Sunday, 21 August 2016

PM Lee on verge of collapsing during National Rally!

I was watching PM Lee's rally today, when I suddenly seen his face turned unwell as he speak.

Suddenly, he could not talk anymore, left hand jerking and body tilted to the side on the verge of collapsing.

The next moment, the TV screen turns to the crowd.

First it was Finance Minister... now it is Prime Minister.

Is this revelation?

Let's pray that he will be well.

Let's hope Singapore can overcome our problems ahead....




Rolf’s View of the World and Singapore’s Economy – Is Singapore over-leveraged? (Part 4)

This post is one of the series of posts I written earlier relating to my view on the global economy. In Part 1 & Part 2, I discussed about the artificial harvest of the past and shared my views. Part 3 describes how the entire world has been leveraging up in recent times. This article is an extension of Part 3 which we turn our attention back home to see if Singapore is over-leveraged?

Debt profile of Singapore

Public (aka Government) Debt 
Singapore has all-time high debt to GDP of ~105% recorded as of end 2015. We ranked top ten in world's most indebted nation relative to GDP. U.S. sits just below Singapore in the indebtedness ranking. 

Surprised? 


Over the last twenty years or so, our public debt to GDP ratio has increased close to 40% from a record low public debt-GDP ratio in 1994 at 66.9% to the current level of more than a century percentage. 


Total debt
If we include debt associated with non-financial corporate sector and household, our Total Debt to GDP is a staggering 382% in 2014 and we are within the top 3 most indebted nation in the world. Japan tops the list with a 400% ratio. 





 According to a report from McKinsey in Feb 2015, Singapore had the fastest debt growth since 2008 only after Ireland. In particular, Singapore’s corporate's debt rapid growth had been nerve-racking and our household debt incurred primarily via housing loans is one of the highest in the world. 

That said, it pays not just scratching the surface, and instead, let's delve deeper.

Why high corporate debt?

“For some nations, an unusually high debttoGDP ratio does not signal imminent danger. These are places that serve as business and financial hubs. The high level of financial sector and corporate debt that results may or may not involve heightened risks. Singapore and Ireland, for example, have tax regimes and other regulations that make them attractive for locating operations of global corporations. The debt incurred by these entities is used to fund activities in other nations, so its relationship to the host country’s GDP is not indicative of risk. 

As a major business hub, Singapore has the highest ratio of nonfinancial corporate debt in the world, at 201 percent of GDP in 2014, almost twice the level of 2007. However nearly twothirds of companies with more than $1 billion in revenue in Singapore are foreign subsidiaries. Many of them raise debt in Singapore to fund business operations across the region, and this debt is supported by earnings in other countries. Singapore has very high financialsector debt as well (246 percent of GDP), reflecting the presence of many foreign banks and other financial institutions that have set up regional headquarters there.”

Mckinsey Global Institute Feb 2015 Report “Debt and Not Much Deleveraging.”

Why high government debt?

SGS, T-Bills, SGSS, SSB & CPF
Singapore government’s debts are in the form of security bonds. In general, they are: 

1)     Singapore Government Securities (SGS) and T-bills to develop the domestic debt and active secondary markets. It also encourages issuers and investors, both domestic and international, to participate in the Singapore bond market.

2)     Special Singapore Government Securities (SSGS) that are non-tradable bonds issued specifically to meet the investment needs of the Central Provident Fund (CPF) Board.  Central Provident Fund (CPF) monies are not managed as a separate entity by the GIC but pooled and invested with the rest of the Government's funds.

3)    Singapore Savings Bonds (SSB) started on Oct 2015 that are non-marketable SGS issued to individuals to provide them with a long-term savings instrument.


Above table shown is as of March 2013 and excludes SSB.

No external debt
According to Singapore Ministry Of Finance, borrowings are not for spending as Singapore operates a balanced budget policy and often enjoys budget surpluses. Therefore the lion share of debts are in fact Central Provident Fund Board (CPF) which is the main holder of these debts. This means government borrowed the most from the people’s CPF, and has no external debts owing to other countries or private entities.

