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11-06-2014, 02:40 AM
An honorable member of the Coffee Shop Has Just Posted the Following:
CPF and borrowing rates – The lowdown on Govt spins (http://www.tremeritus.com/2014/06/10/cpf-and-borrowing-rates-the-lowdown-on-govt-spins/)
http://www.tremeritus.com/simages/dmca_protected_sml_120n.png http://www.tremeritus.org/wp-content/themes/WP_010/images/PostDateIcon.png June 10th, 2014 | http://www.tremeritus.org/wp-content/themes/WP_010/images/PostAuthorIcon.png Author: Contributions (http://www.tremeritus.com/author/contributor/)
DPM Tharman on low government borrowing rates
http://www.tremeritus.org/wp-content/uploads/2014/06/spin_watch.jpgThe writer seems unable to avoid locking horns with DPM
Tharman over another financial issue, not that he is so presumptuous to think
the DPM would actually do so with a mere citizen. This ST interview in 2007 was
quoted in TRE editorial, ST: CPF
can’t please everyone (http://www.tremeritus.com/2014/06/08/st-cpf-cant-please-everyone/). It is still very relevant today.
He (DPM Tharman) said in an interview with this newspaper that the charge of
the Government using CPF as a cheap source of funds was “wrong and plainly
misleading”.
“The Government doesn’t need to borrow from the CPF. If we needed to borrow,
we can borrow from the market at lower rates than from the CPF. Every finance
professional knows that.”
“If we had issued one-year treasury bills, the rate we would have paid over
the last 10 years would have been 1.7 per cent on average.”
“If we wanted to borrow through longer-term bonds, we could issue 10-year
bonds and pay the market rate, without the plus one percentage point. So if the
Government needed to borrow money, it can do so at lower cost.”
“CPF money is actually expensive money for the Government, not cheap money,”
he added.
That DPM Tharman used a 1-year Treasury Bill and 10-year bond rate to compare
CPF in which monies are locked up for an average 20-years is rather ingenuous
and quite humorous if that was his intention. Nevertheless, the writer does not
dispute that the Government can borrow at rates lower than CPF but the DPM
conveniently did not explain why were government borrowing rates so low in the
first place?
Unbelievably Low Rates
Let us look at the average 10-year real interest rates (nominal interest
rates minus inflation) from 2007 to 2013 in comparison to average GDP
growth.
SingaporeAustraliaGermanyUSAAverage Real Rates-1.1%+2.0%+1.0%+0.8%Average GDP Growth+5.2%+3.0%+1.6%+1.1%
The astounding figure that leaps out is Singapore’s 10-year government bond
yielded 1.1% below the rate of inflation despite Singapore delivering an average
GDP growth of +5.2%. As a comparison, real rates in Germany and USA are positive
even though both suffered slow growth and deflationary threat. Australia is a
good example of where real rates should be in a country with healthy economic
growth. Any economist knows that the ultra-low rates in Singapore are unnatural
in view of strong GDP growth and should be at least 2-3% higher.
Why indeed?
The answer is government policies arranged the conditions that result in low
rates. The triad of the Constitution, Fiscal Policy and Monetary Policy combined
to cause rates to be very low indeed. The Constitution forbids the government to
borrow for spending. This limits the amount of bonds available to savers and
investors. This is further worsened by CPF capturing nearly 70% of all existing
government bonds which CPF cannot sell. This causes rates to be low.
The fiscal policy generates persistent budget surpluses which place downward
pressure on interest rates. The government’s debt to CPF and other investors is
combined with budget surplus as reserves and transferred to MAS, GIC and Temasek
to invest overseas. This would have caused the S$ to weaken which should cause
interest rates to rise. However, the MAS monetary policy of keeping a strong
exchange rate meant that not only did interest rates not rise but the
quantitative easing of the West were imported via the exchange rate, putting
further downward pressure on interest rates.
If the triad is not enough, then government agencies and town councils have
the same addiction to operating surplus which they invest in bond markets.
