How money grows in Singapore

How money grows in Singapore

Between 2000 and 2010, M2 money supply grew 135%, or 8.9% a year in the past 10 years, to $401.4 billion. 

Thu, Feb 10, 2011
The Business Times

By Teh Hooi Ling
Senior Correspondent

IT all started with a friend's Facebook status update a couple of weeks back. She posted: 'The critical ingredient is getting off your butt and doing something. It's as simple as that. A lot of people have ideas, but there are few who decide to do something about them now. Not tomorrow. Not next week. But today. The true entrepreneur is a doer, not a dreamer.' - Nolan Bushnell: Founder of Atari and Chuck E Cheese's.

Her friend Cindy Gallop liked the post, and commented by including a link http://www.ifwerantheworld.com/

Ms Gallop had quit a successful advertising career as chairman of Bartle Bogle Hegarty in 2005 to do something different. Today, she continues to work in branding and advertising as a consultant, but is also tending some fascinating projects of her own. She launched MakeLoveNotPorn at TED2009. In January last year, she launched IfWeRanTheWorld, a simple web platform designed to bring together human good intentions and corporate good intentions, and turn them into collective action.

So I went to the IfWeRanTheWorld website and found a simple page with the words: 'If I ran the world, I would (...)'. I typed in 'deemphasise the money culture' in the blank space, and pressed 'enter'. The next screen which appeared said: 'There are 16 available microactions, three superheroes and 11 actionplatforms that match your good intentions.'

Of the list, the one item which caught my attention was: 'Watch Zeitgeist-Addendum on YouTube or Google.'

I did. It was a two-hour show which talked about how the modern world has such unwavering faith in money. The capitalist world is built on the notion of scarcity. A better system, the film argued, is a resource-based economy where all goods and services are available without the use of money, credits, barter or any other system of debt or servitude. The premise is that the Earth is abundant with plentiful resource, so all resources should become the common heritage of all of the inhabitants, not just a select few.

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One part of the film talked about the monetary system. It claimed that the growth of money supply is inherent in a capitalist system, which is why inflation is inevitable. Evidence: an apartment which was bought for $20,000 in the 1970s can now be sold for $500,000. Basically, there is just more and more money being circulated as time goes by.

The film showed a chart of the money supply in the US since the 1950s and juxtaposed that against the chart of the US national debt. The trajectories of both charts are strikingly similar, leading the filmmakers to conclude that money is created out of nothing but government debts. That in fact is the argument of the Modern Chartalism theory, which states that under a fiat money system, net currency is created by government through deficit spending.

That set me thinking. The Singapore government runs a budget surplus year after year. How is the money supply in Singapore created? And oh my, how the money supply in Singapore has grown.

M2 money supply in Singapore - which includes currency in active circulation, demand deposits of the private sector, fixed deposits, Singdollar negotiable certificates of deposits, savings and other deposits - totalled $170.9 billion at the end of 2000. By November last year, M2 in Singapore had ballooned to $401.4 billion. That's an increase of 135 per cent or 8.9 per cent a year in the past 10 years. In comparison, the gross domestic product (GDP) grew by about 6.4 per cent a year during that period.

So what makes the money supply grow in Singapore? I came across a document entitled Monetary Policy Operations in Singapore on the Monetary Authority of Singapore (MAS) website. The 32-page document highlights the key aspects of MAS's monetary policy operations, foreign exchange and money market operations, and the various factors and considerations underlying them.

The four primary responsibilities of MAS are:

• Implementation of exchange rate policy;
• Conduct of money market operations for banking system liquidity management;
• Management/issuance of Singapore Government Securities (SGS) in support of government initiatives in bond market development; and
• Provision of banking and financial services to the government.

MAS's balance sheet looks like this: On the assets side, a big chunk is in foreign assets, i.e. the official foreign reserves of Singapore. MAS also holds an inventory of Singapore Government Securities. It also has domestic credits, that is lending to banks in the course of conducting money market operations for liquidity management in the banking system.

