How Big Should Singapore, Inc. Be?
In the last post, we demonstrated clearly that the while GIC and Temasek manage an impressive amount of financial assets, given the amount of borrowing and government surpluses the amounts under management are a lot less impressive. Singaporean data indicates that operational surpluses and public borrowing from 1974 to 2011 totaled between $645-701 billion SGD. Consequently, trumpeting that you now manage $705 billion SGD doesn’t seem like much of an accomplishment. So how much should GIC and Temasek manage given their stated rates of return of 7% USD and 17% SGD respectively?
- Temasek states on the website that they began operation with $374 million SGD in 1974. Given their claimed 17% annualized rate of return since inception, this would come close but not actually produce their stated assets under management.
- From 1971 to 1973, the Singapore government ran operational surpluses of $337 million SGD. From 1970 to 1973, the Singapore government ran operational surpluses of $418 million SGD.
- The only problem with these facts is that if Temasek began with $374 million SGD as it claims 1974 and earned 17% annually every year until 2011 when it managed $193 billion SGD, it would have had to either put in additional capital or earn 18.4%.
- $374 million SGD compounded at 17% annually from 1974 to 2011 would yield only $146 billion SGD rather than the $193 billion SGD.
- However, if we do nothing more than allow the operational surplus from 1974 of $166 million SGD to be invested in Temasek and compound at 17% annually, this produces $201 billion close to the amount claimed by Temasek. To show you how close, if we change the annualized interest rate to 16.9% we realize a 2011 value of Temasek of $194 billion.
- Turning to GIC we need to make two assumptions. First, let’s assume that all operational government surpluses and borrowing after 1974 was accumulated and then invested in GIC when it began operation in 1981. As needs to be stressed, cash flow from surpluses and borrowing have to go somewhere. As they were not spent according to government records, that means they had to be invested. Second, because GIC provides returns in USD, let’s assume that the free cash flow from operational surpluses and borrowing were converted into USD in the year they happened but does not earn interest until the following year. This makes the results conservative.
- If government surpluses were converted into USD the year of the surplus and did not begin earning interest until the following year, growing at 7% annually this would amount to $404 billion USD as of 2011.
- If government net liability incurrence were converted into USD the year of the borrowing and did not begin earning interest until the following year, growing at 7% annually this would amount to $597 billion USD as of 2011.
- The government states that “No Government borrowings are for spending… All borrowing proceeds are therefore invested.” These are their words not mine. Thus borrowed money should have grown at 7% annually producing nearly $600 billion USD.
- That means that if GIC earned 7% annually in USD since 1981 investing all operational surpluses and additional borrowing, they should manage $1 trillion USD or $1.26 trillion SGD at current rates.
- Combined, Temasek and GIC should manage $1.46 trillion SGD. Given the most recent government balance sheet listing $705 billion SGD of assets, this would imply a discrepancy of approximately $740 billion SGD.
Using government of Singapore numbers and investment policy statements there is a $760 billion SGD discrepancy in financial accounts. How long can these differences be ignored?