Households, knowing their CPF are insufficient, tried to save more. Insufficient
government debt colliding with government surpluses and excessive public and
household savings meant that the demand for bonds is so great that yields are
pushed well below the rate of inflation despite strong economic growth.
Sins of Low Interest Rates
From the days of LKY, the Singapore economy has grown by ever increasing
input of labour and capital with little productivity growth. Under the present
PM, things have not changed, confirmed by the IMF Country Report in 2012.
Readers are well acquainted with the labour side of the equation when they faced
the consequences of low wage foreign workers. Low interest rate is the capital
side of the equation and is the fuel feeding the fires of the Profit
Maximisation and Asset Enhancement strategies.
Low capital and labour costs meant projects and businesses which are
otherwise unprofitable, became viable. Home-buyers over-estimate affordability
due to low mortgage costs which lead to over-paying for larger abodes at ever
higher prices. Thus the raging real estate prices of recent years. In meantime,
personal savings and CPF accounts are financially repressed with low to negative
real interest rates, causing financial risks in healthcare and retirement.
Singapore’s AAA credit rating is bought by a constitution that forbid deficit
spending, by citizen’s retirement funding held captive by CPF and by the
persistent budget surplus generated by the government which failed to spend
enough on healthcare and not at all for citizen’s retirement. The credit rating
may be great advertisement to foreign investors but it meant nothing to
citizens.
Conclusion
The writer does not judge DPM Tharman harshly at all for it is in the nature
of politics to give certain slants or spin to one’s policies. Citizens in a
healthy democracy can see all sides to any issue as this would have been
analysed in the media and debated in Parliament. Sadly this is not the
case.
Chris K
*
Chris K holds a senior position in a global financial centre bigger than
Singapore. He writes mostly on economic and financial matters to highlight
misconceptions of economic policy in Singapore.
Click here to view the whole thread at www.sammyboy.com (http://www.sammyboy.com/showthread.php?183807-CPF-and-borrowing-rates-–-The-lowdown-on-Govt-spins&goto=newpost).
CPF and borrowing rates – The lowdown on Govt spins (http://www.tremeritus.com/2014/06/10/cpf-and-borrowing-rates-the-lowdown-on-govt-spins/)
http://www.tremeritus.com/simages/dmca_protected_sml_120n.png http://www.tremeritus.org/wp-content/themes/WP_010/images/PostDateIcon.png June 10th, 2014 | http://www.tremeritus.org/wp-content/themes/WP_010/images/PostAuthorIcon.png Author: Contributions (http://www.tremeritus.com/author/contributor/)
DPM Tharman on low government borrowing rates
http://www.tremeritus.org/wp-content/uploads/2014/06/spin_watch.jpgThe writer seems unable to avoid locking horns with DPM
Tharman over another financial issue, not that he is so presumptuous to think
the DPM would actually do so with a mere citizen. This ST interview in 2007 was
quoted in TRE editorial, ST: CPF
can’t please everyone (http://www.tremeritus.com/2014/06/08/st-cpf-cant-please-everyone/). It is still very relevant today.
He (DPM Tharman) said in an interview with this newspaper that the charge of
the Government using CPF as a cheap source of funds was “wrong and plainly
misleading”.
“The Government doesn’t need to borrow from the CPF. If we needed to borrow,
we can borrow from the market at lower rates than from the CPF. Every finance
professional knows that.”
“If we had issued one-year treasury bills, the rate we would have paid over
the last 10 years would have been 1.7 per cent on average.”
“If we wanted to borrow through longer-term bonds, we could issue 10-year
bonds and pay the market rate, without the plus one percentage point. So if the
Government needed to borrow money, it can do so at lower cost.”
“CPF money is actually expensive money for the Government, not cheap money,”
he added.
That DPM Tharman used a 1-year Treasury Bill and 10-year bond rate to compare
CPF in which monies are locked up for an average 20-years is rather ingenuous
and quite humorous if that was his intention. Nevertheless, the writer does not
dispute that the Government can borrow at rates lower than CPF but the DPM
conveniently did not explain why were government borrowing rates so low in the
first place?