On its liability side, the biggest component is government deposits. These are surpluses that the Singapore government run year after year. Also in this pool are contributions of members to the Central Provident Fund. Also on the liability side is currency in circulation. Under the provisions of the Currency Act, each Singdollar currency note must be fully backed by foreign assets. As we all know, Singapore's monetary policy targets neither the interest rate nor monetary aggregate. It is centred on the trade-weighted exchange rate. As such, the monetary base is also endogenous, and its level is based more on banks' demand for reserve and settlement balances.

So this is my understanding of how the money supply of Singapore has been growing all these years. Say, a foreign company wants to set up a factory in Singapore because of the good infrastructure here and the convincing marketing campaign by the Economic Development Board.

The foreign firm brings in US$100 million. It needs to convert that amount to Singapore dollars to pay for the construction costs of its building, to pay utilities bills and salaries of its staff. So demand for the Singapore dollar increases. If the aggregate demand for the Singdollar far exceeds the supply in the market, the local unit will appreciate too fast and make Singapore exporters uncompetitive. So since MAS's mandate is to manage the Singdollar's trade-weighted exchange rate, it will intervene by selling Singdollar to meet the demand and buy the US dollar.

That's how money supply in Singapore grows over time. Among other reasons, demand for the currency also arises when Singapore exporters want to convert their revenues in US dollars back to Singdollar, or when foreign investors are keen to invest, say, in real estate in the Lion City, given its safe haven status and its emergence as a global city.

I've charted how Singapore's GDP in current market prices and how Singapore's M2 money supply have grown since 1980. The ratio of M2 to GDP has been rising through the years. Prior to 1998, total M2 had always been lower than the aggregate GDP. But that changed in 1998, and by end of 2009, M2 is 140 per cent that of Singapore's GDP. Is it a wonder then that real estate asset prices in Singapore have been so buoyant in the last few years?

The writer is a CFA charterholder

This article was first published in The Business Times.

The Ascent of Money

How can the Poor Become Rich?

How can the Poor Become Rich?

James Simons, Renaissance Technologies, US$2.5b

He makes $1.7b amid credit crisis

THE current financial crisis may have dwindled the fortunes of many in Wall Street, but Mr George Soros is one among a handful who still made money - about US$1.1 billion ($1.7 billion) of it.

Mr Soros, who predicted the global financial crisis twice before, and was one of the few people to anticipate and prepare for the current economic collapse, was not even at the top of a list of those who made money in these doom times.

That honour went to former maths professor James H Simons,who has made billions in hedge fund Renaissance Technologies, and raked in US$2.5 billion running computer-driven trading strategies.

In an interview with The Australian, Mr Soros, 78, said he has 'been writing a lot more than I was writing before because the crisis really stimulated me'.

His prediction meant he was better able to brace his Quantum investment fund against the global storm.

Other investors failed to take notice of his prediction and his decision to come out of retirement in 2007 to manage the fund made him a total of US$2.9 billion.

Mr Soros is one of 25 top hedge fund managers from across Wall Street who have defied the credit crunch crisis to reap a combined total US$11.6 billion last year.

How they made their profit

The managers made their profit by trading above the pain in the markets, according to Institutional Investor's Alpha Magazine.

Second on the list is Mr John A Paulson, who made his fortune by betting against the housing market, earningUS$ 2billion.

The managers made the profit in a year when losses were recorded at two of every three hedge funds and when hedge funds lost an average of 18 per cent, according to the New York Times.

Two of the three managers who tied for ninth place, at US$250 million, are based in Britain and include David Harding of Winton Capital and Alan Howard of Brevan Howard Asset Management.

Another Brevan Howard employee, Mr Christopher Rokos, also made the list.

The profit comes at a time when the US government is scrutinising Wall Street pay and when hedge funds are facing proposals for new taxes on their gains. Despite the global financial crisis, the combined pay of the top 25 hedge fund managers still managed to top every year before 2006.

