Singapore and Iceland - why Singapore's USD 400bn war chest makes all the difference
Iceland's banking problems started surfacing as early as January this year and the Central bank of Iceland had commissioned a report in April this year to investigate the policy options available. This report remained out of public domain but since the spectacular collapse of the island banking model in October, it is now no longer deemed 'confidential'.
Having read the report I cannot help draw comparisions to Singapore:
1/ A small country with its own currency
2/ Internationally active and exposed financial sector larger than its GDP (Singapore banks have combined liabilities of approx 300 USD bn compared to our GDP of approx USD 150bn)
In Iceland case, even when their banks are fundamentally solvent (in the sense that its assets, if held to maturity, would be sufficient to cover its obligations), such a small country - small currency configuration makes it highly unlikely that the central bank can act as an effective foreign currency lender of last resort/market maker of last resort.
In Singapore's case, our USD 400 bn warchest effectively acts as a backstop in the event the state takes over the banks, to replace bank debt with soverign debt. (This is indeed the nuclear option; otherwise, we will have to borrow from the IMF or World Bank.)
Viewed in another perspective, the constraint for any of our local banks to grow regionally or internationally is that the size of our warchest have to be increased in proportion to the size of the banks' liabilities.
7 comments:
What makes you think we still have 400b USD?
My sentiments exactly. Just curious where the 400bn figure comes from...
I understand that the GIC committed some costly blunders in the last couple of months. Also, S'pore Govt said publicly that they have a US$150bn fund to back the local banks should the need arises.
Frankly, with the opacity of financial health of banks back home, I'm a bit pessimistic. Then again, your post explained why there's a limit to how big S'pore banks can grow. I didn't realise that before. Cheers.
Hello,
I don't have the most up-to-date numbers but here are the breakdown:
Temasek: USD100bn
GIC: USD100bn
Foreign Reserves: USD160bn (as at Oct2008)
CPF: USD 100bn (as at end 2007)
I am not sure how battered our assets are with Temasek nor GIC but our foreign reserves are kept with IMF and in Gold + Foreign Currencies.
easthopper,
Interesting points. There's probably double counting in your figures.
A substantial amount of the CPF funds are probably parked with either GIC and/or Temasek.
Conservatively, $300 billion might be a better estimate of our reserves (though no one knows for sure lah).
Always wondered what we will need the reserves for. The present crisis underlines the importance of building and maintenance of substantial reserves.
On the issue of sovereign funds, the KTM is quite ambivalent. They are under a lot of undue pressure idiots who don't know jack about what they're saying but want to comment. At the same time, with the scale they have, they are in an excellent position to make super-normal returns.
The present crisis provides us with an excellent opportunity to make a killing. Exactly how much the Govt is concerned about public perception and how they will limit the risks taken is unclear. So, exactly whether the folks at GIC/Temasek can pull it off eventually is unclear.
The KTM doesn't understand why people cannot understand that non-disclosure is good policy when it comes to investing. If you haven't read Buffett's autobiography "the Making of an American Capitalist", consider picking it up. It makes for an interesting read. Buffett is almost at the point of paranoia when it comes to secrecy. :-)
Cheers. :-)
Dear KTM,
Nice to hear from you ;-)
I may most likely have made the mistake of double counting. But based upon the most recent report by Temasek, it is noted that Temasek is given funds from MOF and not CPF. I have a hunch our CPF monies are in neither Temasek nor GIC - they are parked with loans to HDB or in SG government bonds. That being said, in a crisis, these assets may not be worth much as they are parked primarily in SG.
For Temasek or GIC, if they could pick up some nice assets during this crisis, they should be able to get good returns over the next couple of years. But again, once bitten, twice shy, the losses they have suffered so far are quite substantial and they may become more risk adverse going forward.
Re the book - will be hunting it down in a bookstore near me. Thanks for the recommendation.
Anyways, thanks for dropping by.
Talk soon,
Eaststopper
Are those funds mostly liquid?
If they aren't, i think it would be a major hindrance when problems arise.
Moreover if there's global financial gloom and predictedly bad futures ahead, it may be difficult to make assets liquid in a short period of time and in time to save the ailing banks.
And my bet is, many of the 400billions are in stakes and shares.
But of course, Singapore might not be crashing into bankruptcy as crazy as what Iceland did. Our SWFs and CPF are probably very good buffers against unexpected financial downturns.
Hi
I am undergrad studying in Singapore Management University. I'm currently doing a project on Iceland meltdown and I've also noticed the similarities between singapore and Iceland. Chance upon your blog when I was doing some research and I would like to know more about how we can use Singapore as a comparison. Would you mind telling me more?
You can email me at angela.chan.2007@smu.edu.sg
thanks
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