FOLLOWING THE MONEY TRAIL OF SINGAPORE'S SECRETIVE

UNCLAS SECTION 01 OF 04 SINGAPORE 000588

STATE PASS USTR
TREASURY FOR RAND, CBERRY

SENSITIVE

SIPDIS

E.O. 12958: N/A
TAGS: EFIN EINV ECON ECIN ETRD SN

SUBJECT: FOLLOWING THE MONEY TRAIL OF SINGAPORE'S SECRETIVE
SOVEREIGN WEALTH FUNDS

REF: (A) SINGAPORE 355, (B) SINGAPORE 80


1. (SBU) Summary: Despite a portfolio estimated at more
than $300 billion, the funding sources and uses of
Singapore's two sovereign wealth funds (SWF) are shrouded in
secrecy and not well understood by the Singapore public or
most analysts. SWF funds come from three sources: the
government's regularly large fiscal surpluses, mandatory
individual retirement savings, and -- to a much lesser extent
-- excess foreign exchange reserves. The two SWFs, Temasek
Holdings and the Government of Singapore Investment
Corporation (GIC),invest these funds and return an
undisclosed portion of the investment earnings to the general
budget to fund ongoing fiscal expenditure. The SWFs retain
the majority of their investment earnings, which have earned
returns significantly higher than the government has paid out
as a return on its population's mandatory savings. End
Summary.

Deliberate lack of transparency
--------------


2. (SBU) Comment: Tracking the money of Singapore's SWFs is a
long and arduous effort as each institution involved can only
describe its small part in the process. Few people in
Singapore (and likely no one outside of government) know the
full details of how funds are transferred in and out of the
SWFs or how decisions are made about how much to transfer.
This compartmentalized structure has kept the general public
in the dark about how much money the GOS has saved on the
public's behalf and how well it has been invested. Details
of investments are released only sporadically, but have
demonstrated strong returns over the years. The current
crisis has raised concerns that GIC and Temasek will not be
able to continue earning similarly high returns without
taking excessive risks. With limited transparency, it
remains impossible for outsiders to assess the SWFs risk-
return tradeoffs. Moreover, Singaporeans are privately
questioning why the SWFs earn much higher rates than the
government pays its citizens as a return on the mandatory
retirement savings accounts which fund the SWFs. End
comment.

Information on Singapore's Large Nest Egg Closely Held
--------------


3. (U) GIC and Temasek Holdings, Singapore's two SWFs,
manage an estimated US$300 billion for the GOS, making them
among the largest SWFs in the world (see table below).
Temasek's portfolio stood at $85 billion at the end of
November 2008. GIC does not disclose the size of its fund,
but private sector analysts estimate the value of its
portfolio at around $220 billion. These estimates include
some but not all of the losses incurred since the global
financial crisis began last fall.

Sovereign Wealth Funds
--------------
(as at end 2008)

Name Assets ($ billion)
-------------- --------------

Abu Dhabi Investment Authority 850
Saudi Arabia General Investment
Authority 431
China SAFE Investment Company 311
Norway State Fund 305
Kuwait Investment Authority 228
Government of Singapore Investment
Corporation (GIC) 220
Russian Reserve Fund 137
Temasek Holdings 85

--------------
Source: Preqin and SWF Wealth Institute, March 2009


4. (U) Mystery also surrounds the sources of the funds that

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the SWFs manage. Temasek received its initial funding
through an in-kind injection of S$354 million (roughly $153
million at then prevailing exchange rates) worth of shares in
domestic government-owned companies in 1974. Later, Temasek
moved beyond being just a holding company for government
shares to become a commercial investment house, owning the
assets it manages with the Ministry of Finance as its sole
shareholder. In contrast, the GIC was established in 1981 to
manage Singapore's investments outside the country. GIC
manages but does not own its funds and the GOS retains direct
ownership and oversight of its assets.


5. (SBU) While technically the MoF sets SWF policy for the
GOS and the President is the constitutionally-appointed
guardian of Singapore's fiscal reserves, it is unclear how
they work in practice with the SWFs' high-powered boards.
GIC's 16-person board is led by Minister Mentor Lee Kuan Yew
(Chairman),PM Lee Hsien Loong (Deputy Chairman),and former
Deputy PM Tony Tan (Deputy Chairman and Executive Director),
while Minister of Finance Tharman Shanmugaratnam is one of
thirteen other directors including several very prominent
businessmen and three foreigners. Temasek's nine-person
board is led by Suppiah Dhanabalan (Chairman),who has a long
career of Cabinet and state-owned enterprise (SOE)
appointments, PM Lee's wife Ho Ching (Deputy Chairman and CEO
until October 2009),and prominent businessman Kwa Chong Seng
(Deputy Chairman),and includes six other directors,
including two foreigners. One of them, American Charles
"Chip" Goodyear, has been designated publicly as Ho Ching's
successor as CEO, effective in October.

Fiscal surpluses feed the SWFs
--------------


6. (SBU) The SWFs source new funds to invest from
Singapore's private and government savings. Singapore has
one of the highest savings rates in the world, with a gross
savings ratio of 47.6 percent of GDP in 2008. This high
savings rate can be attributed both to the conservative
fiscal policies of the GOS and the mandatory contributions to
Singapore's pension fund scheme.