Mr Paulson said his pay was high, partly because he is the largest investor in his fund and that he did not receive a bonus.

He said the pensions,endowments and other institutions which invest in his fund do not object to the profits he and his team make.

'In a year when all their other investments lost money, we're like an oasis,' he said in The Times. 'We have investors who were invested with Madoff, and they can't thank me enough.'

Alpha Magazine's 2008 Top Moneymakers:

1. James Simons, Renaissance Technologies, US$2.5b
2. John Paulson, Paulson & Co, US$2b
3. John Arnold, Centaurus Energy, US$1.5b
4. George Soros, Soros Fund Management, US$1.1b
5. Raymond Dalio, Bridgewater Associates, US$780m

This article was first published in The New Paper.

Guide to financial Crisis in 2008

http://www.skyscrapercity.com/showthread.php?t=778354&page=41

GIC

The keys to nation's wealth

WITHIN three years of becoming independent in 1965, Singapore was able to chalk up Budget surpluses year after year for close to two decades.

Government policies that encouraged foreign investors to set up shop here, a benign external environment and a prudent Government that stressed thrift boosted economic growth and helped build up this savings pool.

At the end of each government's term in office, these and other savings were 'locked up' as past reserves.

For a country with no natural resources, these reserves were deemed a critical form of insurance against the unexpected.

As these funds grew, the Government was concerned that Singapore's key form of wealth could be wiped out rapidly by a profligate government.

It therefore introduced checks to safeguard the reserves.

But the Government also came to recognise that part of the extra income the reserves make can help meet spending needs in times of emergency or when revenue dips.

Thus, over the years, it has refined what is in the reserves, as well as the framework for managing them.

The aim: To strike a balance between growing them and drawing on part of them to fund current needs.

More recently, the Government's draw on the reserves to save jobs and businesses in the current financial maelstrom is recognition that they are indeed meant for times of crisis.

The draw also puts into practice a procedure first thought up 25 years ago to ensure that the country's accumulated wealth is carefully protected and used only when really needed.

Managing the money

THE Monetary Authority of Singapore (MAS) was the first agency to invest the accumulated reserves.

As the pool of funds grew rapidly, the need for a dedicated organisation to ensure it continued to grow over the long term became apparent.

The Government had also set up Temasek Holdings in 1974 to manage, on a commercial basis, a range of national companies, from Singapore Airlines to DBS Bank and Neptune Orient Lines.

What stood at little over $1 billion in 1965 was added to and invested.

By 1981, Singapore's official reserves topped $15 billion.

The same year, the Government moved to create the Government of Singapore Investment Corporation to invest the reserves with an eye on better returns in the long term.

By 1984, the reserves were a sizeable $23 billion.

The Government also became concerned about protecting what it had built up from being frittered away needlessly should a profligate government come into office.

In the 1984 General Election, the People's Action Party won 64.8 per cent of the votes, down from 77.7 per cent in the 1980 election.

Then-Prime Minister Lee Kuan Yew mooted the idea of a 'block' on the reserves, so that they could be drawn down only with the President's assent.

After much consideration, the Constitution was amended and the elected Presidency came into effect in 1991.

The principal sum of past reserves was locked up to safeguard it for crises that might afflict future generations.

Since then, past reserves (estimated to be worth between $300billion and $450billion today) can be tapped only with the consent of the President, who would hold the 'second key' to these reserves.

Should the need to draw them down arise, the first key - or guardian - is the Prime Minister and his Cabinet.

The Government will then have to go to the President, who will consult his advisers before deciding whether or not to approve the withdrawal.

Uses in a crisis

THIS block on past reserves, however, did not mean money made from this pool of funds could not be used.

The reserves generate an annual investment income in the billions of dollars, all of which was available for spending until 2001, when a spending cap of 50 per cent was imposed.

The investment income was considered part of the 'current reserves' that the government of the day was free to spend during its term, as it was accumulated under its watch.

