Sammyboy RSS Feed
01-06-2014, 10:10 PM
An honorable member of the Coffee Shop Has Just Posted the Following:
Source: TR EMERITUS (http://www.tremeritus.com/2014/06/01/mofs-official-reply-raises-even-more-questions/)
MOF’s official reply raises more questions
June 1st, 2014
http://www.tremeritus.org/wp-content/uploads/2011/07/logo_MOF.png
MOF’s Official Reply on CPF: Still Smoke and Mirrors
Despite the obfuscation and contradictions in the limited public information, the writer was not off-target by much in his articles and comments on the subject of CPF and Reserves. But this revised statement from the Ministry of Finance is no full and frank statement (‘MOF official reply on CPF monies & interest rates (http://www.tremeritus.com/2014/05/31/mof-official-reply-on-cpf-monies-its-interest-rates/)‘); the only issue cleared up is that GIC is the manager of CPF monies. It is still all smoke and mirrors.
A word on “risk free” as preamble
The MOF statement makes reference to CPF assets as ”risk free”. The meaning does not exist. The term is actually the “risk free rate” – a theoretical rate of return attributed to an investment with zero risk. In practice, the risk free rate does not exist because even the safest investments carry risks which will be described here. The theoretical rate is meant for analysing the relative merits of investments. The closest approximation to the risk free rate is the yield of the government bond of a stable country. Since CPF invests in Special Singapore Government Securities, it is assumed CPF is risk free. But bear in mind “risk free” has no meaning outside the term risk free rate which by itself is entirely theoretical.
MOF: “The OA is a liquid account. The monies in the OA can be withdrawn at any time for housing. Many members withdraw substantial amounts from their OA.”
A liquid account or a liquid asset is one in which one can realise one’s cash at any time, without prejudice and without restriction. Just because it can be used for housing does not make the OA a liquid account by any definition. The Liquidity Hypothesis and the Liquidity Preference Theory tell us that the lesser the ability to liquidate an account or investment, the higher the liquidity risk. The longer one waits for one’s investment to be repaid, the higher the returns to compensate for the higher liquidity risk. As such, the OA rates should be at least similar to the 4% applied to SMRA.
MOF: “The interest rate on the SMRA aim to be equivalent to what a 30-year SGS would earn, as 30 years is the typical duration for which SMRA monies are held. As 30-year SGS did not exist when the Government made changes to the interest rate structure in 2007, SMRA rates were pegged to the yield of 10-year SGS plus 1%.”
CPF cannot be equivalent to 30-year SGS because as the MOF said, the SSGS are non-tradable. An investor in SGS can sell his bonds at any time without restriction and will do so in the face of rising inflation to protect his investment. But SSGS cannot be sold, leaving CPF dependent on the government to raise rates which it has not done for a long time. But the Net Investment Return Contribution framework gives the Government an inherent bias to peg interest rates low because low CPF rates mean less of GIC returns are used to pay CPF, leaving more money for spending. Putting all this together: since one cannot sell SSGS even when inflation is rising, one is stuck with it for a very long period and finally one’s returns to protect against inflation is decided by a government biased toward low rates, making CPF a high risk investment. CPF ought to have a high return to compensate for the risk.
Why is the yield on SGS, on which CPF rates are pegged, so low in the first place? The Constitution is written to forbid deficit spending. The government has run budget surpluses year after year. The MAS’s exchange rate policy, dictated by the government, produces low interest rates by importing monetary conditions from the West even with the Singapore economy booming and inflation rising from the various pro-business policies. Indeed these financially repressive government policies generate the conditions that cause the markets to price bond yields so low, they are barely above inflation.
MOF: “The OA and SMRA currently earn interest of 2.5% and 4% respectively. However, many members in fact earn higher interest rates on their OA and SMRA accounts, because they benefit from the extra 1% on the first $60,000 of CPF balances. Many earn 3.5% on their OA account. The majority of SMRA balances earn 5%.”
The writer finds this statement puzzling when he checks the last CPF annual financial statement in 2012
Income from Investment: $8,459,150,000
Members’ Accounts: $230,157,671,000
That is an average rate of return of just 3.67% nowhere near the rates of return given in the MOF statement. The writer has asserted in previous articles that the average rate of return for all accounts is barely above inflation over the past 7-10 years compared to bond yields of 1.5-2% above inflation in the West and even 1.2% in Japan over the same period.
Juiciest returns left to the government?