7. (SBU) The GOS has chalked up budget surpluses year after
year for close to two decades. According to CIMB-GK
Research, the consolidated budget surplus, which includes
land and other asset sales, and various vehicle-related
revenue, was about S$20 billion in calendar year 2008, while
it was S$30 billion and S$21 billion in 2007 and 2006,
respectively.

Mandatory Retirement Savings End up in SWFs
--------------


8. (SBU) Singapore's Central Provident Fund (CPF) has also
built up national savings by requiring all citizens and
permanent residents (about three-fourths of the labor force)
to contribute 20 percent of their salaries, and their
employers to contribute a further 15 percent of salaries, to
retirement individual accounts at the CPF. The CPF pools the
individual funds and invests in non-marketable "Special
Government Securities" (SGS),issued by the Monetary
Authority of Singapore (MAS),Singapore's central bank, on
behalf of the government. These SGSs pay the exact amount
that the CPF guarantees on individuals' CPF balances
(currently between 2.5 percent to 4.0 percent). MAS
transfers the funds raised through the sale of SGSs to the
GOS general account where they are mingled with the
government's overall fiscal resources. As of the end of
2008, the total amount of SGS held by the GOS was S$141.3
billion (around US$100 billion),according to a UBS report.


9. (SBU) Once the GOS determines funds in the government's
general account (whether from budget, non-budget or SGS
sales) are "excess fiscal reserves," they are transferred to
one of the SWFs to invest. GIC is usually the recipient,
since in recent years, Temasek has only occasionally received
new cash infusions, the last time being S$10 billion in April

2007. (Most of the growth in Temasek's asset size has come

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from retained earnings and sales of equity stakes in
companies in its portfolio.) Before transferring funds to
GIC, MAS converts the Singapore dollar-denominated savings
into foreign currency, so as to not affect the exchange rate
or monetary policy significantly. (Singapore uses exchange
rates, rather than interest rates, as its preferred monetary
policy instrument. See Reftel A.) The GOS does not disclose
how much fiscal surplus is transferred to the SWFs each year.


10. (SBU) Ministry of Finance and GIC officials confirmed to
Finatt that GIC also manages a small share of Singapore's
large foreign exchange reserves (valued at $170 billion in
April 2009). However, the vast majority of the funds that
GIC manages managed are the product of fiscal surpluses and
CPF funds, rather than the result of foreign exchange
reserves accumulated due to balance of payments surpluses.

Returns from SWFs Fund Budget
--------------


11. (U) Under Singapore's Constitution, fiscal reserves
accumulated by the end of a government's term in office
(typically five years) are automatically locked in as past
fiscal reserves and can be used by the government only with
the concurrence of the President. To prevent a hypothetical
profligate government from needlessly fritting away reserves,
incoming governments do not have access to the cash and
property managed by Temasek and GIC. This January, Singapore
asked for the President's approval to tap the principal of
its SWFs for the first time. To support an expansionary
budget to battle the recession, the GOS withdrew some S$3.3
billion to help pay for temporary counter-cyclical fiscal
programs.(See Reftel B).


12. (U) Although the principal amount has been virtually
untouched over the years, the SWF investment returns can be
partially transferred to the budget. Since 2001, the
government allowed transfers of SWF returns of up to 50
percent of all interest and dividends, termed net investment
income (NII). This gives the government flexibility in case
of any sudden strengthening or deterioration in government
revenue to manage how much in SWF earnings can be used for
budget purposes. However, the government does not have to
disclose exactly what percentage of the NII is brought on
budget, so it is not possible to determine the SWFs overall
returns in any given year. In October 2008, to free up
additional resources to fund increases in fiscal expenditure,
the GOS expanded the definition of investment returns to
include estimated capital gains based on long term expected
real returns for the next 20 years, termed net investment
returns (NIR). The GOS did not disclose the technique for
determining the expected capital gain return. The NIR
definition will apply to GIC while Temasek will continue to
use the NII arrangement which does not include capital gains.
The up to 50 percent cap will continue to apply to both
entities. Citigroup estimates that this change could add
S$5-6 billion annually for the budget, a sum as it would
nearly equal the entire budget surplus for FY2007.

Good returns not flowing to Singaporean savers
-------------- -


13. (SBU) The final source of funds for the SWFs is retained
investment earnings. Over the 20 years to March 2008, GIC
earned an overall 5.8 percent nominal annualized return,
according to its first ever annual report issued last year.
Temasek earned an 18 percent nominal annualized return from
its inception in 1974 to March 2008, according to its 2008
annual report. SWFs channel less than half of returns back
to the budget, retaining and reinvesting the majority of
their earnings. Many Singaporeans privately complain that
the individual savers in the CPF earn substantially less
return on their mandatory savings account (currently between
2.5 and 4 percent) than the SWFs make managing that money.
In essence, the GOS keeps the difference between what the
SWFs earn and what the GOS owes on the SGS held by the CPF.
The government argues that it pays less on the CPF because it
is "government guaranteed" and "risk free", while the SWFs

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undertake higher risk in their portfolio. Any claim about
risk levels at the SWFs is difficult to verify, however, due
to limited transparency on the SWF portfolios and leverage
ratios.

SHIELDS