Monday, 8 July 2013

High Public Debts, High Private Debts and Right Politics

High public debts mean the government borrows and owes people’s money, in particular CPF members. The government says we do not have net debt and our assets are well in excess of liabilities. #

Then, why should we worry?  Investment risks and returns have to be considered.  This is the same things and same warning that we receive for high private debts. MAS and ministers are warning Singaporeans about the danger of property crash and the possible higher interest rate.

The government says we should not worry about internal debts as Singapore does not borrow money in the international markets, like other countries.   Is this true? Foreign debts are more critical than internal (domestic) debts. This is like saying you borrow money from your parents, brothers, sisters, uncles or aunties and you have no worry.  These relatives will not chase you for money.   This must be a wonderfully world! Or perhaps, you have a sugar daddy!

So, according to MAS, we should not worry so much about the internal debts as outsiders will not chase us for money like the loan sharks.  Is the government saying CPF members will not chase and cannot chase them for money? CPF members are sugar daddies too!

There is always a debate how big is our reserve and its actual values. It is so complicated that it would need 50 man-years to calculate. This was first known in the 1990s. By now, with Asian financial crisis, world financial crisis and increasing complexity and sophistication of world financial markets, it may now need 100 years to produce the reserve figure.  

Internal debts have no risk?

Just look at this classic case, the government issues S$ bonds and CPF Board buys the S$ bond. CPF Board needs to pay interest 2.5% or 4% per year to members. The government takes away the CPF money and asks Temasek and GIC to invest. Of course, they have to invest all over the world to make higher returns so that CPF board is able to pay back the principals and interests to members. 

The problem is there are risks involved be it investment risks for bad decisions or foreign exchange risks.  Another risk is putting more money into the reserve and the investment may not necessary yield more positive returns. 

The recent announced Temasek Review shows an increasing shareholder equity but with a stagnant net profits to equity holders. Who are the equity holders, the government and behind the government the people of Singapore. In the past 10 years, we are putting more money as equity in Temasek but we see stagnant return of profits. 

Temasek Holdings has increasing shareholder equity and stagnant net profits.

You can present the above (same) statistics in the following way:

Upward movement of shareholder equity and a straight line movement of profit


The blue line shows the shareholder equity and the red line shows the profit for equity holder from 2004 to 2103.  If this trend continues, whatever amount of equity the government injects into Temasek Holdings, the profit will be a straight line around S$11 billion plus and minus.     

As a main source of internal debts and government borrowings, CPF members will have to worry whether they can continue to play the sugar daddies. Just like the private debts, the banks will check on you.  Why are you borrowing more money and still paying the same installment amount? Needless to say, all your relatives are getting worry, worry about the internal and domestic debts.

Of course, banks will do the opposite – cut your borrowings and ask for early payments.   Banks are not sugar daddies. Then you tell the banks my business portfolio is getting bigger and bigger, like what Temasek said from S$ 354 million in 1974 to S$215 billion in 2013.  Then the banks comments that you are using my money to balloon your portfolio of which there are even bigger, higher and more complicated risks.  You may have a lot of inventory, a lot of account receivables, and a lot of doubtful debts……..The banks finally say they are unable to assess the assets values and the risks involved.

Even professionals like banks have difficulties in assessing the risks and the values, how about relatives who give private loans to the family borrowers.  This is the situation of the CPF members. Many CPF members do not have financial knowledge, not to mention the sophisticated modern and advanced international finance.

CPF members are forced to be sugar daddies by law. And there is only one hope that the government is doing the right thing.  Same thing for our reserve, Singaporeans have to trust the government to do the right thing.

Right politics

Right thing means right politics.

The right politics unfortunately is to make people trust the institutions handling CPF monies and the reserve.  Right politics and right economics are how to convince people and gain public confidence in the administration of public money – CPF and reserve.

However, to the PAP, right politics is to continue giving more equity to them to invest without questions, just like the sugar daddies.  

Unfortunately, majority of Singaporeans are not rich enough to be sugar daddies.  The reality of right politics to them is to have an open, transparent, fair and equal disclosure of public finance.   This is the basic principle of right politics.

If citizens do not trust you anymore, then the answer is simple – wrong politics. 

So, who is at the right side of the right politics – the PAP government or the people?

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