THREE BIG LIES ABOUT THE NATIONAL RESERVES THAT YOU SHOULD KNOW ABOUT

"The national reserves must not be disclosed. If this is made public, the SGD can be subject to attacks by currency speculators" is the mantra of the Singapore government. Enough of this nonsense.

Speculative attacks happen during a currency crisis. A currency crisis is a consequence of chronic balance of payments deficits (it's also called a balance of payments crisis). This is how it goes. Due to trade imbalances ie a chronic deficit, the domestic currency of the country is weakened. Its central bank either refuses or is unable to allow the exchange rate to fall. To maintain the rate, the central bank has to keep buying its domestic currency. It continues the buying policy till it runs out of foreign reserves. This leads to a financial crisis as the value of foreign debt rises in relation to the weakened domestic currency. Foreign currency liquidity freezes because no one's going to sell the foreign currency to you if the exchange rate is forcibly maintained at unrealistic levels. Eventually the central bank capitulates because no one can go against the market in the long run. It is forced to devalue the domestic currency to bring it back to equilibrium. This type of scenario happens when the market anticipates that domestic policies will not be adjusted sufficiently to devalue the domestic currency. So they attack the currency by selling (shorting it) at the unrealistic high rate controlled by the central bank. Sooner or later when the government is forced to devalue, speculators buy back the currency at lower rates and make a killing.

From the above scenario, you should already know of 2 things:

(1). First BIG LIE. Currency crisis happens when the exchange rate does not respond to market conditions. There is sufficient empirical evidence that such scenarios happen in cases of a pegged currency, ie the rate is fixed to some other currencies. In the case of Singapore, MAS manages on the basis of a floating rate, using an official band to control daily volatility only. Should chronic trade deficits force the rate down, MAS will loosen the band to allow the SGD to devalue. So the above illustrated currency crisis scenario won't happen in Singapore.

(2). Second BIG LIE. If the SGD is weakened and the MAS wants to cushion the devaluation, it is forced to intervene in the market to buy up as much of the domestic currency as possible. To do this, MAS makes use of its foreign reserves. Thus, the more forex reserves it holds, the stronger the MAS is to support the SGD. So here's the rub. Like all central banks in the world, the holdings of forex reserves of the MAS are all in the open for the world to see. It is currently about SGD427 billion. There is nothing secretive about it, and it has nothing to do with national reserves.

Currency speculators aren't watching your reserves. There are watching the market. If the market sees the currency as over-valued, they know sooner or later the central bank has to devalue. Just like a poker player, if he sees he has a winning hand, he continues raising the stakes. 

The Third BIG LIE is the increase in asset portfolio of the sovereign wealth funds. The numbers are impressive, but they don't explain how the growth happened. In 2022 Temasek portfolio value grew by S$22b to S$403b, GIC grew by S$280b. Asset growth can come in a number of ways:

Internal growth (earnings ploughed back into the business): This is well and good and a pat on the shoulders.
Currency translation : Not good. It suggests lack of hedging strategies which could have gone one way or the other way. I mentioned in a previous blog the MAS, as a central bank, has to take on market risks which was why they got hit with a S$8.7b revaluation loss in 2022. Unlike MAS, GIC and Temasek can make hedging strategies to minimise translation risks.
Valuation : Good picks or bad picks,  investing expertise or pure luck, we can't criticise from hindsight. CIO has to make a call. But generally, the last 2 decades have been good to investors who ride along with the massive liquidity pumped out by central banks all over which pushed markets to record heights. But what we should be concerned is the vast amount of holdings in unquoted equities, in both Temasek and GIC. The valuation is anybody's guess.
Capital injection : Any idiot could have increased portfolio value with fresh funds. This is not an insult but an aphorism.
Leverage (funded by more loans): This is not bad per se, but it means increased risks. Debts for operational purposes are fine. Temasek has often spoken of taking advantage of cheap funds to leverage and it is creeping into the realm of private equity fund management business. Are they investing savings, or running a private equity business? We would prefer hard-nosed risk-averse managers, not Wall Street cowboys.

