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Singapore National Reserves.

Tuesday, April 9, 2013

A reader, Boon Sun, kindly contributed a piece of academic writing after reading my blog post on CPF and SGS recently.

He said 

"I have written an article on Singapore Reserves to raise awareness of the economic importance of this asset of Singapore's. This topic was also raised in one of the MOE/MOF budget seminar. If you think this is useful and easy to understand, you can share with your readers."




Here is his essay in full:

Singapore National Reserves are a critical resource for Singapore’s future. Our financial reserves are managed by the administrative branch of Government such as the Monetary Authority of Singapore (MAS), Temasek Holdings and Government Investment Corporation (GIC) and they serve as a strategic asset for these two key purposes:

1) They provide a key defence for Singapore in times of crisis. Our reserves are a strategic asset should a major crisis occur, allowing us to mount a decisive and effective response. In 2009, faced with the threat of our worst recession, Singapore government tapped into our reserves for a withdrawal of S$4.9 billion as part of the Resilient Package in our 2009 budget. This cushioned the economy from a severe economic downturn as the Government increased their expenditure to reduce job losses and keep viable companies afloat.

2) The investment of our reserves also provides a valuable stream of income for the Government Budget, which can be spent or invested for the benefit of the current, as well as future, generations. The Net Investment Returns Contribution (NIRC) from our financial investments by MAS, GIC and Temasek Holdings has allowed Singapore to maintain our investment in social and economic developments. NIRC almost quadrupled from S$2.1 billion in 2006 to S$7.9 billion in 2011. The Net Investment Returns Contribution (NIRC) comprises up to 50% of the Net Investment Returns on the net assets managed by GIC and MAS, and up to 50% of the investment income from the remaining assets (which includes Temasek). The NIRC has allowed Singapore to remain economically competitive by allowing Singapore to maintain low personal and corporate taxes while maintaining our government expenditure.


When the Government achieves an overall budget surplus over a term, the surplus will be kept in our National Reserves as Past Reserves. A term of government usually lasts 4-5 years. To prevent reckless fiscal policies by the current Government, which would result in a depletion of our reserves and hurt Singapore’s economic and social stability, our Constitution protects the Past Reserves of the Government and Fifth Schedule entities. Hence, the Government had to ask the President for permission to draw from the reserves in 2009.




Assets and Liabilities
Singapore’s National Reserves refer to the total assets minus liabilities of the Government and other entities specified in the Fifth Schedule under the Constitution.
Our assets include physical assets, such as land and buildings, and financial assets, such as cash, securities and bonds. As it is difficult to get market valuation for our physical assets, we usually refer to our financial reserves which are made up of our financial assets as our Nation’s Reserves. MAS manages Singapore’s official foreign reserves and government deposits, Temasek Holdings acts primarily as a commercial investment company, and GIC is the Singapore Government’s fund manager. As of 2012 March, MAS holds S$304 billion of foreign reserves and S$150 billion of government deposits, Temasek Holdings has a portfolio worth S$198 billion and GIC manages well over US$100 billion. Temasek and GIC are often termed as Sovereign Wealth Funds, which means they are stated-owned investment funds.

Our liabilities mainly comprise of Singapore Government Securities (SGS) and Special Singapore Government Securities (SSGS). The 10-year yield for SGS is decided by market conditions and ranged from 1.3-1.4% per annum between 15th and 18th Jan 2013. The SSGS issued to CPF pays a coupon rate of 2.5% to 4% per annum. To put these figures into perspective, the United States 10-year treasury yield is about 1.84%, Germany about 1.56%, Hong Kong at 1.04%, the Netherlands at 1.70%. Hence, we can see that Singapore enjoys a low cost of borrowing due to its credit-worthiness. Our bonds are ranked as one of the safest by major credit rating agencies. Singapore may have one of the world’s largest public debts (public debt can be measured as a ratio of Debt to GDP) but most of our debts are in local currencies and held by government agencies. Thus, our debt is relatively much more stable and safe as compared to the national debt of other economies.




The System

The diagram below can be used to briefly explain the system in which our Government gets the funds to invest for higher returns and increase our national reserves. Before we can get started, we need to be aware of the differences between different divisions of a government.

In the diagram, we separate the Government into two different sections. One of them is the Government (Executive) which refers to the ruling party of Singapore. Government (Executive) is formed by political party/parties which is/are elected into the Government by the people. Our current Government (Executive) is formed by the People Actions Party, led by our PM Lee Hsien Loong. The other section is the administrative section which is our Public Service division. It is made up of different ministries such as Ministry of Finance and Ministry of Manpower and they are independent of any political parties, and not affected by any political changes in Singapore. Monetary Authority of Singapore is part of Ministry of Finance and both GIC and Temasek Holdings are investment firms owned by Singapore government. Hence, we would group these three entities in one group which manages our financial reserves. These three entities are independent of political influence or the Government (Executive).


