The west dealt with its financial crisis by basically swapping treasuries for non performing loans. It allowed a wholesale transfer of problem debt to the public (taxpayers) balance sheet, funded by the issue of government debt which only the Fed (and some hostage buyers like commercial banks subject to enhanced capitalization requirements) were willing to buy.

China, unfortunately is less experienced in the management of bailouts. They have left problem loans on private balance sheets and tried instead to reclassify these loans as anything but non performing.

Private balance sheets are open to scrutiny or at the least, question. China has instead tried to fund the private balance sheets to allow them to hold these NPLs instead of simply buying them out at par.

The western solution is more effective because it removes the NPLs from prying eyes of private investors and puts them on the Federal balance sheet. Taxpayers can yell all they want but they have no sway over the government like investors might on a corporate entity.

When markets rise, the media quickly approach bulls to interview and feature. When markets fall, they seek bears.

In June, July this year all eyes were on Greece. Every bit of news about Greece was analyzed and scrutinized and markets reacted to these developments as if Greece was larger than the 2% it is of Eurozone output. Soon, the media and markets tired of Greece and despite lack of a credible and durable agreement, Greece was deemed problem solved and off the front page. There remains no credible solution to the Greek’s solvency or liquidity, only a temporary reprieve, if that. The apparent solution features more austerity than the Greek economy can withstand, than the electorate had elected Syriza to negotiate for, and Syriza in its entirety stood for. It threatens to fracture Syriza and result in new elections. The IMF has also recognized that the current plan is commercially not viable. Beware, once media and markets have tired of China, and struggle to find or manufacture a fresh crisis, Greece may be back on the table, despite its de minimis impact on Europe and the world.

Earlier this week the PBOC changed the way the Yuan exchange rate was determined by admitting prior closing prices (which introduce serial correlation to add stationarity to the price generation process), demand and supply and the price movements of other major currencies (which introduce market forces), into the way market makers submit their contributions to the fixing. One of the corollaries, probably a bullet point three and not bullet point one, was that the current fixing would be 2% lower, which is inside the bid offer at your local Bureau de Change. Markets and media tire of details and content but instead focus on the easy bullet point: PBOC devalues RMB 2%, in flashing red LED. News is amplified in transmission and soon RMB is falling a full 5% by day 2.

With a slowing economy in China, RMB faces natural weakness. The prior stability masked central bank operations to shore up the currency, not weaken it as some US politicians believe.

– In an open economy, weak growth weakens currency improving terms of trade in a somewhat self-correcting mechanism. China’s trade numbers have been weak.

-China is intelligent enough to realize that the structure of the world economy today renders competitive devaluation less effective on exports.

-China was probably responding to the IMF’s requirement for a more market determined exchange rate for including RMB in the SDR, something that will be considered in October.

-Now some speculation; either China is aware or believes that the Fed will raise interest rates in September and seeks to insulate the economy from potential acute USD strength dragging up RMB, or China did not factor this into their decision to loosen the reigns on the currency and the resultant relative strength of USD transfers probability of a rate hike from September to December.

-And finally something that we are sure we still do not know: what are the precise mechanics for the determination of the RMB reference exchange rate. We don’t know how many market makers there are and we don’t know what constitutes an outlier (which is excluded from the calculation) and how the previous day’s spot rate, demand and supply, and other major crosses feature in the calculation.

Trouble in paradise:

