    Financial data reported by Temasek Holdings and Singapore reveal problematic characteristics. First, Temasek reports an average annual return of 17% for 35 years despite Singaporean stock returns averaging less than 8% during this same time period. Given the range of stock market returns and its portfolio companies’ returns, it is highly improbably that Temasek has earned the returns claimed in its annual reports. Second, Singapore has become one of the most indebted countries in the world despite supposedly running large and sustained government surpluses. Given publicly available economic data on Singaporean finances, there is a minimum of $350 billion SGD or $275 billion USD unaccounted for from historical surpluses and financing operations. Third, given these results I find that for every $1 SGD in public borrowing, Singapore has received only 25 cents of publicly held Singaporean assets. Either financial returns have been drastically overstated or there are large unreported Singaporean controlled holdings.

    Number of Pages in PDF File: 13

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    Date posted: February 09, 2012  

    Suggested Citation

    Balding, Christopher, A Brief Research Note on Temasek Holdings and Singapore: Mr. Madoff Goes to Singapore (February 8, 2012). Available at SSRN: http://ssrn.com/abstract=2001343 or http://dx.doi.org/10.2139/ssrn.2001343

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    Contact Information

    Christopher Balding (Contact Author)
    HSBC School of Business ( email )
    University Town
    Nanshan District
    Shenzhen, Guang Dong 518055

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