However, the Government did not use this income.

Strong economic growth meant the Government had no need to draw on it to augment what it had for current spending, even in a crisis.

When the impact of the Asian financial crisis hit home in 1998, the Government was able to rely on the previous year's budget surplus of $6 billion - which were lying in its current funds - to pay for off-budget measures costing $2billion in mid-1998.

Nevertheless, it took the opportunity to reiterate the importance of the reserves to Singapore in a crisis.

Then-Finance Minister Richard Hu noted that were it not for the strong reserves, the Singapore dollar and stock markets 'would have been much more severely affected by the fallout from the financial crisis'.

Unlike the Thai baht, which was hit hard by speculators and had to devalue, the Singapore dollar did not come under serious attack.

This was credited to its healthy surpluses, zero debt, and sizeable reserves which would have allowed the country to defend the currency's value.

Finding a balance

IN THE 1990s, then-President Ong Teng Cheong raised several queries about the reserves to which the Government replied.

The outcome was a White Paper on principles for determining and safeguarding the accumulated reserves of the Government, which both Mr Ong and the Government had agreed upon. The document was released in 1999.

Among other things, it defines past reserves, sets out a convention by which the President protects them, and requires the Government and key agencies that manage reserves to provide the President with regular financial reports.

But even before the 1998 crisis, the Government had begun studying how to further safeguard the reserves by locking up some investment income that would then go to building up past reserves.

This was partly occasioned by concern that as the population ages, there would be more pressure for part of this income to be spent on social needs, such as health expenses and social support.

Then-President Ong favoured amending the Constitution to lock up 50per cent of investment income, with the other half available for present use.

The Government eventually decided on this split, and put the new rule in place in 2001.

Dr Hu said the split arose as it was necessary to 'strike a proper balance between restraining a profligate government on the one hand, and allowing a responsible government enough flexibility to operate, on the other'.

Further, income earned from reserves built up by the present Government will still be added to its current reserves, which it is able to spend.

Further refinement

THESE funds have come in handy.

In a bid to keep the economy competitive as it entered the 21st century, taxes, fees and charges were cut, thereby reducing operating revenue.

Combined with the bursting of the dot.com bubble in 2001 and the severe acute respiratory syndrome crisis in 2003, this meant that Government revenue was not sufficient to keep up with spending.

Fortunately, funds from investing the reserves could be - and were - deployed to balance the Budget in the years since then.

These monies helped avert Budget deficits - or reduce their size.

Said the Finance Ministry in 2005: 'Singapore's reserves, built up over time, have therefore provided a fiscal buffer that allows the Government to enhance Singapore's competitiveness by lowering taxes, and to respond flexibly via discretionary measures in a cyclical downturn.'

Nanyang Technological University economist Tan Khee Giap says the reserves played a critical role in these times.

Because they were there, and able to generate a flow of income, the Government did not have to resort to borrowing to fund current spending, as other countries did.

The question it faced, going forward, was how to find that equilibrium between having enough in - and growing - its kitty while leveraging on that sum to spend a little more in prolonged periods of slow economic growth and declining revenue.

So the Government began studying how to improve the system so that the reserves could be tapped for a flow of income that was more reflective of changes to its value.

The Government looked at, among other models, the endowment funds of top American universities like Yale and Harvard, which had robust and sophisticated spending rules, preserved the value of what they had, and generated a stable, sustainable income flow.

Last October, it amended the Constitution to put in place a new framework to draw on the reserves.

What was called the net investment income (NII) framework was replaced with the net investment returns (NIR) framework.

The key changes were: including capital gains - and not just interest and dividend income - in the definition of returns, and using a calculation based on long-term expected real returns, as opposed to present returns.

More funds available

THE change resulted in increased funds for use: For the upcoming financial year, the NIR is $7.7billion - almost 20 per cent of projected total expenditure.

This is more than three times what the reserves would have yielded in the current fiscal year if the NII framework had applied.