Singapore will never make international headlines but then you never know. What if the Fed r
aises rates in September, oil rebounds to 60, equity markets rise steadily and bonds recover? There might be little else for the media and markets to fret over but a little island state turning 50 and about ripe for a mid-life crisis. The long ruling party, the PAP began to lose ground in the 2011 elections and face a new election sometime soon. The passing of the country’s first prime minister, the celebrations at the nation’s 50^th birthday coincide to provide the PAP with the strongest circumstances to contest an election. Every silver lining, however, has a slowing economy, or a weakening currency, or rising interest rates, a discontented people unhappy with the high cost of living, significant wealth inequality, overcrowding and the influx of foreign labour at all strata of society. A strong USD is putting gentle but inexorable pressure on interest rates to rise which increases the debt service costs of a nation obsessed with property ownership and funded by adjustable rate mortgages with favorable teaser rates, a significant portion of which threaten to reset. This increased debt service is eroding disposable income and consumption and slowing an economy already burdened with trading with China, whose economy is itself slowing significantly, and Malaysia, an energy and resource driven economy currently in the process of self-mutilation. Some of Singapore’s ruling party’s veterans are calling it a day as they find the pressure of managing the country beyond the generous monetary rewards of government; and why not? Like a successful private equity partner on Fund VIII, the prospect of cashing out is not all that bad. Singapore’s fortunes were built in adversity as it was evicted from Malaysia. Absent adversity and desperation, what will temper the next generation of leaders who have to find a way through the next half century? Is adversity a condition precedent for the next leg of prosperity? The world is a smaller place, and yet a less friendly place, not just for small island states but for everyone. What does a country where trade is more than twice its GDP do as countries become more insular and less cooperative?

Then there are some troublesome questions which many daren’t seek the answers to.

Greece exposes a structural inefficiency in the euro mechanism. Is it sufficient that Greece is resolved or should the Eurozone examine underlying causes and seek to stave off future potential crises? A currency union without fiscal union and indeed structural and institutional union extending to labor and commercial laws among other things is fragile.

Global debt levels are another concern. How we regard debt at an ideological level and how we deal with its repayment and servicing are questions we have decided to seek but partial answers to. Central banks of indebted countries could be seen as having lost their independence in how they police or intervene in markets. Most are creditors to their sovereigns begging the question of what does a consolidated sovereign balance sheet look like? What are a country’s assets and liabilities? At a more prosaic but no less concerning level, how does a central bank roll back quantitative easing. The US Fed is the most advanced along the line and will serve as an example to the world’s other major central banks. One hopes the Fed knows what it is doing. And that its example is replicable by countries without the luxury of the world’s most trusted IOU, the USD.

Inequality. In world where it is patently clear resources are amply sufficient for the planet, why must one person starve while another basks in luxury. Widespread poverty defers such question as much as robust growth. Slow growth and a growing middle class cast rich and poor in vivid relief. Social media and technology bring rich and poor into close virtual proximity, surely an incendiary environment. Delve deeper and questions about the value of capitalism and socialism and how we organize our economy and society arise.

But markets and media do not concern themselves with problems as intractable as these. They seek more tangible problems, problems which have an immediate or short term price impact.

Here is one. The US is sanguine about a strong USD, but only because it has never been much of an exporter, on a net basis at least. It has now achieved some semblance of energy independence. It is the most stable and robust large economy. It is even considering raising interest rates in the near future. This creates a natural, gentle upward pressure on the currency. But a rising USD changes the calculus for emerging market bonds. Bond yields which appear to be generous in places like Brazil or Indonesia are tempered by the
need and cost of hedging the currency exposure. Sometimes, as in Brazil and Indonesia, the cost of hedging makes the investment less attractive than buying a lower yielding US treasury note or bond. A strong USD and an improving trade balance can happen if a structural phenomenon such as reshoring gains ground and manufacturing is repatriated to automation heavy factories. This combination not only raises local currency borrowing costs but USD borrowing costs internationally. The Fed doesn’t just tighten policy for the US, it tightens policy for the world.

Sovereign balance sheets are not well defined in particular because it is hard to define and quantify the assets of a country. The difficulty in quantifying a country’s assets can impact a country’s ability to raise debt especially in times of financial stress.

One simple way of solving the definition problem is to create a Sovereign Wealth Fund. The SWF is capitalized by injecting state assets such as land, hard assets like resource rights and the capitalized tax base. The definition and quantification of the capitalized tax base is difficult but can be partially solved by a securitization.

With an SWF with a defined asset base it is possible to raise debt. In fact it becomes possible to issue a range of liabilities, secured or unsecured, convertible (to an underlying asset), fixed or floating rate, mezzanine or senior. The cost of debt would depend on the quality of the assets and how the SWF was managed. One important factor would be the dividend policy of the SWF. The dividends would be paid to the Treasury of the country.

