With European equity markets down over 40% and US markets down over 35% Singaporeans must be wondering what has happened to our reserves. LKY always claimed that Singapore’s success was built on depriving Singaporeans of even the most basic social safety nets enjoyed by citizens of other countries much poorer than Singapore (if measured purely by GDP per capita) through policies of severe austerity, forced saving and state ownership of 90% of the land and up to 50% of the economy. The rationale for these policies, which kept Singaporeans much poorer than they should be, was always that prudent and skilful investment of the resulting staggering surpluses would result in an enormous cushion of reserves. for a “rainy day.” Never mind that the rainy day is always ill-defined and somewhere over the horizon!

One of LKY’s key methods of building up the reserves was for Singaporeans’ forced CPF savings (over and above that which Singaporeans were allowed, or in reality forced, to use to pay rent up front on overpriced 99-year leasehold HDB) to be lent to the Government which would then invest it through its own special investment firm, the Government of Singapore Investment Corporation (originally known as GSIC but now shortened to GIC). What at the time was a very low interest rate was paid to CPF savers (currently between 1 and 4%) while any returns above that would accrue to the Government. At the time this seemed like an easy way to generate high returns since GIC had a stable source of cheap very long term money.

In order to control this huge pool of money and be able to use it as to buy friends abroad and pay sycophants (a euphemism for prostitutes) at home LKY made himself the first Chairman of GIC. His son has kept his dad’s tight control over the nation’s finances by making himself Chairman of GIC in his turn, but has tightened his grasp on citizens’ money by ensuring his wife controls the other main component of our reserves as CEO of Temasek. While PM Lee says he is not paid anything to be Chairman of GIC, the same is certainly not true of his wife, whose remuneration is so enormous that his Government refuses to tell us what she is paid for fear that it would open Singaporeans’ eyes to the true nature of our totalitarian regime and show we are little different from an Angola or Kazakhstan.

LKY’s idea of using leverage to make money must have seemed like a stroke of genius since for most of the last forty years CPF savers were woefully under rewarded. The only problem is that the Government appears to have been very bad at investing the money! As I argued in several articles published in 2012 (see links below) the amount of total assets shown in the Government’s Statement of Assets and Liabilities (SAL) is far too low given any kind of reasonable assumptions about rates of return on the borrowed money. And my calculations assumed that Temasek’s assets were not included in the SAL. If they are included then the returns have been even lower.

This is what I said back in 2012:

Even on the most conservative assumptions there should be nearly double the level of net assets (and double the level of equity belonging to Singaporeans). There would seem to be only two conclusions:

1. There are substantial hidden assets and the Finance Minister has presented a misleading statement of Singapore’s balance sheet to Parliament and the President. For instance MAS had over $300 billion of foreign exchange assets on its balance sheet which should be in the ALS since MAS is a Schedule 5 company. However the counterpart of MAS’s assets are the liabilities it owes to the government in the form of SGD deposits and in fact its net equity is only about $25 billion. To include both in the ALS would be double-counting. Alternatively Temasek or GIC’s assets might not be in the ALS. Again this would be both a Constitutional breach as well as extremely unlikely as another entity (a stealth fund) would surely show up in regulatory filings somewhere in the world.
2. Returns have been extremely low, maybe even lower than what the government has been paying out to CPF holders which explains why it has been changing the rules on payouts to disadvantage account holders and lengthen the period it can hold onto their money.

There is a third scenario which is extreme but without answers and transparency how do we actually know anything?  However even without this extreme scenario we should question why the returns achieved are so at variance with the government’s claimed returns.

Before they contemplate raising taxes, the Finance Minister and the PM should come forward and give a proper explanation of the discrepancies in the government’s accounts. They also need to give an accounting of their management of our money and why performance has been so poor.  It is up to you not to let them get away with it.

