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Thread on Singapore Government Investment Corporation's history. I'm live tweeting the book as I read it
Singapore did want a common currency with Malaysia after the separation. (Shows the lack of confidence at the time)
But the problem was that a common currency would mean a common central bank. And they couldn't work the details of that out
But the problem was that a common currency would mean a common central bank. And they couldn't work the details of that out
LKY's basic requirements were that Singapore have control over its reserves, and stability of the currency.
SG wanted a currency board but Malaysia objected. SG wanted the reserves in the central bank to be in its name, but Malaysia said no. So the SGD was born
SG wanted a currency board but Malaysia objected. SG wanted the reserves in the central bank to be in its name, but Malaysia said no. So the SGD was born
The proposed common central bank was *almost* done, till land was to be acquired for the SG branch of the central bank. The MYians would not let the land be under Singapore's name, and the SGporeans got suspicious.
If they wouldn't let them own land, what would happen if SG wanted its reserves back? This last moment decision led to the most influential decision in Singaporean monetary history: The SGD and the currency board being established.
A currency board is a form of a currency, where all the local currency is backed by a foreign currency 1:1 (or more). All of Singapore's assets were backed by Pounds Sterling.
At that time, the UK was the (declining!) superpower, and this was the natural choice for the govt.
At that time, the UK was the (declining!) superpower, and this was the natural choice for the govt.
Its notable how much they stressed reserves as a matter of national survival. They would have rather gone by themselves than lost the reserves. Singapore's estimated $500bn of reserves today are not a one-day phenomenon. They are a result of decades of planning and investing.
Okay I'm sleeping now, but tomorrow night I'll be back
Now lets begin again.Back to reserves. All of Singapore's reserves at the time were in sterling pounds. But that's a little risky. Don't put all your eggs in one basket.
So the Singapore government decided to shift the composition of the reserves from pounds to other currencies. But this was a little problematic. Britain would not take it kindly if it came to know that its former colonies were not buying its currency. They may have cut aid to SG
GBritain would have taken it as a signal that their colonies would be moving away from the sterling as a reserve currency, and they wouldn't like it. So in the words of @bitterasiandude Singapore committed a "sneak attack" on the sterling
All the money they kept in pound sterling was still in it. But any other money earned because of budget surpluses was put in other currencies *without* publicly informing it. This was significant because Singapore got all the benefits of diversification without the costs of
an angry Britain. This diversification paid off. On 16 Nov 1967 Roy Jenkins announced that Britain was devaluing the pound from $2.80 to $2.40. This was a loss for Singapore for 14%. Had they not diversified (sneakily) they would have suffered a larger loss in the portfolio
When Britain came to know of this, they were justifiably pissed. They had delusions of power, and could not believe that a former colony would diversify from THEIR CURRENCY.
Goh Keng Swee had a good answer to Britain though.
Goh Keng Swee had a good answer to Britain though.
Goh told that Singapore's "monetary reserves" which were used to back the Singapore dollar was all in Sterling. No agreement was broken for that.
But for "non-monetary reserves" which were accumulated with budget surpluses, those were in different currencies like the US Dollar.
But for "non-monetary reserves" which were accumulated with budget surpluses, those were in different currencies like the US Dollar.
The British took this as complete nonsense. They saw it as a cheap way to get out of the sterling area without getting out.
But this did show a problem in Singapore's reserve management. The government did have more money than required to back the currency. What should they
But this did show a problem in Singapore's reserve management. The government did have more money than required to back the currency. What should they
have done with that? Later in the story this is why GIC and Temasek @Temasek were formed.
But the British were pissed and they showed it. In 1968 they started to withdraw their forces from Asia faster, making SG vulnerable militarily. SG's response was "angry and militant"
But the British were pissed and they showed it. In 1968 they started to withdraw their forces from Asia faster, making SG vulnerable militarily. SG's response was "angry and militant"
For the first time, SG had bargaining power with the UK. LKY threatened to remove the Sterling reserves to other currencies by 33% each year till 1971.
Other stuff happened. There was a mini crisis in the gold market, with everyone doubting the fixed exchange rate system and buying gold instead. Just before this, SG had sold a little Sterling of around 10mn pounds out of which 7mn was gold. The British were PISSED again.