With such definition, it is likely that the SWF would become the primary funding vehicle of the sovereign.

The Treasury could of course continue to issue debt but the poor definition of solvency, the reliance on confidence as opposed to asset value, would probably deter investors relative to the debt issued by the SWF.

To better define the capitalized tax base we securitize tax revenues. All tax revenues would be collected by an SPV, a tax collection vehicle (TCV). The TCV is basically a conduit which collect taxes and issues liabilities called Tax Backed Securities (TBS). The TBS would be tranched and rated and the stability of the tax revenues would be reported for full transparency towards efficiency pricing of the tranches. TCV’s can be allocated free of payment to the SWF to capitalize it, or sold in an open auction.

All this structuring is for nothing, of course, if bankruptcy laws were weak or did not apply to the securitizations or the SWF’s liabilities. By structuring the sovereign’s assets and liabilities in a standard private corporate structure, albeit one where the equity was owned by the sovereign, bankruptcy laws could be applied in a clear and transparent way to define priority of claim. This would go a long way to bringing fiscally delinquent sovereigns back into the capital markets.

 

As Singapore turns 50 it and its government, the People’s Action Party, face a mid-life crisis. Support for the government fell to a historical low at the 2011 General Elections where a number of contentious issues emerged.

What does the government have to address for the people of Singapore?

High cost of living: Singapore remains a very expensive place to live in, according to the Economist Intelligence Unit and other surveys. More importantly, this is the view of the Singapore people. The government will have to address the high cost of living.

Population. Singapore is overcrowded and congested. Singaporeans are of the view that their country is overpopulated and that there is acute competition for resources. Transport is a particular example. The MRT system is overburdened and operated above capacity leading to breakdowns and service disruptions. The roads are congested despite a car ownership quota system augmented with a road pricing system.

Xenophobia. Singaporeans have developed an acute sense of xenophobia. This is related to the overcrowding problem. Foreigners are seen as taking up resources and taking up jobs.

Inequality. Singaporeans are envious of the wealth and luxury around them but which they struggle to attain. Inequality of wealth and income has grown if not in substance than in perception in Singaporean’s eyes. That much of the wealth is of foreign origin adds to the xenophobia.

Rule of law. Singaporeans have been trained to be law abiding and generally are. They perceive foreigners as being less law abiding. Foreigners have not grown up under Singapore’s well-ordered society and may treat laws as guidelines as opposed to rules. Littering is prevalent in HDB estates whereas private property is relatively clean. This amplifies the feeling of inequality in the country.

Government being out of touch with Singaporeans. Comments by government officials and civil servants have sometimes displayed a lack of empathy and fostered a sense that the government is elitist and out of touch with common Singaporeans.

What other challenges does Singapore face?

Labour shortages. Businesses face a shortage of labour and escalating labour costs. Singaporeans are unwilling and sometimes unable to do certain types of jobs. Businesses have to fill these jobs with foreigners. Unfortunately, Singaporeans often complain that these jobs are being taken up by foreigners. Another complaint is that foreigners have a better deal than locals, they have the freedom to send their children to international schools
, decide if their male children register for national service or not, generally get paid more than locals, live in better conditions than locals, and have the luxury of leaving the country with their CPF funds if they choose to leave and never return.

Singaporeans are human and it is human to seek to be unique and exclusive. This is not a case of vanity but a practical evolution. It is rational to want immigration to bring in more people of lower wealth to do the jobs one needs doing without competing for one’s job. It is also rational to want immigration to bring in more employers. What the Singaporean doesn’t want is competition, a perfectly rational desire, that is people who are of similar ability and wealth who neither do anything for them nor employ them. Of course the more subtle effects are often not immediately felt even if they may be understood, and that is immigration brings increased demand and employment which is good generally for the population as a whole. In the brief history of the species, trickle-down economics has an even shorter history and is certainly not well understood outside of economic circles. Trickle-down economics has been widely sold in most modern capitalists economies although the success of the model is questionable.

