Is Temasek a reflection of Singapore’s economic decline?

Singapore was once an economic powerhouse in the Southeast Asian region. Since the demise of its founding fathers such as Lee Kuan Yew and Goh Keng Swee, it has been struggling with an unprecedented level of domestic challenges. From such issues as security breaches, organizational lapses and infrastructural breakdowns, to divisive issues like the lack of public accountability, growing allegation of cronyism and nepotism, and imbalances in its socio-economic policies, its citizens are at a difficult crossroads.

Blessed with the geographic advantage of a strategic sea route, the inheritance of a colonial legacy in strategic sectors such as ship-building, airbases, military supply, telecommunication infrastructure and their legal systems, beside the accumulation of a sizable reserve of some S$30 billion by the 1970s, its first generation of political leaders were smart in the use of these resources and were persuasive in their commitment to mobilize several generations of Singaporeans in unified nation-building. Yes, they did sell some propaganda and tell some white lies just like most parents. The point is that they get the job done for the betterment of the city-state’s citizens.

Post-independence Singapore also inherited the Central Provident Fund, a national savings scheme for workers created in 1955 by David Marshall, the first chief minister of Singapore. With economic success, the fund under the CPF Board grew tremendously and by 2017, it had an assets under management (AUM) totaling US$211.4 billion.

With a pool of fresh low-cost funds and a growing reserve, the Singaporean government took the initiative in 1974 to create Temasek Holdings as a private commercial entity, to supplement the Government of Singapore Investment Corporation (GIC), a sovereign wealth fund (SWF), in the management of its public funds instead of relying on international fund managers and investment bankers.

While Temasek had to be content with relatively high operating costs due to starting from scratch, coupled with the inevitable need to learn the ropes of private investment and fund management, it was able to profit tremendously from the early economic growth of Singapore by its investments in government-linked corporations (GLCs) such as Keppel Corporation, Sembcorp, Singapore Airlines and Singtel. Through the introduction of the CPF Investment Scheme (CPFIS), more liquidity was injected into these blue chips, government bonds and treasury bills, further fueling the growth of these GLCs and government-led funds under the purview of Temasek and GIC.

Now that Singapore has become a developed economy, the days of easy money have reached their limit. It has to innovate and find new growth strategies to sustain its prosperity. While it may have been successful in the past, competing with the Big Boys is not going to be an easy challenge for Temasek, and to a larger extent, for Singapore too. The alternative is the risk of chronic deflation, and that would very quickly reverse the flow of foreign direct investment and capital out of the city-state.

Comparative review

Together with its GLCs, Temasek has to step outside of the comfort zone and compete with other regional and international powerhouses. It has been an uphill task. If the past three years of performance is indicative of this reality, the outlook for Temasek and its GLCs is not very promising.

In its latest financial report, Temasek announced an increase of 1.62% in its portfolio value, from S$308 billion to S$313 billion (US$230 billion), while its total shareholder return (TSR) surprising fell from 12.19% to 1.49%, citing challenging global outlooks and market volatility.

Yet in May this year, the Government Pension Fund Global, the Norwegian SWF, with a value of US$1.05 trillion and managed independently by Norges Bank, reported its best ever quarterly return. It managed an overall return of 9.1% or US$84 billion in its first three months of 2019. When benchmarked against Temasek, its 9.1% return clearly outsized Temasek’s mediocre return of 1.49%.

China Investment Corporation (CIC), which some analysts had seen as a duplication of Temasek’s business model, was established in 2007 with AUM of US$200 billion. By 2017, its AUM had grown to US$810 billion, a fourfold increase, well outstripping Temasek’s performance.

Comparative speaking, Temasek is showing signs that it is struggling in the Big League. If Temasek cannot protect the value of its funds and generate reasonable real return against inflation and cost of its borrowings, it may become a liability that the Singaporean government can ill-afford. Should its credit rating be downgraded, it will not only increase the cost of borrowing for itself and its GLCs but may rattle Singapore’s nascent bond market.

Interdependency of Temasek and its GLCs

As Temasek is the parent company of most of Singapore’s GLCs and is facing serious headwinds, questions are being asked if its GLCs are ready to stand independently and compete effectively against regional and international competitors, or if they will cannibalize economic opportunities domestically from their own small and medium-sized enterprises.

While Singapore continues to invest intensively in its airports, neighboring Malaysia and Indonesia are exerting their sovereign rights to take back the management of their own airspace. This means that unless Singapore can find a new way to foster collaboration with its immediate neighbors, the eventual return of this airspace will seriously curtail its effort and limit its growth. With Seletar Airport already impacted, other aviation-related GLCs will likely be affected.

The same is true of Temasek’s investment in the new mega-port at Tuas, as the prospect of the Chinese push for the opening of the Kra Canal in Thailand, its port developments within the region and its Belt Road Initiative (BRI) may change the shipping dynamic in the region.

Temasek cannot afford to keep divesting its old cash cows unless it can find new cash cows to stay afloat. It has an obligation not just to be economically viable for itself but to help Singapore grow its reserves to support and sustain its socio-economic benefits for an aging population. The alternative of cutting back socio-economic benefits or further taxing its citizens risks driving its economically viable youth out of the country should the burden become unbearable.

Organization structure and challenges

The hybrid investment structure used by the Singaporean government in the integration of its GIC with Temasek is similar to CITIC Securities, by way of its 2013 acquisition of CLSA. Framed as China’s ambition to create its own investment banking powerhouse like Goldman Sachs, such a public-private investment structure is proving to be too complicated even for the Chinese.

None of this means Temasek is weak and can be pushed around by GIC. Its chief executive officer, Ho Ching, on the other hand is the wife of the current prime minister, Lee Hsien Loong, and the prime minister is also the chairman of GIC. She has been the CEO of Temasek since 2002, while her husband became prime minister in 2004. This symbiotic relationship has not sat well with many Singaporeans for the obvious risks of conflict of interest. Maybe they have worked out some form of Chinese wall between the two entities, but information on Temasek is hard to come by. Even Lee Hsien Yang, the younger brother of the prime minister and brother-in-law of Temasek’s CEO, took to Facebook on July 10 to question why his sister-in-law’s remuneration is such a guarded secret.

Controversies aside, the pertinent question facing Temasek is whether it is still relevant or has outlived its purpose and objective. Temasek is definitely due for a major overhaul. Whether it should it be downsized, have its funds independently managed by international investment banks for better return but at a lower fee, or shut down completely will remain a hot debate for Singaporeans to decide, since 2019 is likely to be an election year.

While some Temasek executives and proponents may like to propose the notion that challenging times will pass and the light will be there at the end of the tunnel, that is a flawed concept and could be misused by individuals or parties with vested interests.

Impending challenges

If Temasek’s performance is a reflection of the economic challenges facing Singapore’s weakening economic power and influence, then the outlook for Singapore is indeed looking less promising with each passing day.

Coupled with the many other challenges and domestic issues, it may be time for Singapore’s political leaders to reflect seriously on where they have gone wrong and why Singapore is not producing sufficient top guns who, like their founding fathers, can turn the city-state back into an economic powerhouse. Singapore critically needs tougher men with bolder vision if it is to survive in the new era of massive transformational economic forces.