VZCZCXRO6523
RR RUEHCHI RUEHDT RUEHHM RUEHNH
DE RUEHGP #0588/01 1740921
ZNR UUUUU ZZH
R 230921Z JUN 09
FM AMEMBASSY SINGAPORE
TO RUEHC/SECSTATE WASHDC 6858
INFO RUCPDOC/USDOC WASHDC
RUCNASE/ASEAN MEMBER COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHBJ/AMEMBASSY BEIJING 2997
RUEHKL/AMEMBASSY KUALA LUMPUR 4962
RUEHFR/AMEMBASSY PARIS 0340
RUEHRL/AMEMBASSY BERLIN 0155
RUEHHK/AMCONSUL HONG KONG 6488

UNCLAS SECTION 01 OF 04 SINGAPORE 000588 
 
STATE PASS USTR 
TREASURY FOR RAND, CBERRY 
 
SENSITIVE 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON ECIN ETRD SN
 
SUBJECT: FOLLOWING THE MONEY TRAIL OF SINGAPORE'S SECRETIVE 
SOVEREIGN WEALTH FUNDS 
 
REF:  (A) SINGAPORE 355, (B) SINGAPORE 80 
 
¶1.  (SBU) Summary:  Despite a portfolio estimated at more 
than $300 billion, the funding sources and uses of 
Singapore's two sovereign wealth funds (SWF) are shrouded in 
secrecy and not well understood by the Singapore public or 
most analysts.  SWF funds come from three sources:  the 
government's regularly large fiscal surpluses, mandatory 
individual retirement savings, and -- to a much lesser extent 
-- excess foreign exchange reserves.  The two SWFs, Temasek 
Holdings and the Government of Singapore Investment 
Corporation (GIC), invest these funds and return an 
undisclosed portion of the investment earnings to the general 
budget to fund ongoing fiscal expenditure.  The SWFs retain 
the majority of their investment earnings, which have earned 
returns significantly higher than the government has paid out 
as a return on its population's mandatory savings.  End 
Summary. 
 
Deliberate lack of transparency 
------------------------------- 
 
¶2. (SBU) Comment: Tracking the money of Singapore's SWFs is a 
long and arduous effort as each institution involved can only 
describe its small part in the process.  Few people in 
Singapore (and likely no one outside of government) know the 
full details of how funds are transferred in and out of the 
SWFs or how decisions are made about how much to transfer. 
This compartmentalized structure has kept the general public 
in the dark about how much money the GOS has saved on the 
public's behalf and how well it has been invested.  Details 
of investments are released only sporadically, but have 
demonstrated strong returns over the years.  The current 
crisis has raised concerns that GIC and Temasek will not be 
able to continue earning similarly high returns without 
taking excessive risks.  With limited transparency, it 
remains impossible for outsiders to assess the SWFs risk- 
return tradeoffs.  Moreover, Singaporeans are privately 
questioning why the SWFs earn much higher rates than the 
government pays its citizens as a return on the mandatory 
retirement savings accounts which fund the SWFs.  End 
comment. 
 
Information on Singapore's Large Nest Egg Closely Held 
------------------------------------------ 
 
¶3.  (U) GIC and Temasek Holdings, Singapore's two SWFs, 
manage an estimated US$300 billion for the GOS, making them 
among the largest SWFs in the world (see table below). 
Temasek's portfolio  stood at $85 billion at the end of 
November 2008.  GIC does not disclose the size of its fund, 
but private sector analysts estimate the value of its 
portfolio at around $220 billion.  These estimates include 
some but not all of the losses incurred since the global 
financial crisis began last fall. 
 