But the revised framework is not without further safeguards.

For instance, the Government has to seek the President's concurrence on what it projects to be the expected rate of return over the next 20 years, before the start of each financial year.

If the President disagrees with this rate, then the average historical real rate of return over the previous 20 years will be used instead.

Drawing on the reserves

THE NIR amendment came around the same time the President had to exercise his custodial powers for the first time, last October.

That was when he had to consider and approve a potential draw on the past reserves, when the Government issued a $150 billion guarantee on all bank deposits here.

The Government has said the probability of an actual payout is low, but the move had to be backed by the reserves to be credible.

Not long after, in January, the Government got in-principle approval from President SR Nathan to draw $4.9billion from past reserves to fund one-off Budget measures to boost the economy.

These are: Jobs Credit to subsidise wage costs in a bid to save jobs, and a Special Risk Sharing Initiative to give companies more access to credit.

It says these moves are temporary and come in 'exceptional' circumstances, as the country braces itself for the most severe global recession in decades.

It is also making the draw despite having enough savings in its current reserves since it began its term of office in 2006.

Explained Finance Minister Tharman Shanmugaratnam in January: 'Tapping on past reserves now gives us the resources that we need to deal decisively with the current economic crisis and also ensures that we have all the resources we need to respond to the considerable uncertainties that lie ahead.'

Among the funds at the Government's disposal is the healthy $6.45billion surplus it chalked up in financial year 2007, and which now forms part of current reserves.

These could come in handy should off-budget measures be needed to further stimulate the economy, which is officially forecast to shrink by up to 5 per cent this year.

And if they are not needed, these funds will become past reserves.

What next?

THE Government has not ruled out a further draw on past reserves, should the need arise as this crisis plays out.

But Singapore is fortunate in having this pool of funds many other countries lack, no longer have, or have seen dwindle in a short span of time.

Even once-successful countries like Iceland have gone deep into debt in the space of months because their debts outweighed their savings.

The Government has been mindful of the need for continued prudence.

Senior Minister Goh Chok Tong this year stressed that any drawdown has to be one-off, for a temporary relief and not for social spending. But the pressures to spend more will not go away soon.

If anything, the story of Singapore's reserves is still unfolding.

This article was first published in The Straits Times.

Fixed deposit rate 11 Mar 2009

Citi Bank sold to GIC for US$35b

2/28/2009

All the way, DBS-Citibank!

Just as I raised my hope for a 7% dividend, it fell flat in my face. And my estimate was way way off. The 7% would have given a return of US$482m pa. GIC could have the money back in no time. Now it is all gone.

But don't worry, there is a better and more promising deal. The conversion price which was US$26.35 was watered down to US$3.25 and the conversion to ordinary shares will give GIC an 11% stake in Citibank, the second largest shareholder next to the US govt. And there are more promises along the way.

If the market recovers and Citi's price shot up, we could reap much higher returns. If the market plunges and Citi became insolvent or be nationalised, gone with the wind. But the second 'IF' is only a big If. No need to worry about that. In the long term everything will be fine.

Now the more juicy part. If our US$6.88b can give us 11% stake in Citibank, it means that the whole bank can be had for no more than US$70b. This is definitely very affordable. Shouldn't GIC launch a general take over of Citibank and merge it with DBS to become an international giant bank?

And another piece of good news. There are so many good news and things are looking much rosier. What's that? Oh, Citibank's share price fell to US$1.55. This simply means we could have the bank for less than US$35b. And with already 11% in our hands, US$30b should do the trick.

I don't think the US govt will object if we let Chip Goodyear to negotiate the deal. The US govt must be more comfortable with Goodyear in charge. Wow, I think we have all these planned in advance. Great foresight and pro active thinking and decision making. We must have see all these coming.

Go for it GIC! Take Citibank under our wings, but make sure the top management are Singaporeans. The Americans can be co opted as advisers.

I will definitely bank with DBS Citibank.