Of course my calls for an explanation fell on deaf ears. As we have seen with the PM’s refusal to tell Parliament what his wife is paid, the Government will not provide any meaningful information, either about the reserves, why the Net Investment Returns Contribution is never actually spent but shuffled from one pocket to another, or about the puzzling disappearance of billions of dollars put into long term funds (a key example being the Productivity Fund under the PM’s direct control) Lee Hsien Loong’s Government was able to ignore my questions while asset markets continued their inexorable upward trajectory

This all changed after 29 February when US equity indices hit all-time highs despite what was happening in China, Iran and Italy and the coming global storm. Now that we are facing a greater crisis than 2009 and one from which the recovery is likely to take much longer, Singaporeans should no longer be complacent about the state or management of our reserves.

In particular the recent large falls in equity and many Government and corporate bond markets expose the dangers of employing leverage using Singaporeans’ CPF savings. If we look at the most recent SAL showing the Government’s balance sheet at 31 March 2019 total assets were some $1,174 billion. Tha balance in the Government Securities Fund at the same date was $609 billion. If listed equity markets have fallen by 35% since the last balance sheet date then this component of the balance sheet will only be worth $280 billion instead of $430 billion. It is not unreasonable to think that unlisted equities (particularly in tech companies like Airbnb or Uber) may have fallen by 60% or more. However let us assume that their valuation has fallen by 50% since the last SAL date. In that case the value of unlisted securities may have fallen to $155 billion.

Assuming that the value of Government Stocks remains unchanged (perhaps a big if given rising yields in many government bond markets and that the cash component remains unchanged and is not pledged elsewhere or trapped in other ministries, statutory boards or government-linked companies, then the total value of assets available to cover the bonds the Government has issued to CPF in exchange for your savings might be as low as $800 billion.

It is possible the situation could be even worse. If, for example, many of the holdings of Government stocks and other securities are through external managers and they have taken on leverage, as Bridgewater (the world’s largest hedge fund and a partner of GIC, revealed recently while disclosing large losses in supposedly safe areas of their portfolio, then the cover remaining may be even less. It might only take another two down days of 20% for the Government’s assets to be less than it owes to Singaporeans!

Singaporeans should rightly be very concerned, not just about their jobs but about their savings which they have foolishly allowed the Government to control for decades now. If there is not enough money to repay CPF holders then the Government can borrow or print money (though they are barred under the Constitution from borrowing from MAS), leading to a depreciating dollar or burdening future generations or they can raise taxes, as Lee Hsien Loong has already said he will. It is not hard to see that GST could be raised to 20% while the top rate of income tax is kept low, supposedly to attract “foreign talent”.

The Government has so far kept silent on the damage to the reserves from recent market falls and whether our CPF is now at risk. This goes against the most basic principles of transparency and accountability but will continue as long as Singaporeans continue to blindly trust them. In the coming election PAP might for the first time since my father won Anson in 1981 get a clean sweep of all the seats in Parliament because of the coronavirus pandemic. I would ask that before Singaporeans think of voting blindly for the PAP and Lee Hsien Loong yet again they write or try to see their MPs and ask them to ask questions in Parliament about what has happened. At rallies keep asking those questions and do not stop until you get answers Otherwise you only have yourself to blame.

Links

Where have our reserves gone?

Sherlock Holmes And The Case Of The Missing ( Or Merely Hidden) Reserves

An Open Letter to TOC in Response to Their Removal of My Article “Where Have The Reserves Gone”

A Short Note on Where Have Our Reserves Gone?

Published by kjeyaretnam

I'm a Singaporean economist who became an opposition activist. I blog to provide an alternative to the porkies that the Pinkies tell. It just so happens that my alternative is the truth. That's why I've never been sued in any civil or criminal court no matter how hard hitting my criticism. I'm quoted and interviewed and asked to speak across the world but largely censored in Singapore in an effort to silence my political opinions. The left hate me because they think I split their vote and because I eschew their outmoded economic models. Models that don't work. The Right and the Conservatives hate me because I'm a liberal. I'm not sure what the middle think of me. I don't think there are more than a handful of people in the middle, here in Singapore. I'm a Singaporean born and bred, dual heritage, my parents Singaporean established here before the State of Singapore was created. I'm not Eurasian. I read economics at Cambridge and could be broadly described as from the Keynesian school but I believe in interventions. I was formerly a successful hedge fund manager. After economics and politics my greatest interests are history, film and Makan. I run but I run so I can eat like a Singaporean. View all posts by kjeyaretnam