Understanding Singapore’s State Debt

Sovereign states raise revenue through borrowings, taxation, and foreign exchange.  Singapore has relatively low taxation, and does not borrow externally.  The Singapore government borrows from the CPF.  This means most of the debt issued by the government is held in country.

The CPF accumulates the mandatory contributions from Singaporeans, permanent residents and people who work here.  It pays a fixed rate of return to its account holders.  Currently, that rate is 2.5%  for the Ordinary Account, and 4% for the Special Account.  Should the total of both accounts be below $60,000, the CPF pays out 1% more for each.  It is estimated that the CPF holds close to S$200 billion of investment assets under management, but this also means it as close to S$200 billion in liabilities in the form of member accounts, since it has to eventually pay it out.  The CPF does not own thee funds; it holds it in trust.  

According to CPF financial statements, 95% of CPF investment assets are “special issues of Singapore Government securities”.  This means CPF is the primary purchaser of the debt issued by the Singapore government.  This makes the CPF part of a system that takes contributions from the people, mainly citizens, pays them an interest rate for this, and then lends that money to the Singapore government at rates that closely match the interest to be paid out.  This is a clever means of managing public debt.  This system provides a significant cash flow to the Singaporean government, which are structural budget surpluses.  From 1990 to 2010 alone, the sum of budget surpluses and net lending is estimated at more than S$500 billion.

Assuming, here, that this S$500 billion earned just the 7% GIC claims per annum, instead of the 27% per annum claimed by Temasek Holdings, we would still be looking at well over a trillion in assets.  Of course, I am quite sceptical of the numbers Temasek Holdings claims because that would mean they outperform even the best funds out there.  These numbers provide a buffer spread over the CPF interest rates.  If we account for the public misfires in both, should they earn well below that spread, the government must subsidise the CPF.

From the data we get from Temasek Holdings’ own website and elsewhere, and from the best estimates of GIC, their assets under management are around S$500 million.  This is commensurate to the amount taken from the CPF, and the budget surpluses.  That is not good.  If we assume an inflation rate of 2%, discounting the nominal return of nothing, we are looking at accumulated losses solely due to inflation of over 30%.  This is what we should have versus what we actually have.

If we take this at face value, the government has been subsidising GIC and Temasek Holdings paper losses despite the fact that they have not earned a return sufficient to cover their CPF obligations.  That would explain measures to increase the minimum sum, to increase the length of payout and raise the withdrawal age.  I say this because based on public records, we have S$500 million in assets that are unaccounted for.

There is, of course, the over S$300 billion in foreign reserves that MAS manages, as mentioned in their records.  This is the third source of government revenue, our foreign reserves.  Foreign reserves grow through current account or trade surpluses.  In Singapore, the foreign reserves are controlled by the Monetary Authority of Singapore, the central bank.

Since 1980, Singapore has run a structural trade surplus averaging 10.2% of GDP.  This is mainly due to currency management policy, as opposed to fiscal policy.  We have been very good at this.  Consider, for example, Saudi Arabia, which is one of the largest exporters of oil.  In that same period, their trade surplus averaged just under 10%.  Singapore has no commodities that we produce.  In 2006, our trade surplus peaked at just over 25% of GDP.  To keep our currency value down, and more competitive, MAS regularly buys large amounts of foreign currency.  These become our foreign reserves.  This also minimises inflationary pressure.  Otherwise, our sustained trade surplus would put an unsustainable upward pressure.  Of course, this does not help when other countries are performing badly economically, such as what we see with the Malaysian ringgit and the Australian dollar.  To lend further perspective to what we are talking about, from 1980 to 2010, Singapore has a current account surplus of around US$350 billion.  If we convert it to local currency based on annual average of the year of the surplus, we get aroundS$600 billion.

From this, we can establish that the source of the foreign reserves are distinct from taxes and borrowings, and those numbers should not be part of the initial discussion.  We have effectively ruled them out.  This means the S$300 billion in foreign exchange reserves has no bearing on the discussion of attributing our debt.  The foreign reserves have been paid for by consistent current account surpluses.  Even during the recession of the early 1980s, when Singapore ran a trade deficit, our foreign reserves grew from S$14 billion to S$30 billion.

Considering the amounts in the foreign exchange reserves and the historical current account surplus mentioned above, the numbers are certainly plausible where they are.  It must be stated that not all the current account surplus is translated into foreign exchange reserves.  That would be illogical.  There is natural currency appreciation, as well as liquidity measures that would affect this.  That being said, there is a close correlation between the two, which can be tracked.

From this, we have further established that the foreign reserves have been paid for, from the current account surplus, barring some possible transfers made from MAS to GIC for investment.  This means that the foreign reserves are distinct from government surpluses and borrowings, and cannot account for the discrepancy mentioned above.  As such, there is much that many of us would like to understand about the nature and structure of our state debt.  My fear is that it is significantly larger than reported.