Retirement planning 1. According to a study by a local bank published in 2014, the savings of the average household in Singapore, including their CPF savings, will be insufficient to fund retirement. This problem is not unique to Singapore. Many western economies have even more acute retirement funding problems compounded by complex systems and policies. CPF is unique and efficient in its defined contribution nature. Households do need to save beyond CPF for their retirement needs that much is clear. Another complaint among Singaporeans is that they do not feel their CPF monies are secure. Better investor education can go a long way to allaying their concerns. Investors need to understand matters like credit risk, investing in equities and bonds, how the CPF funds the interest rates it pays out on deposits, whether the CPF is a custodian of their money or a debtor, what the CPF does with their money, where does the CPF invest and why, is there concentration risk, how diversified is the CPF portfolio etc etc.

Retirement planning 2. The CPF is a defined contribution scheme. What happens to those who have contributed little or nothing? What form of social security do they have? The defined contribution CPF is the envy of many developed nations facing unfunded or underfunded pensions. That said, a defined contribution scheme is insufficient and has to be augmented by a social security scheme providing defined benefits. In a mature and compassionate society, social security is needed. Defined contribution schemes only serve those who have contributed and contributed sufficiently. A National Insurance should be established which would be part funded from existing reserves and part funded by either a more progressive tax system or a distinct national insurance tax. Such tax would ideally be designed to apply at higher thresholds. The actual marginal rates should initially be low and adjusted to increase with income earned. The National Insurance could ensure a basic level of medical insurance, pay unemployment benefits or fund workfare, and fund a pension. The total tax burden will rise but it is a necessary evil. It is a fantasy to expect more benefits and social security without someone shouldering the burden. That burden should be shared by the more fortunate among Singaporeans. A national insurance scheme augmenting CPF will mean that the retirement age of CPF need not be extended since it is always fully funded. The risk of frivolous spending after retirement is mitigated by the introduction of national insurance. CPF contribution rates can be adjusted down to manage cash flow and also because CPF will not be the sole asset at retirement.

 

The funding of more discretionary spending and investment:

 

Singapore has been a pioneer in the establishment and management of sovereign wealth funds. It should extend this pioneering spirit to better define sovereign assets and sovereign debt. The opportunity exists to create a priority of claim among sovereign liabilities, from the unsecured to the secured. State assets should be transferred to the sovereign wealth funds. The GIC and Temasek should be merged. The Singapore government can borrow through the issue of Singapore government bonds, a sovereign security, or it can issue unsecured and secured bonds as well as covered bonds and asset backed securities from the sovereign wealth fund. All projects and expenditures must be specifically funded by defined revenues or liabilities on the sovereign’s or the sovereign wealth fund’s balance sheet. This promotes transparency and an innovative mode of funding.

 

With time, outright expenditures as opposed to investments will also be able to be funded through the sovereign wealth fund against specific funding routes.

To reiterate: The Singapore People’s To Do List For Their Government:

High cost of living: Bring down our cost of living. In particular please address food, shelter and transport.

Inequality: We the citizens of Singapore are grateful for the roof over our heads. The next challenge is to have better dwellings. That means, not so many, not so close together, lots of greenery, less congested roads, trains and buses, make our HDB flats of a higher (not lower) quality and closer in look, feel and quality to private property. For 50 years we supported you and you gave us home ownership. But 80% of us are in HDB and we all still strive for private property. Either only 20% can live this dream or you can make the 80% of HDB close enough to private property that the difference doesn’t matter so much.

Population: Singapore is too crowded. We do not want any more people than we absolutely have to have. We know it’s a balance between bringing in more workers and employers and its difficult to strike that balance.

Immigration: This is a difficult one. We want more of the type of people who add to our society and less of those who don’t. Adding to society is more than spending or keeping money here, it means engaging with the community, providing meaningful employment and investment in productive assets. We the people do still have unreasonable requests, such as not wanting to do certain jobs yet not wanting foreigners coming here to do these jobs. You will need to educate people on the harsh reality. Pandering will only postpone the problem until one day you get total misunderstanding.

