Reserves
Anxiety rises
Singapore's national savings suffer market plunge because of global banking woes, possibly with worst to come. By Seah Chiang Nee a day before Temasek leadership change.
Feb 7, 2009

(This article makes no mention of the exit of Temasek’s CEO and Executive Director, Ho Ching, since it was written one day before the news broke. Official emphasis is that her move is unrelated to any poor investment.)

AS RECESSION deepens and foreign investment values tumble, the government is facing rising public pressure for information on just how badly the national reserves are faring.

Singaporeans are becoming more anxious about not knowing how much their collective savings have been lost – or tied up – in troubled investments as a result of the global market collapse.

The amount of losses has not been disclosed, except in the most general way, but market analysts believe that they are in the region of many tens of billions of dollars.

The people’s unease, which has been building up for a year, took a recent turn for the worse when the government dipped into the reserves for part of a S$20.4b stimulus package.

It is the first time in history that Singapore has done so, drawing out S$4.9b, a drop in the ocean compared with total reserves believed to be more than US$200b.

This was followed by a Bloomberg interview in which Singapore’s Finance Minister revealed that US$24b was invested in three of the West’s worst hit banks in the past 14 months.

The banks were UBS AG (Switzerland’s largest) and America’s Citigroup and Merrill Lynch, which was subsequently taken over by Bank of America.

Decimated, their values are still falling. Other invested equities have fallen sharply, too.

“We haven’t seen the worst yet,” warned minister Tharman Shanmugaratnam, indicating more trouble ahead for Singapore’s bank investments.

At a time when recession-hit Singaporeans – especially the growing unemployed – needed financial help, the reminder that US$24b of their assets had been invested abroad was jarring.

“This amount is more than the S$20.4b ‘Resilience Package’ unveiled in the Budget...” said online commentator Eugene Yeo.

“The obvious question that comes to mind is: If Temasek and GIC (Government Investment Corpora—tion) had not invested so much money, would we have needed to dip into our reserves?” he asked in WayangParty.com.

Using the reserves to alleviate hardship had been a frequent cry here. Instead of being greeted with relief, the move is highlighting something the government doesn’t want made common knowledge – the state’s declining assets.

How much of the reserves do we have left, some asked. One precise question is: “How much of the bad investments had been lost – or is irrecoverable – and what are the plans to protect the rest?”

In an apparent response, the authorities have assured people that state investors had reduced equities, and increasing cash to 7% of the total.

The issue of reserves worry many Singaporeans – particularly founding leader Lee Kuan Yew – as the republic’s worst ever recession deepens.

Reserves are Singapore’s life-line. Its growth has kept pace with the country’s rapid progress during the 43 years since independence.

Lee and his thrifty colleagues had been instrumental in building up much of the current reserves, virtually brick by brick in the past and almost treating them as sacrosanct.

But in the past decade, this caution had given way to a more aggressive mega-billion dollar investment policy in an effort to increase the rate of returns.

The timing and the sense of anticipation have been poor. However, the importance Lee had attached to accumulating national savings was based on sound principles.

Without natural resources and being excessively dependent on the world for trade, Singapore has always regarded building up strong reserves as crucial for survival.

By and large Singaporeans go along with this. The complaint, however, is over the excessive collection of revenue – through indirect taxes and increased costs – to make it happen.

Now, ironically, it is the severe nature of the current global crisis that shows how important savings are to Singapore.

Without it, this city state could have gone under. It has, in fact, allowed Singapore to gear up for a strong bounce back when the world recovers.

Just how strong is Singapore financially?

The official reserves are managed by GIC and Temasek Holdings. GIC had invested US$100bil (RM362.5bil) of the foreign reserves abroad, Reuters reported last April.

(Morgan Stanley, however, said in February that GIC was the world’s third-largest sovereign wealth fund with US$330b in assets under management, behind Abu Dhabi Investment Authority, with US$875b, and Norway’s Government Pension Fund, with US$380b.)

Temasek, headed by the prime minister’s wife Ho Ching, has a S$164b portfolio, Reuters reported.

(According to Morgan Stanley, Temasek manages S$159.2b and is the world’s seventh-largest sovereign wealth fund.)

Last year, the government defended these US and European banks as good strategic investments that it intended to keep for 30 years.

But some of their fundamentals had so badly deteriorated in recent months that such talk no longer resounds.

Merrill Lynch has closed and was taken into the Bank of America, which is finding its troubles run so deep that it needs the US government to help with the merger.

And Citigroup is only a pale self of what Singapore had purchased, after selling off many major assets and reverting back to being a bank.

“It’s like buying a Rolls Royce but getting a Mini-Minor,” said a trader.

Today, few well-informed Singaporeans accept the argument that they are a good buy or will be sound, credible long-term investments.

The banking industry in the world is undergoing big changes, with the future looking less than certain.

In a few years’ time the recession will blow over, almost everyone is sure.

But no one can be equally sure that even when it happens Singapore can recover from its investment mistakes, even years after that.

I hope and pray that – as a Singaporean – events will prove me wrong.
(This was published in The Star on Feb 7, 2009).