Note that GIC and Temasek make annual contributions to the government of NIR (net income return) based on 50% of a computed 20-year annualised rate on their 'Net Relevant Assets', in basic terms, assets less debts. This means that in a given year, the NIRC (net income return contribution) has no relation to the actual profit or loss. In 2022, the NIRC was S$21.6b but it's not known how much came from GIC and how much from Temasek. We know MAS was unable to contribute due to its S$7.1b losses.

Read : An increase in the government's assets is not an increase in national reserves which is assets net of national debt, and Singapore has one of the highest national debt in the world.

Where did Temasek's S$22b asset growth come from? :

- Was it from its operations? Temasek's net profits in 2022 was S$10.6b. After deducting it's share of the NIRC (how much ???), it did not generate much to increase the asset portfolio.
- Did it come from currency translation? It's porfolio geographical distribution showed Singapore 27%, US 21%, but the currency distribution showed SGD 49%, USD 34%, HKD 7%. This shows there were currency hedges. USD appreciated 1% and HKD gained 0.3% over SGD. That means translation gains were not significant. Although CNY gained 3.7% over SGD and Temasek had substantial Chinese assets, these are in American Depository Receipts, which are basically USD assets.
- Did asset growth come from debts? Temasek had been taking on debt since 2014, rising from S$9b to S$90b as at 31 Mar 2022. In 2022 debt increased by S$8.5b.
- Did it come from capital injection? There was no fresh capital injection, in fact equity decreased by S$4.6b in 2022.

So where did the increase in S$22b in asset value come from? It came from a mix of operating gains (???), translation gains (???), and debt (S$8.5b) -- shared more or less equally.

Where did GIC's S$280b asset growth come from?:

- Did it come from profits? Who the heck knows. Checking out GIC performance is like looking into a black hole. We can only speculate. I'm betting my right arm GIC profits for 2022 wasn't anything to crow about for the simple reason that if it were so, the state media would have celebrated the current year ROI instead of hiding behind a 20 year annualised rate and about returns beating inflation rate.
- Did it come from currency translation? We are looking at a black hole. But this much I can say. In terms of currencies, GIC has 2 sources of funds. One is from forex reserves from MAS. It is likely that these funds would be invested in the relevant countries so there is no asset-liability mismatch, no translation losses. Two is about S$1 trillion of SGD debt + land sales + budget surpluses which are subject to translation risks if invested overseas without a hedging strategy.
- Did it come from valuation? Again, no way to tell. But note that GIC had 37% portfolio in bonds and cash. The bonds should be bleeding heavy losses in the current rising interest rate scenario and was a significant dampener on profits.
- Did it come from injection of fresh funds? Aha, this, I have plenty to talk about.

GIC gained a fabulous S$280b in portfolio value in 2022. PAP uno numero fan Singapore resident Polish blogger Critical Spectator could not help but to write with glee. His Facebook  echo chamber of fawning supporters and opposition haters asked with unabashed sarcasm where are the critics now?  Sadly lacking is the independent brain power to stop and ask where did the increase come from.

Well, a substantial part of the increase came from fresh funds injected :
- S$108b from net increase in securities issued (issuance less redemptions)
- S$75b new RMGS issued (for MAS forex reserves transferred to GIC)
- S$13b from sales of land.

So S$196b fresh funds were provided to GIC to invest., of which S$183b was from government debt. And what did I say about capital injection? Any idiot can increase asset portfolio - it's not an insult but an aphorism.

The more important question to ask is where did the increase of the balance of S$84b (S$280b-S$196b) of GIC's asset increase come from? I have no idea and nobody's talking.

Don't we all know a narrative can be spin in several ways. GIC and Temasek squirmed in word salad instead of telling it as it is. GIC lectured about high falutin 'Rolling 20 Year Annualised Rate Of Return' that cannot be measured against anything. They will not plain speak about current year ROI. Temasek talked about their participation in Singapore Airlines' mandatory convertible bonds issue "enabling the airline to strengthen its balance sheet and to position it for the resumption of global travel" and Sembcorp Marine's rights issues "which strengthened its balance sheet and liquidity position, accelerating its strategic pivot to high-growth renewable and clean energy segments" when the whole world knows Santa Claus was bailing out two troubled companies.

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