Transport: We want MRT trains and buses that work and are efficient and cheap. We probably don’t know how much it costs to build, buy and run public transport but we just want it cheap and efficient. Congestion is a big problem on our roads which COEs and ERP hasn’t solved, at least not sufficiently. Cars are where we need a more progressive tax. Politically you can get away with that provided interest groups don’t get their way. Each household only needs one car. We need more cabs, buses and trains and we need the cabs to be more evenly distributed by location and time.

Rule of law: We really feel that respect for the law has dropped. Don’t worry about antagonizing people by tightening up law enforcement. The people want to see Singapore as a safe, green and clean Garden City as it once was. Even if it means tougher enforcement of laws.

There are probably a lot of other things that are also important but which Singaporeans aren’t complaining about. Yet. Don’t forget those.

Racial harmony is sometime taken for granted in Singapore. The government has been and remains paranoid about maintaining racial and religious harmony and creating a Singaporean identity strong enough to subordinate racial and religious distinctions. This paranoia is well placed. A quick survey around the globe finds racial and religious antagonism confounding rationality. The Singapore identity must be maintained and strengthened to combat any risk of fracture. Race and religion are but two factors which can divide a people. Rich and poor may be a new distinction which arises not just in Singapore but across the globe.

Singapore’s economic and business model. The world is becoming a more contentious place. Countries are becoming less willing to trade and cooperate. The reason is that global growth is slowing, mainly due to the accumulation of debt over the last few decades which in 2008 was shuffled from private to public b
alance sheets, mostly in the developed world, and which remains a drag on growth. An example is Ireland which went bust bailing out its commercial banks. In such a contentious world we see China seeking to be less reliant on US consumers, and the US trying to be less reliant on Chinese factories. We see a US less reliant on OPEC and oil retract from the Middle East with serious geopolitical consequences. As the tectonic plates shift, where does Singapore find itself? How does Singapore see the economic and political development of ASEAN and South East Asia and Asia and China and India, and how will she position herself not only to prosper but to persist, to exist.

And finally a word about politics…

I myself have been critical and laudatory of the PAP. And I will give them this: it is a difficult job and very often a thankless one. 40% of the electorate do not thank them, nor do some of the 60%, some of whom vote out of pure utilitarianism. Call it 50% in all, conservatively.

Yes, the pay is high, but Singaporean’s tax drag is well below any of the developed economies who struggle to pay their bills and their politicians. And yet a politician is a public servant and the office is an office of honour and duty, not just another job. It is good that they should sacrifice some monetary reward and not draw the same pay as the high flying itinerant manager for hire. I’m not smart enough to tell anyone how much an MP should be paid.

The job is tough. It was tough in 1965 and its tough now. In 1965 it was the local topography that was shifting; today it is global tectonics. You really want the job of running the country and navigating through these waters?

And finally, could we have more debate about the issues in this election please? And less personal issues whether laudatory or critical. Thanks chaps.

 

Oh. Sorry, I forgot. Just one more thing. There is the little question of transparency over a whole host of issues. I am sure everything is fine but just to satisfy your citizens could you please just publish all the relevant data to the standard one would expect of a first world country. Its not such a big deal except when the queries are met with silence.

 

 

Singapore’s government has attempted to solve a labour shortage and economic growth problem by importing foreign labour and encouraging immigration. In the last election in 2011 the topic of immigration became a serious issue. Singaporean’s faced with overcrowding and competition for jobs diverted votes away from the PAP. In response, the PAP acquiesced and slowed the pace of immigration and import of foreign labour.

Yet constantly we hear of plans for an ever increasing population in Singapore. The PAP’s economic plan apparently cannot see a way forward without immigration and foreign labour. As a result I expect they will engineer a means of getting Singaporeans to accept more immigration.

 

Here is how I think they will do it. They will build more housing in preparation for a greater population. This they have already done creating an oversupply of housing. This is uncharacteristically poor planning on the part of the government unless it is an intentional strategy to create oversupply. The government will also cool the housing market. This they have done. They may choose to lift some of the curbs on property investment or speculation but I suspect they will be more vigilant than expected in order to maintain soft property prices.

 

When vacancy rates rise and house prices drop they will present a solution to the people, namely importing foreigners to shore up the real estate market.