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Singapore offers a model for running sovereign-wealth funds well
IN MOST countries the priority with the public finances is how to stop debt
spiralling. But some places have the opposite difficulty: how to manage piles
of savings. China and Saudi Arabia are examples. Globally, governments have
over $20trn stashed in state-run investment vehicles. That sum is three times
the size of BlackRock, the world s biggest asset manager. Managing it is
fraught and becoming more so owing to protectionism. Governments with spare
funds should study Singapore, which, as in many aspects of administration, has
its head screwed on.
State investment funds come in several flavours. There are currency reserve
funds, which are often managed solely by central banks. Then there is an array
of entities that are lumped together under the sovereign-wealth fund label,
which typically manage pension assets, oil revenues, some currency reserves, or
own stakes in companies that governments view as strategic.
Central bank reserve kitties have existed for centuries, and sovereign-wealth
funds date back to the 1950s, but both became prominent in 2004-08. High oil
prices, trade surpluses and capital inflows meant that Asian and Arab countries
were knee-deep in foreign earnings, which they reinvested in safe treasury
bonds and also in riskier assets such as stakes in foreign firms. The spending
spree peaked in 2008. By that point Western governments had become uneasy about
the funds power.
There are still problems. Often the funds objectives are muddled. Some have
their capital depleted by profligate politicians; others cannot decide whether
to invest at home as well as abroad. It is a constant struggle to avoid
cronyism and to persuade other countries that they are not a tool of foreign
policy.
Judged by their size, state funds have trodden water. Since 2015 emerging
countries have burned up reserves as capital flows reversed and commodity
prices fell. Adding up all global currency reserves and sovereign-wealth funds,
their weight in the financial system has stayed flat over the past six years,
at 12% of the market value of all shares and bonds. Governance is patchy. A
Malaysian state fund, 1MBD, has been at the centre of a corruption scandal. The
$250bn Saudi Public Investment Fund is making huge, wild, bets on Silicon
Valley and pursuing the pet projects of Muhammad bin Salman, the crown prince.
China has pots of money but has made little progress on reform. A body called
SASAC owns stakes in firms at home, but fails to insulate them from political
influence. Another fund, CIC, styles itself as an independent global asset
manager, but holds stakes in local banks, talks up foreign policy aims such as
the Belt and Road Initiative, and wants approval to play in the sagging
domestic stockmarket. Even Norway s $1trn fund has seen political rows over its
approach to private investment and energy firms.
Relative to the pack, Singapore is doing well. Its funds have assets of about
$770bn the exact figure is secret. They have made an annual return (in dollar
terms) of about 6% over the past two decades, slightly more than an indexed
portfolio with two-thirds of its assets in shares and one-third in bonds. Their
income pays for a fifth of government spending. The funds are free of scandal
and enjoy a solid reputation both in China and the West.
There is a clear division of labour. The central bank runs $290bn of liquid
reserves. A national piggy-bank manager called GIC runs an estimated $250bn,
long-term, diversified foreign portfolio. Then a holding company, Temasek, has
the rest, keeping a quarter of its portfolio in stakes in Singaporean firms. It
also makes punchy bets abroad.
On the funds boards sit a combination of officials, politicians and captains
of industry; Singapore s elite can sometimes seem too tightly knit. Yet overall
governance is good. The city-state s leaders view reserves-management as a
national mission. Advisory boards and staff include lots of outsiders: 37% of
the total employees of Temasek and GIC are foreign, versus under 10% at CIC.
There is little evidence of Temasek meddling in the local champions in which it
invests, such as DBS, a bank. In 2014 it did raise its stake in Olam, a
struggling local commodities firm, but made a modest profit on the deal. In
2015 it unsentimentally sold control of Neptune Orient, a shipping line, to a
French firm.
The fiscal framework is admirably clear. The reserves have special protection
under the constitution. Under rules put in place in 2008, the government can
spend up to half of the long-term expected annual real return of its net
reserves each year. In practice this equates to about 1.6% of the funds
capital value. The aim is to ensure that the pool of reserves and their income
remain constant as a share of GDP over time, which Singapore has achieved; its
capital is about 220% of GDP, the same as in 1997, The Economist estimates.
While the official calculations are confidential, a rough estimate is that
annual nominal returns would need to drop below 5.5% before the state eats into
its inheritance.
Keeping on the Strait and narrow
Few countries have Singapore s graft-free civil service and polity, which make
technocratic excellence easier. And there are blemishes. The funds are now so
big that there is more risk of pointless duplication. In June, for example,
both GIC and Temasek invested in Ant Financial, a Chinese fintech firm.
Mistakes happen: in 2007-08 both funds made some badly timed bets on Western
banks. As Singapore s population ages, state health-care costs will rise by
almost one percentage point of GDP over the next decade. There will be pressure
to raid the piggy bank, or for the funds to juice up their returns by taking
bigger risks.
Nonetheless, for many countries, including China and Saudi Arabia, Singapore s
model for state investment funds is the one to emulate. Markets are frothy, so
rash investment decisions can be very expensive. And protectionism means that
countries lacking a credible, apolitical investment process may suffer a worse
fate: having their state funds locked out of foreign markets.