Investment returns more than sufficient to cover debt
Singapore Government cannot spend the monies raised from SGS and SSGS. All borrowing proceeds are therefore invested. The investment returns are more than sufficient to cover the debt serving costs. As of 2013, this can be seen from  the  investment returns that are made available for spending on the Government Budget – or Net Investment Returns Contribution (NIRC). Under the NIRC framework, up to 50% of  the  long-term  expected  returns  earned  on  the  net  assets  (i.e.  assets  net  of liabilities)  are  available  for  spending.  The  NIRC  of  about  S$7  billion  each  year means  that  even  after  deducting  all  the  Government’s  liabilities  (including  CPF monies), the remaining net assets produce significant returns.  

Surplus returns belong to Past Reserves and cannot be spent by the Government.

Strong balance sheet
The Singapore Government also has a strong balance sheet, with assets well in excess of its liabilities. According to the 2013 MOF report, our S$396b public debt also does not take into account the Government’s asset  position, which exceeds its liabilities, and its ability to service debts through returns on its assets. Government’s assets are mainly managed by GIC. The Government also places deposits with the MAS; in turn, MAS as a statutory board holds its own assets on its balance sheet. In addition, the Government is the sole equity shareholder of Temasek Holdings (Temasek). Temasek owns the assets on its balance  sheet. 

Credit Ratings
Since 2003, Singapore has consistently achieved the top credit ratings of triple-A with a stable outlook from the three main credit-rating agencies.  

Why high housing debt?

High ownership of housing
Singapore has 90% home ownership which is the highest in the world with Germany at the other extreme with 53% home ownership. This high ownership is largely due to our government policy that majority of the Singaporeans are staying in HDB. As of 2013, 80% of our population is living in HDB with 95% of them owning their HDB flat. Since HDB’s inception on 1 Feb 1960, it had built 1,077,103 flats up to end 2014.

Government’s CPF-HDB policies
As mentioned earlier majority of Singapore’s public debt is held by CPF of the people. A large part of the CPF is also used to invest in HDB in Singapore. So our government borrowed money from us (CPF), to build home for us. They also invest for us to pay interest to our CPF. We then borrowed money from the government to buy these HDB built. In order to repay the long term debts of HDB, the people will then have to work their lifetime to repay the debt and interest.

Therefore if the government invests more and more on public housing, our government debt will increase. As the people borrowed more and more from the government to buy housing, household debt will also increase.

But essentially, there is no external debt involved.

Further justification that Singapore is not over-leveraged

An article from Strait Times (refer here) in Nov 2014, further justified why Singapore is not heading for a debt disaster despite our high debt-to-GDP ratio.

Extracted essence from the article:

Ability to service debt
Singaporean households have shown an excellent ability to service their debts, mainly thanks to the robust job market and their ownership of liquid assets. Singapore’s household have strong ability to liquidate our assets to pay in a timely manner. Huge household liquid assets are held in the form of cash and bank deposits. At the end of March 2014, it had in aggregate $329.4 billion in cash and bank deposits, which exceeded the total liabilities of $282 billion.

Strong household balance sheet
Assets of Singaporean households were worth over six times their liabilities in each of the past five years. In short, for every dollar that the household sector has in debt, it has over $6 in assets for repayment.

Strict lending conditions
US sub-prime crisis took place due to over lenient lending conditions. On the contrary to US, Singapore has strict lending conditions with home loan capped at 80% of property price. The 8 rounds of property cooling measures after the GFC with the increased Sellers Stamp Duty (SSD), lengthened holding period and introduction of Total Debt Servicing Ratio (TDSR) had proven this.
Furthermore, in practice, mortgage loans have been lower than the bank mortgage limits. The Monetary Authority of Singapore (MAS) estimated that the average loan-to-home value was 47.5 per cent as of the 1Q2014.

Reasonably low loans
As of 2014, personal loans were at 26 per cent of total liabilities, and credit card loans at 3 per cent, throughout the last five years. There is no sign of a significant change in consumer spending or borrowing habits.

The size of bad loans for the banking sector in Singapore averaged only 1 per cent of their lending portfolio as at the end of last year. Bankruptcy cases, while on the rise from 1,748 in 2012 to 1,992 last year, represented only 0.14 per cent of total credit-card users over the same period, an insignificant number at the macro level.

Low unemployment
In addition, the unemployment rate is very low at about 2 per cent, and job market prospects still look healthy, barring unforeseeable economic calamities.

