The Mess that is Singapore Part 1: Explaining the Debt

Balding's World

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 what happened 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.