In the writer’s opinion, having GIC manage CPF monies while the government is the sole shareholder of Temasek is exposing CPF monies to the vagaries of the global markets while the government keeps the far more valuable entity to itself. The comparative returns between GIC and Temasek are here given:
GICTemasek10-year return5.3% (adjusted from US$ to S$)13%
30% of Temasek’s portfolio comprises GLCs which return 16%pa over the same period compared to 13%pa for the MSCI Singapore index. This should be no surprise due to the dominant position of the GLCs in Singapore; hence they are most valuable assets.
Questions left unanswered – Where do the budget surpluses go?
The MOF has still refused to divulge the total reserves in GIC. MAS’ balance sheet is revealed to be $320b, Temasek $215b and if GIC manages only CPF monies that would be $260b. Singapore’s total reserves should be S$795b. The writer was wrong by $100b in his previous estimates or was he?
The Ministry of Finance states that Temasek manages its own assets, which have accrued mainly from divestment proceeds from the sale of its investments and re-investments of dividends but where are the Government’s budget surpluses? Did the historical transfer of GLCs at nominal prices comprise its entire value of $215b or has Temasek been provided with periodic capital injections from budget surpluses? Are the Government surpluses in MAS? But the MAS balance sheet is $320b, compared to IMF report of $393b ($490b in today’s money) in budget surplus dating back to 1990. Are the balances in GIC?
The MOF has not explained how interest is paid to CPF if GIC makes no money, a distinct possibility since its investment report shows the medium term 5 year return is just 2.6%pa in USD terms or 0.6% in SGD terms, very poor indeed. Will CPF rates be reduced or foregone since rates are decided by the government? Reader should dwell on this question in relationship to CPF being “risk free”.
Conclusion
The MOF may have been compelled to issue the reply to defuse the furore over CPF after the bull’s eye was trained on it by the Prime Minister’s libel suit against Roy Ngerng. Since clarity and transparency seem not to be its remit, the MOF raises far more questions than it has answered. CPF and our reserves remain in a dark abyss.
Chris K
* The writer holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.
Click here to view the whole thread at www.sammyboy.com (http://www.singsupplies.com/showthread.php?183037-MOF’s-Official-Reply-on-CPF-Still-Smoke-and-Mirrors&goto=newpost).
Source: TR EMERITUS (http://www.tremeritus.com/2014/06/01/mofs-official-reply-raises-even-more-questions/)
MOF’s official reply raises more questions
June 1st, 2014
http://www.tremeritus.org/wp-content/uploads/2011/07/logo_MOF.png
MOF’s Official Reply on CPF: Still Smoke and Mirrors
Despite the obfuscation and contradictions in the limited public information, the writer was not off-target by much in his articles and comments on the subject of CPF and Reserves. But this revised statement from the Ministry of Finance is no full and frank statement (‘MOF official reply on CPF monies & interest rates (http://www.tremeritus.com/2014/05/31/mof-official-reply-on-cpf-monies-its-interest-rates/)‘); the only issue cleared up is that GIC is the manager of CPF monies. It is still all smoke and mirrors.
A word on “risk free” as preamble
The MOF statement makes reference to CPF assets as ”risk free”. The meaning does not exist. The term is actually the “risk free rate” – a theoretical rate of return attributed to an investment with zero risk. In practice, the risk free rate does not exist because even the safest investments carry risks which will be described here. The theoretical rate is meant for analysing the relative merits of investments. The closest approximation to the risk free rate is the yield of the government bond of a stable country. Since CPF invests in Special Singapore Government Securities, it is assumed CPF is risk free. But bear in mind “risk free” has no meaning outside the term risk free rate which by itself is entirely theoretical.
MOF: “The OA is a liquid account. The monies in the OA can be withdrawn at any time for housing. Many members withdraw substantial amounts from their OA.”
A liquid account or a liquid asset is one in which one can realise one’s cash at any time, without prejudice and without restriction. Just because it can be used for housing does not make the OA a liquid account by any definition. The Liquidity Hypothesis and the Liquidity Preference Theory tell us that the lesser the ability to liquidate an account or investment, the higher the liquidity risk. The longer one waits for one’s investment to be repaid, the higher the returns to compensate for the higher liquidity risk. As such, the OA rates should be at least similar to the 4% applied to SMRA.
MOF: “The interest rate on the SMRA aim to be equivalent to what a 30-year SGS would earn, as 30 years is the typical duration for which SMRA monies are held. As 30-year SGS did not exist when the Government made changes to the interest rate structure in 2007, SMRA rates were pegged to the yield of 10-year SGS plus 1%.”
