How the Singapore reserves might get spent … and you would never know about it.

How would you feel if I told you, there’s a 100% legal way that the PAP government have set up to enable government spending of Singapore’s accumulated reserves?  You think any draw down on historical reserves requires presidential approval?  Actually not!  “Draw down” has a specific legal meaning, and guess what, when you’re in charge of making the laws, you can work around that! You thought reserves can only be spent in an emergency with Presidential sign off? Wrong again, this is a mechanism that the PAP uses every year to bring billions of dollars from Tamesek & GIC into the government budget.  Unfortunately the question of whether or not these billions cause our historical reserves to be reduced is considered too secret to tell anyone.

Let’s get to the point.  This mechanism by which the reserves can get spent is called “Net Investment Returns Contribution”.  In 2012 it was used to pull 7.3 billion dollars into the annual budget. In 2011 the figure was 7.8 billion.  How does it work?

This framework allows the Government to take into the Budget, up to 50% of the long-term expected real returns on the funds managed by GIC and MAS, after deducting Government liabilities.

The expected long-term real rate of return refers to the investment rate of return that can be expected to be earned on the funds managed by GIC and MAS over the next 20 years, after netting off inflation.

[Emphasis Added][1]

There you have it.  The key word obviously is “expected”, as opposed to “actual” or “real”.  A prudent government might only pull funds from the reserves based on actual returns achieved in the previous year or two, but not the PAP.  How can the government have any idea what the expected returns of GIC and MAS will be over the next 20 years?  Remember that assets can be transfered from Temasek to GIC without any oversight from anyone, so all of Singapore’s investment funds are in play here.

So how does this really work?  Well, the government picks a number to represent the “expected” returns from investing the reserves over the next 20 years.  This might not be a problem if the number chosen was very conservative.  Unfortunately, as has been pointed out by Christopher Balding [2] and Kenneth Jeyaretnam [3] there is an immediate problem here, in that various indicators point to the returns of GIC (and Tamesek) being overstated.  So we have to at least suppose the government may chose an optomistic / inflated / excessively high value for the expected rate of returns.  Then, let us suppose through the course of the year, the actual returns of GIC, MAS and Tamesek are quite a bit lower than “expected”.  The government will still bring funds out of the reserves in line with “expected” returns, and if that is greater than actual returns then so be it.  There is no further safeguard to protect the reserves if returns are less than “expected”.  So by this mechanism, every year, the government could end up reducing the value of Singapore’s reserves.

But, there is one safeguard – the value chosen for the “expected” returns of GIC and MAS has to be approved by the president.  However, given that the President was previously the Deputy Chairman of GIC while they were busy losing many billions in toxic investments, I am not convinced he is best placed to provide a safeguard on these funds.  Further, Dr Tan was also for many years a senior member of the PAP government, including a ten year stint as Deputy PM, so again it could be argued that he is not an independent observer, but actually has an interest in supporting the PAP and thus maintaining the legend of the “Men in White” of whom he was in fact one.  One look at the President’s silence over the illegal world bank loan [4] which was made without his permission reveals that he clearly has no interest in protecting the finances of Singapore.

[1] http://app.mof.gov.sg/reserves_sectiontwo.aspx

[2] https://mostlyeconomics.wordpress.com/2012/04/18/temasek-and-singapore-puzzle-is-it-another-madoff-crisis-in-making/

[3] http://sonofadud.com/2012/09/07/where-have-our-reserves-gone/

[4] http://sonofadud.com/2012/08/30/auditor-general-mof-breached-constitution-article-144-in-january-2012/

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3 Comments

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3 responses to “How the Singapore reserves might get spent … and you would never know about it.

  1. Pingback: We need to talk about the reserves | andyxianwong

  2. Abel Tan

    Here is the hypocrisy: The REAL 5 year rate of return for both GIC and Temasek have been negative.

    http://therealsingapore.com/content/hypocrisy-cpf-and-singapores-reserves

  3. Pingback: 20150602 Why I no longer trust GIC (PAP) with my CPF | likedatosocanmeh

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