Singapore as financial corporation

Over the last quarter Singapore’s gdp fell at an annualized rate of 4.6%, in large part because of China problems (that’s your “China fact of the day”).  And household debt is about 75% of gdp.  Yet the nation’s finances are much sounder than that may sound, and it is worth thinking through why.

I think of the government of Singapore as having three main fiscal arms.  One is a tax collection authority, one is like a life insurance company, and the other is like a hedge fund.  In fact it is a hedge fund.

The tax collection angle is pretty straightforward.  Singapore does an excellent job of both collecting taxes and keeping the overall (direct) tax burden low.  As the population ages, however, we can expect these taxes to rise somewhat, but in a predictable and manageable way.

Now consider the financial side, in particular the question of what the government earns on the investment of people’s retirement funds.  Here it gets more interesting.

Singapore’s social security and welfare system relies on forced saving.  Overall this policy has served Singapore well, and has kept down government as a share of gdp, but in an era of low rates of return it may stumble.  Imagine for instance that the retirement fund were to earn zero percent or so (real) over a period of ten years.

There is already a perception that people put in a lot of forced savings for what they get back for retirement.  I’ve heard Singaporeans claim that they “save for forty years and get paid for twenty,” and similar such assessments.  By no means is everyone happy with the system.

Here is a good survey of criticisms (pdf), including this one:

Those dissatisfied with CPF [Central Provident Fund, the forced savings body] interest rates argued that, given the comparatively higher returns from investment bodies like the GIC and Temasek Holdings who invested government funds, the government should rightfully offer a higher rate of return to CPF holders. The failure to do so was thus perceived as proof that the current government was miserly and profit-seeking at the expense of CPF holders’ welfare. Some also highlighted that annual dividends provided under Malaysia’s Employment Provident Fund (EPF) 83 were higher than the 2.5-3.5% annual interest provided on the OA and the 4-5% on the Special, Medisave, Retirement Accounts (SMRA), as proof that CPF rates could be higher.

Here is a useful ADB history of the Central Provident Fund (pdf, and I’ll use the shorter CPF).  In its early years the fund did well by investing in the low-hanging fruit of Singapore’s housing stock.  That option will not be as socially or financially potent looking forward.  Here are concerns about the sustainability of CPF investment plans (pdf).

The CPF balance sheet states that funds are invested in high-quality government securities, but in fact there is a sizable surplus and a lot of the money is invested abroad, basically as part of sovereign wealth fund activities (see pp.13-15 in this pdf, the link is interesting more generally too).

In essence, one part of this system has the financial structure of a life insurance company, and another part has the financial structure of a hedge fund.

Singapore as a financial corporation has amassed an enormous amount of wealth, due to the earth-shattering performance of its fund managers.  You can think of modern Singapore as in part built on the phenomenal “hedge fund” returns of the 1990s.

I read in the Business Times that Temasek, one of the two major Singaporean funds, has averaged a 16 percent rate of return since its inception in 1974.  That is impressive, and even if you think that exact number is somehow cherry-picking, everyone agrees the returns have been high.  The problem of course is that we do not expect the next few decades to be anywhere near that performance, especially as Asian growth has been slowing down and China is no longer an easy path to riches.  Singapore runs the risk of being the next Warren Buffett, so to speak.  That said, Buffett is still a pretty rich guy, as is Singapore; imagine shouting to a bum on the street “Hey, buddy — you’re going to be the next Warren Buffett!”  He wouldn’t feel so distressed.

For all the talk of forced savings, you can understand the current CPF as (partially) a pay-as-you-go system, where some of the CPF funds are transferred to government holding companies and then the higher returns are kept within the state.  I cannot ascertain the size of that transfer, but I believe it to be large.  As a public choice issue, the market-oriented defenders of forced savings programs need to come to terms with the fact that there is far less than full pass-through.  That said, the private savers mostly would not have earned those high rates of return on their own.

