Singapore’s financial surplus raises question of control

Richard Hubbard
5 December 2003

The tiny island nation of Singapore is set to end 2003 with a weak economy and high unemployment but a very fat bank balance.

Singapore’s reserves, already estimated to exceed $100 billion in a nation of just over 3.3 million citizens, are set for a top up from a record current account surplus the country has in its balance of payments with the rest of the world.

But as the reserves mountain grows analysts are questioning whether the current system of control by a large and secretive institution, the Government of Singapore Investment Corp (GIC), is in the best interests of the country.

“It is highly risky for Singapore to place virtually its entire reserves under the management of a single entity, particularly one marked by low transparency,” said Manu Bhaskaran, a partner in Centennial Group Inc.

Owing to the government’s dominance in the city state’s economy, a large slice of the current account surplus — the gain from exporting more goods and services than are imported plus net investment income — is likely to end up in the coffers of either the central bank or the GIC.

The surplus for the first three quarters of 2003 stood at S$35.1 billion ($20.36 billion) — the highest ever recorded, according to the Department of Statistics.

A strong final quarter will easily push it above S$40 billion for the whole year, a level never seen before.

“It’s a crisis of plenty,” according to P.K. Basu, managing director of Robust Economic Analysis in Singapore.

Basu said the surplus, running at around 30 percent of gross domestic product, was a result of a reluctance by the government to increase spending as the economy slowed down.

When a government increases spending, people generally have more money to buy imported goods and the current account surplus would normally shrink.

Analysts said the surplus also partly reflected Singapore’s weaker currency after the central bank eased monetary policy mid-year, which would have made imports more expensive.

With the manufacturing and service sectors hit by the Iraq War and the deadly SARS outbreak, Singapore’s GDP is expected to be only one percent higher this year than in 2002, when it showed 2.2 percent growth.

Investments abroad

A current account surplus must be invested in foreign assets, such as foreign exchange, stocks, bonds, and real estate overseas. In Singapore some of this will be done by private sector firms, but the bulk would be handled by the GIC or the central bank.

The GIC manages funds that come from the government’s accumulated budget surpluses, including the profit of investment agency Temasek Holdings, and some of the assets of the central bank, the Monetary Authority of Singapore.

Chaired by modern Singapore’s founder and current senior minister, Lee Kuan Yew, the GIC said last year it had around US$100 billion in assets, but does not make public its accounts.

The central bank, chaired by Lee Kuan Yew’s son Lee Hsien Loong, currently has official foreign reserves of over $90 billion, mainly held in foreign exchange and gold.

Temasek, whose executive director is married to Lee Hsien Loong, earns income from stakes worth more than $45 billion in about 40 major Singapore companies.

The agency’s stable of companies includes well known names such as Singapore Telecom, Singapore Airlines and DBS Bank, and the port operator PSA Corp.

The GIC invests its funds in everything from outright purchases of hotels and hospitals in Australia to heavy investments in U.S. equities and bonds.

Temasek uses its money principally to build local companies, but recently has begun making direct investment abroad as well, including buying stakes in two large Indonesian banks.

Some analysts argue that, after years in which this government-led investment has turned Singapore into a highly developed country, it may be time for the state to step back.

“What needs to be done is that the government has to decide whether to pass the investment decision back to the people,” said Joseph Tan, an economist at Standard Chartered Bank.

“The wealth in a sense doesn’t belong to the government.”

Basu of Robust Economics believes the concentration of the management of the country’s wealth has also contributed to the country’s lack of entrepreneurship.

Centennial Group’s Bhaskaran said the GIC was most in need of reform and suggested a statutory board be set up to oversee its management, and that the group’s various fund management divisions be broken up and sold off.

“For a small country, do we want to put all our savings in one fund management house?” he said. ($1=1.724 Singapore Dollar)

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