Unbelievably Low Rates
Let us look at the average 10-year real interest rates (nominal interest
rates minus inflation) from 2007 to 2013 in comparison to average GDP
growth.
SingaporeAustraliaGermanyUSAAverage Real Rates-1.1%+2.0%+1.0%+0.8%Average GDP Growth+5.2%+3.0%+1.6%+1.1%
The astounding figure that leaps out is Singapore’s 10-year government bond
yielded 1.1% below the rate of inflation despite Singapore delivering an average
GDP growth of +5.2%. As a comparison, real rates in Germany and USA are positive
even though both suffered slow growth and deflationary threat. Australia is a
good example of where real rates should be in a country with healthy economic
growth. Any economist knows that the ultra-low rates in Singapore are unnatural
in view of strong GDP growth and should be at least 2-3% higher.
Why indeed?
The answer is government policies arranged the conditions that result in low
rates. The triad of the Constitution, Fiscal Policy and Monetary Policy combined
to cause rates to be very low indeed. The Constitution forbids the government to
borrow for spending. This limits the amount of bonds available to savers and
investors. This is further worsened by CPF capturing nearly 70% of all existing
government bonds which CPF cannot sell. This causes rates to be low.
The fiscal policy generates persistent budget surpluses which place downward
pressure on interest rates. The government’s debt to CPF and other investors is
combined with budget surplus as reserves and transferred to MAS, GIC and Temasek
to invest overseas. This would have caused the S$ to weaken which should cause
interest rates to rise. However, the MAS monetary policy of keeping a strong
exchange rate meant that not only did interest rates not rise but the
quantitative easing of the West were imported via the exchange rate, putting
further downward pressure on interest rates.
If the triad is not enough, then government agencies and town councils have
the same addiction to operating surplus which they invest in bond markets.
Households, knowing their CPF are insufficient, tried to save more. Insufficient
government debt colliding with government surpluses and excessive public and
household savings meant that the demand for bonds is so great that yields are
pushed well below the rate of inflation despite strong economic growth.
Sins of Low Interest Rates
From the days of LKY, the Singapore economy has grown by ever increasing
input of labour and capital with little productivity growth. Under the present
PM, things have not changed, confirmed by the IMF Country Report in 2012.
Readers are well acquainted with the labour side of the equation when they faced
the consequences of low wage foreign workers. Low interest rate is the capital
side of the equation and is the fuel feeding the fires of the Profit
Maximisation and Asset Enhancement strategies.
Low capital and labour costs meant projects and businesses which are
otherwise unprofitable, became viable. Home-buyers over-estimate affordability
due to low mortgage costs which lead to over-paying for larger abodes at ever
higher prices. Thus the raging real estate prices of recent years. In meantime,
personal savings and CPF accounts are financially repressed with low to negative
real interest rates, causing financial risks in healthcare and retirement.
Singapore’s AAA credit rating is bought by a constitution that forbid deficit
spending, by citizen’s retirement funding held captive by CPF and by the
persistent budget surplus generated by the government which failed to spend
enough on healthcare and not at all for citizen’s retirement. The credit rating
may be great advertisement to foreign investors but it meant nothing to
citizens.
Conclusion
The writer does not judge DPM Tharman harshly at all for it is in the nature
of politics to give certain slants or spin to one’s policies. Citizens in a
healthy democracy can see all sides to any issue as this would have been
analysed in the media and debated in Parliament. Sadly this is not the
case.
Chris K
*
Chris K holds a senior position in a global financial centre bigger than
Singapore. He writes mostly on economic and financial matters to highlight
misconceptions of economic policy in Singapore.
Click here to view the whole thread at www.sammyboy.com (http://www.sammyboy.com/showthread.php?183807-CPF-and-borrowing-rates-–-The-lowdown-on-Govt-spins&goto=newpost).