Global financial markets are in turmoil so as night follows day, the season of that big black hole in the Singapore government finances is here again. According to a local blogger, the shortfall is close to $200b while in the recent past, a China-based American academic thought the black hole was $500b or more.

Apparently the evidence is in the government’s Statement of Assets and Liabilities which shows that the government owned $834b of assets comprising quoted and unquoted securities and deposits. The Statement also reported a large liability of $401b under the Singapore Government Securities Fund which accounts for the debt the government owed to CPF and to investors in Singapore Government Securities (SGS). That leaves $433b of assets that ought to have been invested from budget surpluses and past returns generated by GIC. By deducting Temasek’s $169b of shareholder equity according to the local blogger or Temasek’s $266b of market value and MAS’ $300b+ in foreign reserves according to the academic, and then subtracting estimates of budget surpluses, the end result is a negative balance of between $200b or $500b depending who one wishes to follow. Therefore the twits in GIC have made massive losses.

In my humble opinion, both have made omissions and incorrect assumptions in their interpretation of the Statement of Assets and Liabilities. The fundamental error is to assume the Government is a holding company which leads to the further error that the Statement is akin to a consolidated balance sheet report. This is patently not the case because standard reporting of government financial positions around the world does not consolidate the assets and liabilities of arms-length or standalone government agencies and enterprises such as the giant KfW of Germany and Fannie Mae and Freddie Mac of the US into those of the respective government. This means the Statement does not consolidate the assets and liabilities of the Constitutionally- defined Fifth Schedule entities such as MAS and Temasek Holdings.

If the Statement is a consolidated balance sheet report, then assets and liabilities will be much larger since they must include all other Fifth Schedule entities such as CPF, Land Authority, EDB, LTA etc . On this alone, one can disregard the black hole because those arguments are based on the assumption Temasek (and MAS) are consolidated into the Statement.

Temasek’s shareholder equity of $169b does not mean the entire amount is derived from transfers of government surpluses into Temasek as capital injections. Since Temasek pays only a small amount of its net income as dividends to the government which the latter variously re-injected back into Temasek, the majority of its shareholder equity would have been retained earnings. Besides, since Temasek’s shares has no market price, it is far more likely than not that the government recorded the value of its equity at historical nominal prices which means far less than $169b shows up in the Statement.

Finally one cannot simply take an estimate of the overall budget surplus (including land sales revenues and retained investment earnings) of close to $400b according to IMF data since 1990 and assume all of the surplus must show up as assets in the Statement. First not all returns are re-invested since 50% of net investment returns are extracted into the budget under the Net Investment Return Contribution rule. Second, the Statement reports only financial assets and does not include land holdings.

Surpluses are not always invested in financial assets – they have also gone into increasing the land bank through acquisition, land development and reclamation. DPM and former Finance Minister Tharman has admitted that financial assets in the reserves have been drawn down on numerous occasion and reinvested in land. There has been no disclosure of the amount reinvested in land but as an indication of scale, $100b is presently sitting unspent in the Development Fund.

In truth, if there was really a black hole of $200b to $500b, it would have eliminated the NIRC provided in the annual budgets which means no Pioneer Generation Package for example. It would also have caused significant revisions to the IMF country assessment of Singapore and it would have removed Singapore’s AAA credit rating. None of that happened but allegations of these nature and others will continue so long as the Singapore government persists in its indefensible opacity.

Chris Kuan

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