Over a term of 5 years, the Government runs either a balanced overall term budget where the deficits and surpluses cancelled out each other, an overall term budget surplus where the net surplus will be added to the Singapore reserves. Due to Singapore Constitution, it is almost impossible for a government to have a term deficit unless the President allows the Government to withdraw from our National Reserves. The borrowed sum of money from our reserves needs to be repaid back to the reserves once the Government runs a budget surplus. As mentioned earlier, up to 50% of the net investment return of our investments is used for our annual budget.

When the economy grows, the employment market also improves. The improvement in employment market increases the CPF contribution from employees, and as long as the increase in CPF contributions outweighs the withdrawal of CPF funds by retirees, the employment situation will lead to a higher net CPF contribution, ceteris paribus. Hence, it is important that for the Singapore labour market to keep growing, so that we have a positive net CPF contribution for Singapore to grow its reserves. However, this inflow of money is threatened by the aging population, as there will be more withdrawal by the retirees and less contributions from economically active residents. CPF liability refers to the total amount of money owed to the workers of Singapore when they retire.
The Government will issue the SSGS bonds to CPF to borrow the cash for various purposes, such as investment by the different organisations. This completes the basic cycle in which how the Government gets the money to invest for higher returns and grow our national reserves.




Monetary Authority of Singapore (MAS)

According to the IMF, Singapore has the 12th largest foreign reserves of US$250 billion in 2012. Our GDP was US$240 billion in 2011, and Singapore had the world’s highest foreign reserves per capita in the world, at US$50,128.

            Singapore is able to accumulate large amount of reserves due to our high national savings rate, healthy BOP, and fiscal surpluses accumulated over the past decades. These foreign reserves allow the Singapore government to intervene in the foreign exchange market, usually to stabilise the exchange rate fluctuation during economic crisis. In 2011, MAS recorded a net profit of S$2.77 billion.

            Having large foreign reserves is very important for Singapore, which has a small and open economy reliant on exports. A highly volatile exchange rate deters long term foreign investment such as FDIs and would hurt Singapore’s economic growth. It would also disrupt the long term business plans of local companies. Therefore, it is important that MAS intervenes to reduce our short term currency fluctuations.

            As financial markets have been experiencing high volatility over the past few years due to numerous macroeconomic shocks such as the world financial crisis, the EU debt crisis and now the US debt crisis, it is imperative that MAS has a steady flow of foreign reserves for us to tide over the tough economic conditions.



Temasek Holdings
            Temasek’s aim is to maximise shareholder value over the long term. A significant portion of Temasek’s portfolio is invested in Singapore. However since 2002, Temasek has taken active steps to diversify its portfolio into Asia and other markets. Currently, as of 31 March 2012, 72% of the portfolio is invested in Asian markets, with Singapore accounting for 30% of the overall portfolio, 25% of the portfolio is in Australia, New Zealand, North America and Europe while 3% of the portfolio is invested in Latin America, Africa, Middle East and Central Asia.


            Some of the major investments of Temasek Holdings include Standard Chartered PLC, DBS Group Holdings, Singapore Telecommunications Limited, Keppel Corporation Limited, Singapore Airlines Limited, Singapore Power Limited, SMRT Corporation Limited, Capitaland Limited and Olam International Limited. In 2012, the net accounting profit was S$11billion.



Government Investment Corporation (GIC)
            GIC’s mandate is to achieve good long-term returns, to preserve and enhance the international purchasing power of Government reserves. As a rule, GIC’s investments are outside Singapore and not in Singapore companies or instruments. Due to national security issues, the Government does not disclose the size of our financial assets in GIC to prevent speculative attacks on our financial system which would threaten our economic stability.


            We can see that due to the rule set by the Singapore Government, the geographical locations of GIC investments differ from Temasek Holdings, and this complements the different portfolios between these two entities.
Performance of Our Financial Investment
            Due to the long term investment view taken by Temasek Holdings and GIC, we have achieved a real positive return on our investment. GIC has achieved a real investment return of 3.9% after taking into account of the global inflation. Temasek Holdings has achieved a nominal annual return of 16% over the past 20 years. These figures compare favourably against other mixes of portfolio investment in the financial world of investment.

            During the financial crisis in 2008, GIC and Temasek Holdings made the headlines together with other SWFs as they invested heavily into banks by purchasing equities. Due to the timing of the investment, both GIC and Temasek Holdings incurred huge losses through their purchase of equities in distressed banks such as UBS, Barclays, Bank of America and UBS. Since then, the value of GIC and Temasek portfolio has recovered and surpassed the pre-crisis level.

