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06-03-2015, 12:40 AM
An honorable member of the Coffee Shop Has Just Posted the Following:
GOVT’S SPENDING GAP: NOW YOU SEE IT, THEN YOU WON’T
Post date:
5 Mar 2015 - 5:03pm
http://therealsingapore.com/sites/default/files/styles/large/public/field/image/pedestrians-walk-down-a_0_0.jpg?itok=7psp-VWR (http://therealsingapore.com/sites/default/files/field/image/pedestrians-walk-down-a_0_0.jpg)
Now that we know the government has a $6.67b shortfall in its budget, isn’t it fortuitous it is announced effective from 2017 the application of the expected long term rate of return rule to Temasek’s share of the Net Investment Return Contribution which can make that fiscal shortfall disappear, as if by magic?
Temasek delivered only dividends
First, the writer is ticked off by the Ministry of Finance explanation of the NIRC on its website,
“comprised up to 50% of the net investment returns on the net assets managed by MAS and GIC and up to 50% of the investment income from the remaining assets which includes Temasek”
In the disclosure following the announcement of the changes, this is now revealed to be incorrect. Temasek had delivered its declared dividend which was far less than 50% of its net income. Moody’s October 2014 credit opinion reported that Temasek paid a dividend of $2.8b to the government, far less than $5.3b if the MOF was correct. So the MOF’s communications department did not know what it was communicating.
What is Real Returns?
The actual or nominal returns comprised dividends, interest and valuation of its assets minus investment costs such as operational costs and management expenses. Real returns is a calculated rate of return in which the inflation rate is subtracted from the actual or nominal return, e.g. GIC’s S$ nominal return may be 4%, its real rate of return is 2% assuming 2% inflation rate.
Using the real rate of return on GIC and MAS is economically sound and follow best practice such as Norway’s GPF. It permit spending while compensating for the effect of inflation. The actual question is a political one: is the 50% cap necessary given the already massive size of the reserves? In comparison, there is no cap on the GPF.
The Spending Gap’s Disappearing Act
How much will Temasek deliver under the new rules? Based on its current $223b portfolio, the amount of NIRC derived per Temasek’s reported rates of return calculated below
PeriodReported Actual ReturnsReal Rate of Return (2% inflation rate)Temasek’s share of NIRCIncrease over 2014Inception from 197416%14%15.6b+12.8b20 years6%4% 4.46b+ 1.66b10 years9%7% 7.8b+ 5.0b
We do not yet know Temasek’s dividend contribution to the 2015 NIRC of $8.94b but it appears the budget shortfall can only be closed by basing the expected real return on the inception rate.
Spending Past Reserves?
If the inception rate of return is used, then it must be remembered that the GLCs were transferred to Temasek at nominal prices, i.e. well below their actual market value. Therefore, part of the inception rate of return of 16% was unearned by Temasek, representing the difference in the GLCs’ nominal transfer prices and market prices. In other words, it includes past reserves realised in the rate of return. If expected real return is based on the inception rate, is that therefore not spending past reserves? Can secrecy be justified in a potential breech of the constitution? Whatever the expected long term real return, it should now be of national interest.
The Trouble with Temasek
What is problematic with the change of rule from dividends to expected real return is that delivering dividends is delivering realised cash, i.e. dividends and interest earned by Temasek. Delivering returns is delivering not just dividends and interest but also the unrealised market value of assets.
In this Temasek differs from GIC and GPF as it holds huge bloc of shares exceeding 20% of a portfolio company’s market value up to 100%, a risk highlighted by its spat with S&P. It takes majority control or seek to have a major influence from risk concentration. However delivering returns means Temasek will require to sell down its holdings which affects its control over portfolio companies. This is not faced by GPF in particular since it does not acquire more than 10% of any company.
Mr. Tharman even admits:
“Temasek’s inclusion in the NIR framework was deferred in 2008. One reason was that there were no established methodologies for projecting the long-term expected real return on its portfolio. This is in light of Temasek’s investment approach of taking concentrated stakes and making direct investments.”
Since Temasek’s investment approach has not materially changed, why is there now an established methodology when previously there had been none? Is this more a leap in the dark made imperative by the budget shortfall?
Conclusion
The writer had always called for greater use of the reserves and such use of the reserves be ringfenced specifically for mandatory social entitlements such as a retirement pension or allowance to back up CPF, reduce citizens’ healthcare spending, childcare support etc. But, despite a 55% increase, total spending on social transfer is still below the NIRC.
Estimated Social Transfer for 2015NIRC provisioned in Budget 2015$7.15b$8.94b
However unlike mandatory social entitlements, few of these binds the government since most are one-off top-ups and rebates and transfers to endowment funds, all of which can be granted, withdrawn or in the latter not disbursed at the sole discretion of the ruling party.
Which means, if the rule change on Temasek and the tiny tax hike do not deliver enough revenues the government can still close the deficit simply by reversing social transfers, preferably right after the next general election. Or it can raise GST to piss off the masses. Or it can rein in elevated spending on defence and the world highest government and civil service salaries together with a more meaningful tax hike on the wealthy and the corporations.
Hurt the masses’ pockets or hurt their own? Easy options or Hard Truths for the PAP?
Chris K
*Chris is a retired executive director in the financial industry who had mostly worked in London and Tokyo. He writes opinions and commentaries mostly on economic and financial matters
Click here to view the whole thread at www.sammyboy.com (http://www.sammyboy.com/showthread.php?202015-Govt’s-spending-gap-Now-you-see-it-then-you-won’t&goto=newpost).