Singapore built up a strong state rather rapidly, but partially at the expense of retirees, and those who must save along the way for retirement, and you can think of that as Singapore’s major hidden tax.  “State capacity,” when turned to beneficial ends such as infrastructure and wise decision-making, benefits the young most of all.  In my view it is good policy to be investing so much in the more distant future, rather than in the elderly, but of course opinions here will differ.

One implication, by the way, is that if you measure wealth rather than income, Singapore’s government is much larger than it may at first appear.  On the flow side, Singapore is small government — about eighteen percent of gdp by many measures — but on the stock or wealth side it is big government.  That is one reason why the country has fans on both sides of the political spectrum.

Of course as retirees ask for more, as is the political trend, Singapore will have to increase payments. That will be a massive de facto privatization of the wealth held within the Singaporean state apparatus.  But of course the privatized flows will, to a large extent, be soaked up by household debt and recycled to the financial sector.

It will be tricky to maintain the balance between having a strong state and meeting voter demands.  Such is the tension of living at r> g, and in a funny way the Singapore scenario has, at least until now, fit Piketty’s model fairly well, albeit with a much larger role for the state.  The problems will come when those rates of return on capital start to fall as indeed I believe they are about to.

But don’t worry just yet — Temasek a few weeks ago announced that they pulled in a return of over nineteen percent during this last year.

I continue in my belief that Singapore is one of the most fascinating places in the entire world.  If you have not yet been, I envy you for the experience of visiting the first time.


Believe Temasek's figures at your own risk. There is a distinct lack of transparency regarding the links between Temasek and the state.

You can look up Temasek's website, and even there they claim they do not handle CPF money.

"Temasek does not manage CPF savings (which are managed by the Board of the Central Provident Fund), Government surpluses, or Singapore’s Official Foreign Reserves (which are managed by the Monetary Authority of Singapore)."

Not that we believe a word of it.

For some years now, they have been pushing back the CPF withdrawal rate. Many locals suspect this is due to the various state-investment companies sustaining horrific losses in the economic crisis of 2008, and delaying the withdrawal age was one way to stem the bleeding, hope the elderly die off before claiming their money, and buying time (heh) to recoup those losses.

In addition, Temasek Holdings (TH) has its extensive fingers in virtually every pie in Singapore. For example, the operator of our train network, SMRT, has TH as its major shareholder. Recent train disruptions and constant stoppages led to investigations and the shocking discovery that maintenance levels had not been sufficient. But they were still able to make significant dividend payouts to their shareholders, specifically TH. It gets worse when we consider that they raised public transport fares to 'cover the increased costs'.

Why didn't SMRT increase its funding for maintenance operations?
Why is TH so hard-up for money?
Why did they keep putting the CPF withdrawal age back?

Why, why, why?

Oops, sorry, I should just shut up like a good worker drone and stop asking so many irritating questions.

the CPF withdrawal restrictions far, far predate the 2008 crisis; the Minimum Sum restriction dates to 1987.

the theory that CPF restrictions are intended to disguise investment failures in GLCs makes no sense, given that the steady direction of liberalization has been to encourage large CPF holders to direct their own investments

I think that Temasek and the CPF are pretty darned opaque, myself, but I will never understand the perennial Singaporean-opposition urge to look toward wild conspiracy theories instead

"given that the steady direction of liberalization has been to encourage large CPF holders to direct their own investments"

Any links to support this assertion? What do you mean by 'large'?

"Just a few years ago, if you turned 55 before 2009, you could have withdrawn 50% of your combined OA and Special Account (SA) funds! So if you had today’s current minimum sum of $148K, you could withdraw $74,000. Then in 2009, the limit dropped to 40%...

...if you don’t have the full minimum sum of $148K – you ONLY get $5K. The rest gets sent over to your RA, which you probably won’t see for another 7 to 10 years."

Yup, decreasing the amount of money you can withdraw from your retirement savings. That's liberalisation.