            According to the Sovereign Wealth Fund Institute, as of Jan 2013, both Temasek Holdings and GIC are listed among the Top 10 SWFs in terms of the value of their assets. The top 3 SWFs are the Government Pension Fund (Norway), with assets of US$660 billion, Abu Dhabi Investment Authority (UAE) with assets of US$627 billion, and SAFE Investment Corporation (China) with assets of US$560 billion. In 2012, Temasek Holdings recorded a net profit of S$11 billion whereas China Investment Corporation, another SWF of China, recorded a loss of 4.3% on its overseas holding. Thus, our SWFs have performed admirably over the past decades to grow our reserves.



Conclusion

            Our National Reserves form a critical part of our national security in ensuring economic stability. In times of crisis, they act as a powerful tool for government to resolve economic problems. Over the past decades, the three agencies, MAS, GIC and Temasek Holdings, have managed to grow our national reserves despite a resource-scarce economy.

            As the issue of aging population become more acute, the net CPF contribution may fall, reducing the inflows of funds into GIC and Temasek Holdings. Political demands by Singaporeans to establish a wider social safety net would result in an increase in Government’s expenditure. As a result, The Government may require a higher contribution from Net Investment Returns Contribution to fund the increase in government’s expenditure. These two issues pose challenges to the growth of our national reserves.

The 1998 Asian Financial Crisis, the Argentina debt crisis in 2000, the EU debt crisis and the on-going US debt issue show us the need to be prudent in our use of national reserves and to avoid populist policies which many hamper our economic growth in the long run.

A depletion of national reserves could create an economic crisis in Singapore. Thus, we should not be complacent in our management of National Reserves. As the world economy has become more volatile the past few years and in times of economic distress, our National Reserves would serve as a key national asset for us to fall back on.

13 comments:

SnOOpy168 said...

What is the objective & objective of this thesis ?

Ray said...

how sure are we that the Temasek Holdings' losses in recent investments did not already empty our reserves?

SnOOpy168 said...

A good summary of this reserves of ours. Surprised that this tiny red dot has more reserves than big boys like Abu Dabi & China.

So, we are millionaire stake holders of this country. BUT is asset rich and (likely) cash poor.

AK71 said...

Hi all,

I have sent an email to Boon Sun for him to reply to your comments. :)

lzyData said...

> Surprised that this tiny red dot has more reserves than big boys like Abu Dabi & China.

As the article says, ADIA and SAFE each manage more funds than Temasek and GIC combined. Not sure how you got that conclusion.

SnOOpy168 said...

> "MAS holds S$304 billion of foreign reserves and S$150 billion of government deposits, Temasek Holdings has a portfolio worth S$198 billion..."

thats S$652billion in total. off the back of envelope. Into the details, could be double counting. Nonetheless, it is positive and huge for this little red dot. Super proud of it.

"" Government Pension Fund (Norway), @ US$660 billion,
Abu Dhabi Investment Authority (UAE) @ US$627 billion,
SAFE Investment Corporation (China) @ US$560 billion""

Anonymous said...

This is a typical governement spokesman's writing. If the figures in this article cannot be verified (eg. returns from TH and GIC), I do suggest that some form of disclaimer be highlighted lest it misleads readers.

AK71 said...

Hi HPB,

I did not verify details in the essay. So, I cannot lay claim as to their accuracy. However, the essay actually has a bibliography and footnotes which I removed in order to make the essay blog friendly. :)

This reader/contributor is a friend and one time yoga classmate. He is also an Economics graduate who went on to study in NTU. So, I guess he knows what he is talking about. Of course, I could be bias. ;p

Sun said...

@snoopy,

look at the currency... if you look at the currency, then our SWF is smaller.

@Porky,

I am trying to offer an objective view. This has nothing to do with my political affiliation.

Just as there are so many rumors about our reserves, sometimes, it is important for us to look at what is available for us to analysis and ignore the noise.

Just a point about the inflation of figures...

The return has a tendency to be overstated due to SGD gains against the USD over the past few years, and that has nothing to do with the gains due to management of the difference agencies. Nevertheless, they have contributed about 7 billion to our annual budget and without that 7 billion, we would have experienced a budget deficit and under the constitution of Singapore, our government not allowed to run budget deficit in a term, usually 5 years.

These are the references.

