20160305 Supplementing our budget through NIR framework = reserves drawdown

The government has repeatedly stated our reserves must be spent prudently. However, it has been able to dip into the reserves with no accountability via the NIR framework.

According to the MOF, the returns from our reserves are used to supplement our budget under the NIRC (No 20 – 23) comprising:

1) Up to 50% of the Net Investment Income (NII) derived from past reserves from the government’s net assets.
2) Up to 50% of the Net Investment Returns (NIR) on the net assets managed by GIC and MAS.

Point 1 is pretty straightforward – less than 50% of actual dividends, interest and other income from investments ie spending earned returns.

But Point 2 really does not make any sense because the NIR framework “allows the government to spend up to 50% of the expected long-term returns (including capital gains)..”:

With parliament representing only PAP’s interest, Singaporeans appear to have been taken for another ride.

Public: What is the projected inflation rate?
PAP: Cannot tell.

Public: What is the expected long-term returns?
PAP: Go on guessing.

Public: What is the definition of long term?
PAP: Same as the above.

Public: What is our government’s net assets?
PAP: Whether it’s curiosity of even a matter of public interest, that is not sufficient reason to disclose information.

The government could have simply included GIC and MAS under the NII framework where their contributions are drawn from past returns. Why does it need to speculate on expected returns if GIC’s 20-year real rate of return is 4.9%? Has the PAP used up all GIC’s past returns?

After netting off Temasek’s average yearly contribution of $2 billion during the past 5 years, GIC and MAS contributed about $7 billion in 2015. How come an economy on steroids still require to take more supplements?

The NIR framework effectively gives the PAP a blank cheque. The spike in the amount supplementing the budget suggests a very aggressive approach taken by PAP, ie uses a high long-term real rate of return. Is this sustainable?

My guess is the NIR framework – spending projected unearned returns – was introduced because all the past returns from our reserves have been exhausted due to ‘conversion’. The ‘conversion’ is evident from the islandwide construction activities which must have exhausted tens of billions of our reserves.

(When it was discovered that Nathan wasn’t aware of the number of times our reserves were used for land reclamation, etc, Minister Tharman explained there was no drawdown: only a ‘conversion’ from financial assets to state land. The public is expected to somehow believe that a drawdown could also mean reserves were not used?)

But no matter how one looks at it, the net effect of the NIR framework leads to a drawdown on the reserves.

In short:

Without NIR framework – Budget cannot be supplemented from reserves because all past returns have been ‘converted’.

With NIR framework – Use arbitrary figures to project returns, complicate framework, then claim using only a portion of projected returns to supplement the budget is prudent spending.

On the issue of projected capital gains under the NIR framework, how the hell can anyone predict the return 20 or even 10 years down the road? If PAP had projected Singtel to grow at 5% annually, shouldn’t Singtel be worth $10 after 22 years? What would have happened if PAP had spent the projected capital gains which did not materialise?

With the ’improving’ global economy built on mountains of debt since 2009, won’t there be more KepCorps, NOLs, StandCharts, etc?

The NIR framework allows the PAP to spend projected (unearned) returns and is extremely reckless. It gives the impression of no drawdown on past reserves but in reality, billions in past reserves have been used.

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One Response to 20160305 Supplementing our budget through NIR framework = reserves drawdown

  1. sinkie says:

    For SingTel, it’s mainly a “utility-type” stock i.e. for dividends only. It’s not a growth stock and whoever has been selling SingTel as a growth company is either lying to profit or smoking crack. The share price is all over the place since end-1993 when it started trading — effectively flat over 22 years, but with large drawdowns & spikes along the way. Dividend yield is roughly about 4%-5% throughout. If you re-invest the dividends, then the overall money growth would be about 5%. But most investors don’t do that.

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