GOVT’S SPENDING GAP: NOW YOU SEE IT, THEN YOU WON’T
Post date:
5 Mar 2015 - 5:03pm
http://therealsingapore.com/sites/default/files/styles/large/public/field/image/pedestrians-walk-down-a_0_0.jpg?itok=7psp-VWR (http://therealsingapore.com/sites/default/files/field/image/pedestrians-walk-down-a_0_0.jpg)
Now that we know the government has a $6.67b shortfall in its budget, isn’t it fortuitous it is announced effective from 2017 the application of the expected long term rate of return rule to Temasek’s share of the Net Investment Return Contribution which can make that fiscal shortfall disappear, as if by magic?
Temasek delivered only dividends
First, the writer is ticked off by the Ministry of Finance explanation of the NIRC on its website,
“comprised up to 50% of the net investment returns on the net assets managed by MAS and GIC and up to 50% of the investment income from the remaining assets which includes Temasek”
In the disclosure following the announcement of the changes, this is now revealed to be incorrect. Temasek had delivered its declared dividend which was far less than 50% of its net income. Moody’s October 2014 credit opinion reported that Temasek paid a dividend of $2.8b to the government, far less than $5.3b if the MOF was correct. So the MOF’s communications department did not know what it was communicating.
What is Real Returns?
The actual or nominal returns comprised dividends, interest and valuation of its assets minus investment costs such as operational costs and management expenses. Real returns is a calculated rate of return in which the inflation rate is subtracted from the actual or nominal return, e.g. GIC’s S$ nominal return may be 4%, its real rate of return is 2% assuming 2% inflation rate.
Using the real rate of return on GIC and MAS is economically sound and follow best practice such as Norway’s GPF. It permit spending while compensating for the effect of inflation. The actual question is a political one: is the 50% cap necessary given the already massive size of the reserves? In comparison, there is no cap on the GPF.
The Spending Gap’s Disappearing Act
How much will Temasek deliver under the new rules? Based on its current $223b portfolio, the amount of NIRC derived per Temasek’s reported rates of return calculated below
PeriodReported Actual ReturnsReal Rate of Return (2% inflation rate)Temasek’s share of NIRCIncrease over 2014Inception from 197416%14%15.6b+12.8b20 years6%4% 4.46b+ 1.66b10 years9%7% 7.8b+ 5.0b
We do not yet know Temasek’s dividend contribution to the 2015 NIRC of $8.94b but it appears the budget shortfall can only be closed by basing the expected real return on the inception rate.
Spending Past Reserves?
If the inception rate of return is used, then it must be remembered that the GLCs were transferred to Temasek at nominal prices, i.e. well below their actual market value. Therefore, part of the inception rate of return of 16% was unearned by Temasek, representing the difference in the GLCs’ nominal transfer prices and market prices. In other words, it includes past reserves realised in the rate of return. If expected real return is based on the inception rate, is that therefore not spending past reserves? Can secrecy be justified in a potential breech of the constitution? Whatever the expected long term real return, it should now be of national interest.
The Trouble with Temasek
What is problematic with the change of rule from dividends to expected real return is that delivering dividends is delivering realised cash, i.e. dividends and interest earned by Temasek. Delivering returns is delivering not just dividends and interest but also the unrealised market value of assets.
In this Temasek differs from GIC and GPF as it holds huge bloc of shares exceeding 20% of a portfolio company’s market value up to 100%, a risk highlighted by its spat with S&P. It takes majority control or seek to have a major influence from risk concentration. However delivering returns means Temasek will require to sell down its holdings which affects its control over portfolio companies. This is not faced by GPF in particular since it does not acquire more than 10% of any company.
Mr. Tharman even admits:
“Temasek’s inclusion in the NIR framework was deferred in 2008. One reason was that there were no established methodologies for projecting the long-term expected real return on its portfolio. This is in light of Temasek’s investment approach of taking concentrated stakes and making direct investments.”
Since Temasek’s investment approach has not materially changed, why is there now an established methodology when previously there had been none? Is this more a leap in the dark made imperative by the budget shortfall?
Conclusion
The writer had always called for greater use of the reserves and such use of the reserves be ringfenced specifically for mandatory social entitlements such as a retirement pension or allowance to back up CPF, reduce citizens’ healthcare spending, childcare support etc. But, despite a 55% increase, total spending on social transfer is still below the NIRC.
Estimated Social Transfer for 2015NIRC provisioned in Budget 2015$7.15b$8.94b
However unlike mandatory social entitlements, few of these binds the government since most are one-off top-ups and rebates and transfers to endowment funds, all of which can be granted, withdrawn or in the latter not disbursed at the sole discretion of the ruling party.
Which means, if the rule change on Temasek and the tiny tax hike do not deliver enough revenues the government can still close the deficit simply by reversing social transfers, preferably right after the next general election. Or it can raise GST to piss off the masses. Or it can rein in elevated spending on defence and the world highest government and civil service salaries together with a more meaningful tax hike on the wealthy and the corporations.
Hurt the masses’ pockets or hurt their own? Easy options or Hard Truths for the PAP?
Chris K
*Chris is a retired executive director in the financial industry who had mostly worked in London and Tokyo. He writes opinions and commentaries mostly on economic and financial matters
Click here to view the whole thread at www.sammyboy.com (http://www.sammyboy.com/showthread.php?202015-Govt’s-spending-gap-Now-you-see-it-then-you-won’t&goto=newpost).