It's perhaps a wild conspiracy theory, but given the lack of information we have, what do you expect? And we don't need outright liars either.

All the 2008 losses were made back in 2009, and more. Ever held shares through a downturn? There are many issues with Singapore, but investment losses is not one of them.

High returns to CPF investments have an opaque relationship to subsidies to the Housing Development Board, and high returns to Temasek investments have an opaque relationship to the exact nature of government-linked formerly-nationalized corporations, which (until the 2000s) occupied the bulk of its portfolio.

As Singapore Plc goes, to describe it as a 'hedge fund' is a little misleading. This understates the role played by activist management (that is, central planning) to maintain the value of real estate constructed by the government, or the nationalized industries set up by the government, in particular before 1985. The story of the creation of the Singapore light rail network is a story of economist central planners sitting together in a room and justifying investments based on quantified increases in property tax revenue (!) or even land reclamation (!!), even though the SMRT Corporation sits in Temasek's portfolio today.

The fact that Singapore's economy is in a deflationary recession is most likely due to their own central banking, not to the 7 percent annual growth rate of China.

Deflation everywhere and always is a monetary phenomenon. Well, usually anyways.

CPF monies have guaranteed returns, in govt securities, which are in turn invested in GIC and others. Does CPF face GIC? I don't think so. CPF faces Govt of Singapore, which faces GIC and Temasek and MAS even. Consequently, I don't think CPF is technically invested in these asset classes, otherwise pensioners would make much better money! This is the criticism you state. Malaysia's EPF just passes their earnings (or losses) straight onto pensioners. CPF just gives steady govt bond returns, with little upside passed on. AFAIK, the govt makes tons of money which can be used for a wide array of things, including implementing Singapore's overall strategic vision, and increasing standards of living. This is an important part of Singapore's national defense--be smart(er than its neighbors)! Be wealthy. Wield the power. Singapore has no natural resources, like Malaysia so the money is far harder to come by.

GIC is not a hedge fund. Real money is more like it. They have done well of course but the bond market has rallied for 20 years, pretty much. But, like other RM shops, their performance is close to benchmarks. GIC accounts have been increasingly transparent, so it is possible for all to see their performance.

Temasek is not a HF either--more like a large holding company for virtually everything. Super illiquid stuff, state holdings of large corporations. I'm pretty sure SIA stakes and all the major Singaporean banks are part of Temasek, as are large telecoms both in and outside of Singapore.

HF? This is not the case. Singapore might want its holdings to be more of a HF-like (i.e., more market-neutral) but currently there is little reason to believe they are.

Smart? Absolutely, Singapore is extremely strategic and always, the upper echelon is totally smart about how they do things. Always.

Kiasu? Kiasi? Many would say these are typical failings of many SE Asians, Singaporeans included.

Amazing place? Yes, definitely. Singapore is an amazing place, full of contradictions in some ways, escaping from its past in many ways, unable to escape in others.

Conservative utopia? Singapore is not the idyllic place for those who believe in small government to be sure!

Singapore prefigures the rest of the world. It "Disneyfies" life. Very nurturing, very very safe, very rejecting of anything disturbing, very prescriptive. It's dull, once you have digested its distinctions. It's what women (and some men) want. In an adapted form, it's coming to your town.

We used to call them Singapoodles, you could always spot them since they were both arrogant and terrified, not to mention unintelligible. I did a google search and only found a couple of references in malay, but I used to hear it all the time.

I had a couple of friends who used it daily, one was Singaporean but had a real hatred for the place since his uncle had been imprisoned for criticizing policy and his family harassed in a huge number of incredibly petty ways. Housing was a perfect avenue of attack. The other was from Perak and just found most Singaporeans completely unable to handle any unplanned for difficulties. I didn't disagree.

If Singapore life is really Disneyfied, I admire it now. It's better to feel society is boring than society is barbaric. The first has a simple solution: spend a few days alone in the mountain, the sea or the desert. The second, it takes years or centuries to reach that level of organization in society.