Sovereign Wealth Funds 
---------------------- 
(as at end 2008) 
 
Name                                   Assets ($ billion) 
----                                   ------------------ 
 
Abu Dhabi Investment Authority               850 
Saudi Arabia General Investment 
 Authority                                   431 
China SAFE Investment Company                311 
Norway State Fund                            305 
Kuwait Investment Authority                  228 
Government of Singapore Investment 
 Corporation (GIC)                           220 
Russian Reserve Fund                         137 
Temasek Holdings                              85 
 
--------------------- 
Source: Preqin and SWF Wealth Institute, March 2009 
 
¶4.  (U) Mystery also surrounds the sources of the funds that 
 
SINGAPORE 00000588  002 OF 004 
 
 
the SWFs manage.  Temasek received its initial funding 
through an in-kind injection of S$354 million (roughly $153 
million at then prevailing exchange rates) worth of shares in 
domestic government-owned companies in 1974.  Later, Temasek 
moved beyond being just a holding company for government 
shares to become a commercial investment house, owning the 
assets it manages with the Ministry of Finance as its sole 
shareholder.  In contrast, the GIC was established in 1981 to 
manage Singapore's investments outside the country.  GIC 
manages but does not own its funds and the GOS retains direct 
ownership and oversight of its assets. 
 
¶5. (SBU) While technically the MoF sets SWF policy for the 
GOS and the President is the constitutionally-appointed 
guardian of Singapore's fiscal reserves, it is unclear how 
they work in practice with the SWFs' high-powered boards. 
GIC's 16-person board is led by Minister Mentor Lee Kuan Yew 
(Chairman), PM Lee Hsien Loong (Deputy Chairman), and former 
Deputy PM Tony Tan (Deputy Chairman and Executive Director), 
while Minister of Finance Tharman Shanmugaratnam is one of 
thirteen other directors including several very prominent 
businessmen and three foreigners.  Temasek's nine-person 
board is led by Suppiah Dhanabalan (Chairman), who has a long 
career of Cabinet and state-owned enterprise (SOE) 
appointments, PM Lee's wife Ho Ching (Deputy Chairman and CEO 
until October 2009), and prominent businessman Kwa Chong Seng 
(Deputy Chairman), and includes six other directors, 
including two foreigners.  One of them, American Charles 
"Chip" Goodyear, has been designated publicly as Ho Ching's 
successor as CEO, effective in October. 
 
Fiscal surpluses feed the SWFs 
------------------------------ 
 
¶6.  (SBU) The SWFs source new funds to invest from 
Singapore's private and government savings.  Singapore has 
one of the highest savings rates in the world, with a gross 
savings ratio of 47.6 percent of GDP in 2008.  This high 
savings rate can be attributed both to the conservative 
fiscal policies of the GOS and the mandatory contributions to 
Singapore's pension fund scheme. 
 
¶7.  (SBU) The GOS has chalked up budget surpluses year after 
year for close to two decades.  According to CIMB-GK 
Research, the consolidated budget surplus, which includes 
land and other asset sales, and various vehicle-related 
revenue, was about S$20 billion in calendar year 2008, while 
it was S$30 billion and S$21 billion in 2007 and 2006, 
respectively. 
 
Mandatory Retirement Savings End up in SWFs 
------------------------------------------- 
 
¶8.  (SBU) Singapore's Central Provident Fund (CPF) has also 
built up national savings by requiring all citizens and 
permanent residents (about three-fourths of the labor force) 
to contribute 20 percent of their salaries, and their 
employers to contribute a further 15 percent of salaries, to 
retirement individual accounts at the CPF.  The CPF pools the 
individual funds and invests in non-marketable "Special 
Government Securities" (SGS), issued by the Monetary 
Authority of Singapore (MAS), Singapore's central bank, on 
behalf of the government.   These SGSs pay the exact amount 
that the CPF guarantees on individuals' CPF balances 
(currently between 2.5 percent to 4.0 percent).  MAS 
transfers the funds raised through the sale of SGSs to the 
GOS general account where they are mingled with the 
government's overall fiscal resources.  As of the end of 
2008, the total amount of SGS held by the GOS was S$141.3 
billion (around US$100 billion), according to a UBS report. 
 