CPF cannot be equivalent to 30-year SGS because as the MOF said, the SSGS are non-tradable. An investor in SGS can sell his bonds at any time without restriction and will do so in the face of rising inflation to protect his investment. But SSGS cannot be sold, leaving CPF dependent on the government to raise rates which it has not done for a long time. But the Net Investment Return Contribution framework gives the Government an inherent bias to peg interest rates low because low CPF rates mean less of GIC returns are used to pay CPF, leaving more money for spending. Putting all this together: since one cannot sell SSGS even when inflation is rising, one is stuck with it for a very long period and finally one’s returns to protect against inflation is decided by a government biased toward low rates, making CPF a high risk investment. CPF ought to have a high return to compensate for the risk.
Why is the yield on SGS, on which CPF rates are pegged, so low in the first place? The Constitution is written to forbid deficit spending. The government has run budget surpluses year after year. The MAS’s exchange rate policy, dictated by the government, produces low interest rates by importing monetary conditions from the West even with the Singapore economy booming and inflation rising from the various pro-business policies. Indeed these financially repressive government policies generate the conditions that cause the markets to price bond yields so low, they are barely above inflation.
MOF: “The OA and SMRA currently earn interest of 2.5% and 4% respectively. However, many members in fact earn higher interest rates on their OA and SMRA accounts, because they benefit from the extra 1% on the first $60,000 of CPF balances. Many earn 3.5% on their OA account. The majority of SMRA balances earn 5%.”
The writer finds this statement puzzling when he checks the last CPF annual financial statement in 2012
Income from Investment: $8,459,150,000
Members’ Accounts: $230,157,671,000
That is an average rate of return of just 3.67% nowhere near the rates of return given in the MOF statement. The writer has asserted in previous articles that the average rate of return for all accounts is barely above inflation over the past 7-10 years compared to bond yields of 1.5-2% above inflation in the West and even 1.2% in Japan over the same period.
Juiciest returns left to the government?
In the writer’s opinion, having GIC manage CPF monies while the government is the sole shareholder of Temasek is exposing CPF monies to the vagaries of the global markets while the government keeps the far more valuable entity to itself. The comparative returns between GIC and Temasek are here given:
GICTemasek10-year return5.3% (adjusted from US$ to S$)13%
30% of Temasek’s portfolio comprises GLCs which return 16%pa over the same period compared to 13%pa for the MSCI Singapore index. This should be no surprise due to the dominant position of the GLCs in Singapore; hence they are most valuable assets.
Questions left unanswered – Where do the budget surpluses go?
The MOF has still refused to divulge the total reserves in GIC. MAS’ balance sheet is revealed to be $320b, Temasek $215b and if GIC manages only CPF monies that would be $260b. Singapore’s total reserves should be S$795b. The writer was wrong by $100b in his previous estimates or was he?
The Ministry of Finance states that Temasek manages its own assets, which have accrued mainly from divestment proceeds from the sale of its investments and re-investments of dividends but where are the Government’s budget surpluses? Did the historical transfer of GLCs at nominal prices comprise its entire value of $215b or has Temasek been provided with periodic capital injections from budget surpluses? Are the Government surpluses in MAS? But the MAS balance sheet is $320b, compared to IMF report of $393b ($490b in today’s money) in budget surplus dating back to 1990. Are the balances in GIC?
The MOF has not explained how interest is paid to CPF if GIC makes no money, a distinct possibility since its investment report shows the medium term 5 year return is just 2.6%pa in USD terms or 0.6% in SGD terms, very poor indeed. Will CPF rates be reduced or foregone since rates are decided by the government? Reader should dwell on this question in relationship to CPF being “risk free”.
Conclusion
The MOF may have been compelled to issue the reply to defuse the furore over CPF after the bull’s eye was trained on it by the Prime Minister’s libel suit against Roy Ngerng. Since clarity and transparency seem not to be its remit, the MOF raises far more questions than it has answered. CPF and our reserves remain in a dark abyss.
Chris K
* The writer holds a senior position in a global financial centre bigger than Singapore. He writes mostly on economic and financial matters to highlight misconceptions of economic policy in Singapore.
Click here to view the whole thread at www.sammyboy.com (http://www.singsupplies.com/showthread.php?183037-MOF’s-Official-Reply-on-CPF-Still-Smoke-and-Mirrors&goto=newpost).