The options are not boredom or barbarism. Try humanity harder.

"One implication, by the way, is that if you measure wealth rather than income, Singapore’s government is much larger than it may at first appear."

This is a great way of putting it and shows the deficiency of relying on G/GDP as an indicator for the "size of government." I calculated that workers and their employers in Singapore contribute about one-third of gross compensation to CPF. That is twice as large as the U.S. payroll tax (again, including the employer share) but does not show up in any crude measure of government spending or tax revenue. The government also owns most of the housing stock.

Isn't the trick with Singapure that forced contributions to CPF (I think 36% of salary) are not counted as tax so silly free market economists can show low G/GDP as a proof that Singapore is free market economy?

most Western European countries will take about 50% of your gross pay in taxes and welfare contributions if you're in the highest-earning bucket and provide a pension when you reach old age in return.

A like-for-like comparison for Singapore is a ~20% personal income tax rate + 36% CPF contributions. Therefore, Singapore's tax take is broadly equal to that of Western Europe?

If you account for Singapore's relatively low GST and the fact that it doesn't have a capital gains tax, the rich have more disposable income and purchasing power there than probably in most Western European countries. But the implicit tax burden is almost certainly higher than it is for most Americans. Government ownership and control over most residential real estate also doesn't show up in government spending but it is certainly a very large intervention in the market that affects most Singaporeans' everyday lives.

Singapore also has a very large majority of its citizens live in public housing, combined with almost no low-skilled immigration (in large part because low-skilled immigrants would not be eligible for the public housing and unable to live in market-rate housing.) So some of the proposed strategies elsewhere for dealing with its aging population (and Singapore has one of the lowest birth rates anywhere) are not possible without very large changes.

The Singapore sovereign fund has been a major investor in industrial properties, in China and elsewhere, not the most sexy investment but one that that is more reliable (and generates more cash flow) than trophy properties (such as high rises), and one that has been an enormous success for Singapore as China and other places in the Far East have grown into industrial powerhouses. This has significance to me because the person most responsible was my client and friend in the late 1980s and early 1990s. During that time, he built a portfolio of industrial properties that was eventually acquired by a large REIT, which hired him to build industrial portfolios in Japan and later in Europe and China. He eventually became CEO of the REIT, a position he lost when the combination of the financial crisis and too much debt (much of it taken on to expand the portfolio) strained the REIT. But he quickly recovered, founding a new venture to invest in industrial properties which partnered with the Singapore sovereign fund to buy most of the portfolio of his former employer in Japan, China, and elsewhere. The downturn in China has no doubt adversely affected the investment, but one can see the different path he took this time as compared to the last in building the portfolio. He was a brash young man when I knew him (I first met him when he was still in his 20s) and a quick learner (not just anyone can build a business in such culturally different (from the U.S.) places as Japan and China). I write this comment both to remember my friend (he died last year) and to highlight the importance of sovereign funds (such as Singapore's) in economic development and growth. We have a lot to learn.

If you aggregate up the leverage of the hedge fund and the safe asset holdings of the life insurance company, do you just get an unlevered portfolio of local real estate investments and equities? When its the same agent on both sides of the transaction, financial intermediation seems like a waste of effort.

Professor, this is extremely insightful. I live in Singapore and follow these debates every day - but your exposition is brilliant. The insight that Singapore government is small (flow) but big (stock) is powerful.

I wanted to ask: what makes you spend time looking at Singapore's economy - just professional curiosity or do you actively consult/advise them?

Tyler, given that you appear to have a high opinion of Chris Balding, I suggest that you read his commentary on Temasek - go to his blog and search on the word.

The suggestion is a response to your extraordinarily uncritical acceptance of the Singapore Inc. line on these issues. As Balding makes clear the numbers don't add up and the opacity around the data should make any democrat's hair stand on end.

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