How we fund our SWFs

In CPF, GIC, S'pore Inc, Temasek on 02/11/2010 at 5:42 am

This piece is an attempt* to answer, “If Singaporeans are not “hard-driving and hard-striving”, where did GIC and Temasek get so much money to lose?”: a posting on a Temasek Review article in late 2009.

The answer parroted mindlessly by the government is that government budget surpluses mean that GIC and Temasek get money to invest with.

A more detailed explanation has to start with how the surpluses arise.

As about 43% of the working population  don’t pay income tax, and VAT and other taxes are relatively low: one way the surpluses are generated is by a government being thrifty (government’s view) or mean (view of many netizens).

Economists in the private sector, and the Reform Party (the sec-gen was once an economist and he has a first-class degree from Cambridge) have argued that rather than accumulate large surpluses that are then invested abroad, the government should spend more building up Singapore’s human capital. By spending more on things like education, healthcare and consumer protection, the returns generated will be better than the returns on overseas investments.

This is an argument that has excellent academic credentials. China is often asked by eminent economists ,”Why do you export so much when you, in return, use the surplus lend to the Americans so that they can buy more from you?” The economists advise that China should invest more locally.

The government’s view is that Singapore needs the reserves as an emergency fund should things go badly wrong. The late Dr Goh Keng Swee talked of spending the reserves in a recession (as has happened recently). Dr Goh and others could also have quoted the example of Kuwait. When Kuwait was invaded by Iraq, the reserves were used to help pay for the war. And afterwards for the reconstruction of the country. They could also have cited Iceland and Dubai as countries that got into trouble because they ran out of $, when they could not borrow any more.

The second reason why surpluses occur is that our CPF monies are invested in special government bonds. The $ from the bonds flow into the government’s Consolidated Fund together with revenues from taxes etc. All government expenses are paid out from this fund. If there is a surplus (as there usually  because the government is thrifty or mean depending on who is doing the talking) part of that surplus can go to GIC and Temasek. The government argues that because all the monies in the fund  is fungible (cannot be separated), one is wrong to argue that CPF monies are invested abroad.

Technically and legally the government is correct, but so what is the retort? The financial effect (though not the legal consequences) is the same as if our CPF monies are directly invested abroad.

And these special bonds are the reason why S’pore is up there on a  list that the local media does not ever publicise. S’pore has the 8th highest public debt to GDP ration (113.10%) in the world. Greece is 7th with 113.40. Other countries on the list above us are Zimbabwe  (champion), Japan (second), Lebanon and Italy. Iceland is 9th (106.7) while Ireland is at 36 (57.7).

(Aside, could this high debt to GDP ratio be the reason why the govmin wants to force-feed GDP growth through immigration? I may explore this issue in future and I hope RP will explore the issue as something the electorate should be educated upon.)

Singapore is unique among the countries with the largest sovereign wealth funds. The other SWFs are effectively funded from oil revenues. In the case of Singapore, it could be reasonably argued, by government critics, that the funding results from the “hard-driving and hard-striving” Singaporeans who are forced to save and lend the money to the government; and from less than optimal government spending.

So the quote at the beginning of this piece has elements of the truth. And worse: one could reasonably argue that the government makes something for itself from “hard-driving and hard-striving” S’poreans.  One noted local economist has said that the government is effectively pocketing the difference between the returns it gets from investing abroad and the returns it pays on our CPF accounts: a carry trade arbitrage. Borrow low and invest for higher returns.

*What with an election coming, I tot I should revise (and repost) a piece I did in December last year. The revision has been pretty extensive.

  1. Good post. I didn’t know about that debt to GDP ratio stat!

  2. […] or meanness according to who is talking) and (indirectly via a circuitous route) our CPF monies, sales of state land also contribute to the reserves that GIC, Temasek and the central bank […]

  3. There are 2 technical errors in your article:

    1. Proceeds from Singapore Government Securities sales do not go into the consolidated fund. Neither are they counted as ‘income’ in the government’s budget.

    2. The GIC/foreign reserves are not funded by government surpluses/CPF savings. They are a consequence of having a ‘managed’ exchange rate. For example, Japan runs persistent deficits financed by domestic borrowing and still has growing forex reserves.

  4. Forgot to mention: CPF buys the Singapore Government Securities from MAS, not MOF. The proceeds are not part of MOF’s revenue although the investment income from TH and GIC is.

    • Fox,

      My MoF and MAS friends suggest you make sure of yr facts. EG there is a parly statement in 2007 “explaining” why we cannot link CPF monies to funds by GIC. It talks of govmin issuing a special bond for CPF money, proceeds of which go into the Consolidated Fund. One LKY said the same in a speech in 2001 or two.

      EG2 — MAS is govmin agent for all govmin securities issues. It is not a principal.

      • I made a mistake. Consolidated fund is not counted as part of MOF’s operating revenue.

        But it cannot possibly be used to fund GIC because GIC is funded with forex (USD, JPY, RMB, etc). CPF savings are all denominated in SGD.

      • Fox

        You saying govmin got no power to sell S$ and buy Yen, US$ etc?

        As I said look up Parly statement in 2007 when there was a debate on CPF. .

  5. Some corrections on my part:

    More precisely, under the Government Securities Act, money from buying SGS goes into Government Securities Fund, the excess of which can be transferred into the consolidated fund by MOF.

    This is how I think the govt converts CPF savings into forex:

    The SG govt buys forex with SGD (which is considered a liability of the government), thus increasing the SGD supply. Under the Currency Act, all SGD has to be backed up by a basket of international reserves. This increase is then mopped up by mandatory savings (via SGS bonds and CPF Act), which decreases its liablity in terms of SGD but increases that in terms of SGS bonds. Technically, I don’t think it is a direct exchange between CPF and forex.

    The conversion process is already done the minute the MAS issues SGDs which firm use to pay employees. Exchanging CPF proceeds for forex does not help to increase Singapore’s total international reserves.

  6. Your are absolutely wrong in one aspect. The funds from CPF do not go to the Consolidated Funds. It goes to the Securities Fund.

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