P-K4 Project Editorial
This article is also written with the intention of allowing readers to understand better the contents of New Asia Republic’s interview with Dr Christopher Balding, which is accessible here.
Madam Ho Ching is the CEO & Executive Director of Temasek Holdings
An above average or more accurately, the best ever claim of return of 17% by Temasek Holdings, budget surpluses, barriers to withdrawal of Central Provident Fund (CPF) such as the minimum sum scheme, Good Services Tax, Temasek-linked companies. How do we connect the dots?
When our editors approached Dr Christopher Balding for an interview regarding Singapore’s Sovereign Wealth Funds, we were tasked with coming up with questions for Balding. We did harbour a certain view as regards to the overall scheme of things on how the Singapore government manages its budget and run its finances, and thus, we designed our questions along those lines.
However, going back to the rhetorical question that was asked from the start, how do we connect the dots? In a nutshell, the situation is not too far-fetched from the reality perceived by some Singaporeans out there – money out of our pockets and possibly into the coffers of god-knows-which-beneficiary, regardless of who they are, they should be either government-linked companies and those under the umbrella of Temasek Holdings.
However, to begin the discussion, Balding is correct in the atypical nature of Singapore’s debt. If governments in other countries are in need of funds, they will issue what is known as government bonds, which is optional for the citizenry to purchase. The bond purchasers will be paid an interest for the loans, but because of inflation, which means the principal paid will have less purchasing power, many governments issue inflation-indexed bonds which protect investors against inflation risks. In Singapore, however, the government has mandated the Central Provident Fund (CPF) which allows it to borrow funds easily, so in our case, it is mandatory for citizens to lend to the government. The source of funds also came from somewhere else – budget surpluses, where revenues, for instance, taxes from our income and savings, Goods Services Tax, exceeds government expenditure in public services like healthcare for example. Temasek Holdings was designed for the purpose of investing Singapore’s budget surpluses.
For Temasek Holdings to claim such figures of much better than average returns, their companies must be really performing well. Hence, we also asked Balding the question about what he thought about the competitiveness of these companies, and our assessments are similar – these companies are not globally competitive. The earlier term “performing well” is actually more of a misnomer. It is rather because these companies are monopolies in their respective markets that they can afford to raise the price of their goods and services to maximise profits, as most monopolies do, hence, the illusion that they are performing ‘well’ in the local market. Local consumers suffer from having to foot the higher prices.
Therefore, in the grand scheme of things, it is money out of our pockets virtually from our CPF, taxes in the form of Goods Services Tax, income tax, that goes to the government and subsequently to the Sovereign Wealth Funds (SWF), who will invest in those companies that we were talking about earlier. We also have to pay for more expensive goods and services charged by these monopolistic entities. All in all, there is nothing impressive about Temasek’s 17% claims, which has 30% of its portfolio in Singapore. Which holding company wouldn’t profit from its umbrella of companies that hold monopolies in their markets and have arbitration over how much to charge for their goods and services?
Balding also elaborated on the undesirable situation Singaporeans are in which the government pays back a certain percentage, say 2% of the debt in interests, but can capture the difference in gains, say a 10% gain. The converse scenario if say the fortunes of Temasek and Government Investment Corporation go south and they are unable to pay back their debt. In this case, taxes can be raised and in the overall scheme of things, Singaporeans bear the financial risk, but do not enjoy the rewards.
This system, which Balding describe as “perverse”, suggests a bigger problem – that of moral hazard. Since Singaporeans bear the financial risks, is there any motivation then to avoid risky investment decisions? And yet, moral hazard through history has been blamed for major financial crises. Since the current arrangement creates a moral hazard situation, there is virtually nothing to prevent our SWFs from making bad investment decisions in the full knowledge that the people will bail them out possibly through increases in taxes to pay for their losses.
A local comic artist, in a comic series known as Demon-Cratic Singapore, which painted a dystrophic picture of Singapore’s current political realities, labelled Temasek Holdings as “The Masak” Holdings in a parody. “Masak”, in Malay language is part of two same word phrase – Masak Masak, a form of play popular among young girls. Yet, it is our current reality where the government extracts from the people’s savings or put more crudely, money taken out of Singaporeans’ pockets which goes towards the SWFs and their investments, and the people also pay for higher costs of goods and services provided by Temasek’s companies who function in virtual monopolies. The other main worry is the moral hazard situation by virtue of the people bearing financial risks makes one wonder cynically at times whether it can result in a situation where in the knowledge that they (guys running the SWF) will not suffer the consequences of bad investments, they will play “Masak Masak” with their investments?
As for average Singaporeans, the main worry is how to approach their twilight years with less in their pockets…Neither could they count on the government to provide public services that would come free in other countries, instead of investing in such areas, these budget surpluses go to the likes of Temasek.
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Photo courtesy of Vivek Prakash / REUTERS
Thanks for the 2 posts on SWF and Balding’s pieces. It distills into a bite-size nuggets more edible to digest. All great questions asked in the context of our reserves, and how officials are being accountable and transparent in their dealings, with citizens having a more active stake. What I would really like to see, if possible, is an infographics diagram where it can be clearly illustrated. Not sure if NAR has the resources to do this?
Regards
It is very vital that when you have a leaking boat, that you watch who bales our first, and taking what with them. All the economists of this country need to be vigilant and respond accordingly if ever the elite decides to take what it ours and leave us high and dry. Watch how they fulfill their claims that they are for nation and for Singaporeans. Totally not credible nowadays.