Flexibility of foreign workforce
One special characteristic of the labour market in Singapore is the high proportion of foreign workers: about 35 per cent of the workforce. Should unemployment rise, the Government can activate pro-Singaporean worker schemes to promote employment among the resident population. This makes it unlikely that a prolonged high level of unemployment will threaten Singaporeans' financial stability.

The unexpected bear striking

If all earlier said is true, then our high debt levels should then be no cause of alarm. Nonetheless, it pays to be prudent and there can be inconceivable scenarios which will push many Singaporeans to the corner. Below are some scenarios.

Property price shock
Our household debt is backed strongly by household asset. However household asset value is vulnerable to property price shocks. If the economy is not doing well, unemployment rate will rise and income will fall. This will affects the ability to service the mortgage debt. Auctions of “debt default” properties will soon become widespread and put spiral down pressures on the property price. If outlook continues to deteriorate, there will then be many desperate sellers. Then it will not just be the price of property that matters, but the inability to find buyers in a certain period of time.

Interest rates in Singapore have a high correlation with US interest rates. The Singapore dollar is pegged to a basket of currencies, with one of the currencies being the US dollar. If for whatever reasons, Fed implements a rate hike, households and corporations with large share of the loans on variable rates will be drastically affected.

Imagine a scenario which you use to have a good job with good income, servicing your mortgage with 1-2% floating interest rate for the last 7-8 years. You are very comfortable. Now you lose your job, and floating mortgage rate spike to 2-3, then 3-4%, then 5-6%. Your cash is depleting faster than you expected without income and yet have to service the hefty loan. Fearing that interest rate rise further, you wanted a fixed interest rate financing. Unfortunately, you are unable to re-finance because you have no job and no income. Even if you still have income, the value of your house may have depreciated against your loan value. This makes re-financing impossible unless you fork out additional cash to top up the difference in the loan and the property valuation.

If you are staying in a HDB, perhaps government is still kind enough for you to default many payments of installments. If you are staying private property with relatively high bank loan that you no longer can service, soon the bank will take possession of your house.

Asset rich but not cash rich
Most Singaporeans are asset rich but not necessarily cash rich. Furthermore, assets and liabilities are not necessarily evenly divided among households. There can be a possibility that the minority of the wealthy are contributing to the healthy figures shown.

Vicious cycle
In an unfavorable economic situation, there is high chance of corporate default in debts. This will lead to more non-performing loans recorded in Banks. We already had seen how DBS had been over-optimistic or not as transparent to say the least in their handling of Swiber’s debts.

If corporations and banks are not doing well, jobs will be lost. Unemployment heightens, income of individual will fall. And if debt burden is rising faster than income, servicing of mortgage or personal loans will become increasingly difficult. Cash of individual household will deplete faster than expected. This will lead to Government intervention and likely drawing from our past reserves to salvage the situation. Not a situation we want to see.

War
If war do takes place which is not totally unlikely and like one of the readers pointed out during the Iraq war, even when it was nowhere geographically near to Singapore, prices for daily necessity back then inflated rapidly due to the panic. Undersized panic, but not to be underestimated! Earnings fall, cost of living rise - double whammy! 

Rolf’s final thoughts

Without any external debt and with strong reserves coupled with a stable political system, we are in a strong position to weather any downturn ahead (if any). While being paranoid, I am confident that Singapore is still able to do well or at least sustain economically for decades to come unless we see a big screw up in our leadership. 

That said, the short term possible knee-jerk events may mean sufferings for many Singaporeans.

As Warren Buffett once said “Only when the tide goes out do you discover who's been swimming naked.”

For our survival sustainability,  a lot have to depend on the next generation in the 90s/ millennials. I am no big fan of them, but let's even hope there can be an awakening to change their mindset. 

The thing that inflicts more concerns for the country I love TODAY is not just economically ....

In the past ......

As a boy in the 80s and 90s, I was always told by all my teachers that Singapore was well recognised by the world as the "Garden City" clean and green! Rarely heard that from kids nowadays. 


The two Lions that I am proud of, so prominent for all Singaporeans in the 80s / 90s! 



Today ......

We are more proud of these man-made structures today. The kids are talking about it. 



The landmark of Singapore to all tourists in the world is almost always - Marina Bay Sands! 

Oooops .... didn't we realise that the CORE of MBS is a casino or at the very least owned by an owner whose wealth were acquired via gambling business. 

Think again.... Singapore's landmark today.... A casino! 

ok what? You really think so?