Low Return A Concern
Singapore's foreign investment are low for traditional reasons: a longer gestation period; now with the Asia crisis and poor investment decisions, it will be worse..
Apr 29, 2001

By Daniel Lian and Anita Chung, Singapore
Morgan Stanley

The report on "Singapore's Investment Abroad 1997-98" released by the Singapore Department of Statistics in the second week of September 2000 validates our balance of payments methodology for valuing the stocks and flows of Singapore's external economy - some of which we presented in the first week of September.

Without taking into account the part of the external economy that is owned by the government (i.e., other than foreign reserves), official statistics valued the stock at around S$297.7 billion (US$177.8 billion) in 1998 compared with $344.7 billion (US$205.9 billion) estimated by our model.

We believe the difference of $47 billion (US$27 billion) at the end of 1998 largely represented the part of the external economy owned by the government (through government agencies such as Temasek Holdings, Government Investment Corporation, and statutory boards like Economic Development Board and Jurong Town Council).

In fact, for 1998 alone, the government directly, without this being captured by the official survey statistics, recycled some $15.7 billion (US$9.4 billion) worth of the current account surplus abroad.

It is reasonable to assume that by the end of 1999, the government-owned external economy (excluding foreign reserve holdings) could be as large as S$40 billion to $60 billion.

Government, GLCs and MNCs Dominate

The government external economy constituted more than 50 per cent of the total external economy in 1998. If one takes into account the GLC-owned external economy, then the government share balloons to some 60 per cent.

Foreign MNCs accounetd for 29 per cent whereas the local private sector (excluding GLCs) owned 11 per cent.

It is therefore clear that if the government and GLCs fail to secure a good return on their external economy, the performance of the economy overall would be adversely affected.

Low Return a Major Concern

We are somewhat concerned about the apparent low return generation by the external economy. We collate gross factor income of Singaporeans abroad and express it as a percentage of both GNP and the external economy (public and private sector).


Returns have been declining over the past few years, acfording to our projections, and the selection by our model of a 6 per cent nominal return as the proxy of profitability for the external economy during 1980-99 was consistent with real world observations.

We do not know the exact sources contributing to the reduced profitability of the external economy in the past few years. However, such a decline has coincided with a period in which the government and GLC-led buildup of the external economy (primarily through direct investment, portfolio investment and other foreign assets); has taken precedence over the past practice of accumulating plain vanilla foreign reserves.

The former forms of investments assume more risks and should earn better returns than foreign-market instruments and bonds.

Something appears to have gone wrong with the risk and reward profile of the external economy in recent years.

We conjecture that the following factors could have contributed to the poor returns earned by the externale conomy despite the higher risks profile.

(1) Longer gestation period.

Direct and portfolio assets tend to take longer to reap returns after their initial formation. Industrial parks, transportation and telecommunication infrastructure are examples of projects of the external economy that could have generated poor returns in the early years.

(2) Asia crisis and currency devaluation.

The Asian crisis and currency devaluation in Southeast Asia could have negatively affected both stocks and income flows of the external economy. Singapore's direct investment abroad and among the top four investment destinations, i.e., China, Malaysia, Hong Kong and Indonesia, three were severely hit by the crisis. Both the ringgit and the rupiah have also sharply depreciated against the Singapore dollar.

(3) Poor Investment decisions.

We have emphasised in our previous in our previous analysis that management of the external economy has rapidly become the most important economic activity of the republic.

Diversification is key to securing steady returns and protecting investment. While gestation periods and the Asian crisis may have played a role, we cannot rule out poor investment decisions.

Even though we cannot ascertain whether it is the government (through its agencies and statutory boards), GLCs, MNCs or indigenous private sector that has been making such decisions, the sheer domination of the government in the external economy means that responsibility for the poor returns must lie with the government to a large degree.

In the Hands of Government

The simulation that we carried out in our previous article demonstrates that not only is the future rate of return critical to the growth of the external economy, it will also determine its relative contribution to the Singapore economy.

Our estimates suggest that the external economy needs to secure a rate of return of at least 8 per cent to be commensurate with the economy's long-term growth potential of 6.5 per cent.

Given the preponderance of government ownership, the task of raising returns clearly lies in the hands of government and the GLCs.
(Released on September 14, 2001)