Aridas, V. P. (2012). International Reserves of Countries Worldwide. Retrieved from
Global Finance: http://www.gfmag.com/tools/global-database/economicdata/11859-international-reserves-by-country.html#axzz2J3rwCIx0
Government Investment Corporation. (2012). Report on the Management of the
Government's Portfolio for the Year 2011/2012. Retrieved from Government
Investment Corporation: http://www.gic.com.sg/newsroom/reports/2011-2012
Leung, P. Y. (2005). The Exchange Rate Systems in Hong Kong and Singapore.
Prentice Hall.
Lim, K. P. (2012, July 31). Singapore’s GIC Boosts Cash to Levels Above 2008
Crisis. Retrieved from Bloomberg: http://www.bloomberg.com/news/2012-07-
30/singapore-s-gic-boosts-cash-amid-europe-crisis-u-s-slowdown.html
Ministry of Finance. (2013, Jan 13). Ask MOF. Retrieved from Ministry of Finance:
http://www.ifaq.gov.sg/mof/apps/fcd_faqmain.aspx
Monetary Authority of Singapore. (n.d.). Monetary Authority of Singapore. Retrieved
from Monetary Authority of Singapore: www.mas.gov.sg
Singapore Parliament Report. (2012, March). Debate on Annual Budget Statement.
Retrieved from Parliament of Singapore:
http://sprs.parl.gov.sg/search/topic.jsp?currentTopicID=00077010-
WA&currentPubID=00077017-WA&topicKey=00077017-WA.00077010-
WA_10%23budget%23,%20retrieved%2014/01/2013.
Sovereign Wealth Fund Institute. (2013, Jan). Fund Ranking. Retrieved from
Sovereign Wealth Fund Institute: http://www.swfinstitute.org/fund-rankings/
Temasek Holdings. (2013). Portfolio Highlights. Retrieved from Temasek Holdings:
http://www.temasek.com.sg/portfolio/portfolio_highlights
The World Bank Group. (2012). GDP Ranking Table. Retrieved from World Bank
Data: http://data.worldbank.org/data-catalog/GDP-ranking-table

lzyData said...

> If the figures in this article cannot be verified (eg. returns from TH and GIC), I do suggest that some form of disclaimer be highlighted lest it misleads readers.

As the saying goes, if you want to make a serious allegation, better be able to back it up. You insinuate, with absolutely no proof, that all these agencies and the government's Auditor-General are lying. And yet it is the author and not you who has to provide a disclaimer? Hilarious.

There is just something about the topic of reserves and Temasek/GIC that makes all the conspiracy theorists come out of the woodwork.

Anonymous said...

IzyData,

"As the saying goes, if you want to make a serious allegation, better be able to back it up."

- Whose saying was that? The last I heard, it was from a presidential candidate.

"You insinuate, with absolutely no proof, that all these agencies and the government's Auditor-General are lying."

- I said "if", if you read carefully.

"And yet it is the author and not you who has to provide a disclaimer?"

- I was suggesting to AK, not the author, and I believe AK understood it hence his reply on the bibliography and footnotes which makes sense to read the entire document as a whole.

"Hilarious."

- Thank you.

"There is just something about the topic of reserves and Temasek/GIC that makes all the conspiracy theorists come out of the woodwork."

- If you are directing this at me, you have no proof. If you are not, then I let it pass.

SnOOpy168 said...

Chill man.

Either way, this is good knowledge. It is up to use to believe what we read or wished to go in-depth.

I too made the mistake on the currency and happy that someone pointed out. I would have expected the source to use a common base currency - otherwise, the Indonesian could be way ahead of everyone on the SWF list, with their IDR.

AK71 said...

全自然 said...
Currently cpf ceiling is 6000. Why based on an absolute amount? If i earn 6000 and less, 20% of my salary goes to cpf, it is a lot to me. So any policy changes made to cpf , i will be paying a lot attention.

Now, they are a lot people, high income earning people who make a few tens even hundreds of thousands a month, i am sure people who make such policies changes earn salary in that ranges. My question is, why not we have cpf policy that regardless of how much you earn, 20% of your salary goes to cpf? Isn't this more fair to everyone? Will they make the same cpf policy of cpf if this is the case?

Just to add on, someone may say that if i earn 200k a month, i don need cpf to help retirement, but who is that to say i need cpf to help if i earn 6k a month?

Removing the ceiling also goes a long way in helping the cpf to boost up its reserves which in turn benefits every one, so is not just about fairness, it is also social responsibility. Those who made the policy will also can better appreciate the benefits cpf bring to them, I think
--------------------
Blogger AK said...

The CPF system is not meant to help high flyers and the rich. These people have greater financial ability to prepare for a comfortable retirement and they should not burden the system.

The CPF does not contribute to our country's reserves. The money is used to buy special bonds issued by our government and our sovereign wealth fund has to generate returns to honor the currently guaranteed interest rates.

(http://singaporeanstocksinvestor.blogspot.sg/2017/10/purpose-of-cpf-is-to-make-rich-richer.html?showComment=1507630642765#c3198577550881641873)


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