¶9. (SBU) Once the GOS determines funds in the government's 
general account (whether from budget, non-budget or SGS 
sales) are "excess fiscal reserves," they are transferred to 
one of the SWFs to invest.  GIC is usually the recipient, 
since in recent years, Temasek has only occasionally received 
new cash infusions, the last time being S$10 billion in April 
¶2007. (Most of the growth in Temasek's asset size has come 
 
SINGAPORE 00000588  003 OF 004 
 
 
from retained earnings and sales of equity stakes in 
companies in its portfolio.)  Before transferring funds to 
GIC, MAS converts the Singapore dollar-denominated savings 
into foreign currency, so as to not affect the exchange rate 
or monetary policy significantly.  (Singapore uses exchange 
rates, rather than interest rates, as its preferred monetary 
policy instrument.  See Reftel A.)  The GOS does not disclose 
how much fiscal surplus is transferred to the SWFs each year. 
 
¶10.  (SBU) Ministry of Finance and GIC officials confirmed to 
Finatt that GIC also manages a small share of Singapore's 
large foreign exchange reserves (valued at $170 billion in 
April 2009).  However, the vast majority of the funds that 
GIC manages managed are the product of fiscal surpluses and 
CPF funds, rather than the result of foreign exchange 
reserves accumulated due to balance of payments surpluses. 
 
Returns from SWFs Fund Budget 
----------------------------- 
 
¶11. (U) Under Singapore's Constitution, fiscal reserves 
accumulated by the end of a government's term in office 
(typically five years) are automatically locked in as past 
fiscal reserves and can be used by the government only with 
the concurrence of the President.  To prevent a hypothetical 
profligate government from needlessly fritting away reserves, 
incoming governments do not have access to the cash and 
property managed by Temasek and GIC.  This January, Singapore 
asked for the President's approval to tap the principal of 
its SWFs for the first time.  To support an expansionary 
budget to battle the recession, the GOS withdrew some S$3.3 
billion to help pay for temporary counter-cyclical fiscal 
programs.(See Reftel B). 
 
¶12. (U) Although the principal amount has been virtually 
untouched over the years, the SWF investment returns can be 
partially transferred to the budget.  Since 2001, the 
government allowed transfers of SWF returns of up to 50 
percent of all interest and dividends, termed net investment 
income (NII).  This gives the government flexibility in case 
of any sudden strengthening or deterioration in government 
revenue to manage how much in SWF earnings can be used for 
budget purposes.  However, the government does not have to 
disclose exactly what percentage of the NII is brought on 
budget, so it is not possible to determine the SWFs overall 
returns in any given year.  In October 2008, to free up 
additional resources to fund increases in fiscal expenditure, 
the GOS expanded the definition of investment returns to 
include estimated capital gains based on long term expected 
real returns for the next 20 years, termed net investment 
returns (NIR).  The GOS did not disclose the technique for 
determining the expected capital gain return.  The NIR 
definition will apply to GIC while Temasek will continue to 
use the NII arrangement which does not include capital gains. 
The up to 50 percent cap will continue to apply to both 
entities.  Citigroup estimates that this change could add 
S$5-6 billion annually for the budget, a sum as it would 
nearly equal the entire budget surplus for FY2007. 
 
Good returns not flowing to Singaporean savers 
--------------------------------------------- - 
 
¶13. (SBU) The final source of funds for the SWFs is retained 
investment earnings.  Over the 20 years to March 2008, GIC 
earned an overall 5.8 percent nominal annualized return, 
according to its first ever annual report issued last year. 
Temasek earned an 18 percent nominal annualized return from 
its inception in 1974 to March 2008, according to its 2008 
annual report.  SWFs channel less than half of returns back 
to the budget, retaining and reinvesting the majority of 
their earnings.  Many Singaporeans privately complain that 
the individual savers in the CPF earn substantially less 
return on their mandatory savings account (currently between 
2.5 and 4 percent) than the SWFs make managing that money. 
In essence, the GOS keeps the difference between what the 
SWFs earn and what the GOS owes on the SGS held by the CPF. 
The government argues that it pays less on the CPF because it 
is "government guaranteed" and "risk free", while the SWFs 
 
SINGAPORE 00000588  004 OF 004 
 
 
undertake higher risk in their portfolio.  Any claim about 
risk levels at the SWFs is difficult to verify, however, due 
to limited transparency on the SWF portfolios and leverage 
ratios. 
 
SHIELDS