This led to relations between UK and SG getting worse. In 1968 the UK and SG decided to renegotiate the Sterling Agreement. After a lot of back and forth, SG and the UK settled on a requirement of 40% of reserves being in £ for 3 years.
THE BIG BANG
Very luckily 3 years after 1968 was 1971 when Nixon removed the dollar from gold. In 1972 the UK also gave up the farce of fixing the price of their £, and floated the currency.
Very luckily 3 years after 1968 was 1971 when Nixon removed the dollar from gold. In 1972 the UK also gave up the farce of fixing the price of their £, and floated the currency.
So in 1968, managing the reserves was kind of a problem. That's when the Department of Overseas Investments was formed. The DOI was the first government investment agency to invest reserves. Normally reserves were kept in cash and short term paper.
But these guys were different
But these guys were different
The reserves were too big in 1968 to be managed only in cash and ST paper. So, they looked outside into equities and bonds.
That was unheard of at the time. Large SWFs did not exist, and investing in stocks was blasphemy!
That was unheard of at the time. Large SWFs did not exist, and investing in stocks was blasphemy!
Dr. Goh though was very clear on this. He wanted the DOI to maximise returns. So, they called brokers from far and wide for this. James Capel and the Crown Agents for Britain, Lehman and Lazard for the US, Dresdner Bank and MM Warburg-Brinckman Wirtz for West Germany
Nomura Securities and Daiwa Securities for Japan; and the Swiss Bank Corporation and Union Bank of Switzerland for Switzerland. The reason why I'm highlighting this is to look at a few specific ideas here.
The first one is that no one single firm had a monopoly on a country
The first one is that no one single firm had a monopoly on a country
Even small markets like Switzerland had two companies working for the SG govt. So a lesser change of a monopoly and corrutpion. The second is that this was actually an international investment plan. It included brokers from all developed countries and they walked the talk
But the DOI was short lived. In 1971, the MAS was formed which became the central bank of Singapore. In 1972, SG went off the Stering standard and on the Dollar standard.
And that's when the fun began.
And that's when the fun began.
The 1970s were a weird time for politics, economics and the markets. There was a surge of authoritarianism (Cultural revolution, Nixon tapes, Indira Gandhi), stagflation and a bear market in stocks.
It was a difficult time to start a central bank, but the MAS did it.
It was a difficult time to start a central bank, but the MAS did it.
The MAS's investment department managed the reserves of Singapore. The Cabinet was very explicit that they should aim for the highest rate of return possible, in contrast to conventional wisdom at the time.
Again, its almost 1 AM and I need to sleep, but the story gets way more exciting here on.
Now lets start with the MAS. The MAS is unlike most other central banks was not politically independent of the government. CB independence is useful to prevent politicians from printing too much money.
The IMF was a little concerned about it. But I guess with LKY, you don't
The IMF was a little concerned about it. But I guess with LKY, you don't
have to worry about monetary irresponsibility. The book talks of how Dr Goh thought that central bank irresponsibility could happen even with independence and used the Fed under Nixon and Burns as an example. Similar stories could be written today.
Barely months after the MAS was established, the world turned upside down. Nixon took the dollar off gold and the new rules of the game were being written. Then in the mid to late 70s there was a bout of rapid inflation worldwide because of the oil shock.
So this really sucked for the MAS. Its like having your first days as a soldier on D-Day. In 1971, the Sterling Area agreement was extended for a further two years. Again this time, the SGporeans had a way to get out of it (sneakily)
There were consols that the UK had issued to finance WW2. These were trading at a large discount to the par value. So when they bought them, they bought them for cheap. But on the accounting books they could record them at par value.
This was standard accounting convention. Nothing fishy here. But this wasn't in the spirit of the agreement while being in the letter.
So SG could record on the books that their sterling reserves were (a little) higher than the actual reserves in the bank account
So SG could record on the books that their sterling reserves were (a little) higher than the actual reserves in the bank account
And thats how they escaped some of the sterling area rules.
But there was a small problem with having central banking and reserve management in the same place. Central bankers are the cautious people of the office. Their job is to maintain price stability, and nothing else. They'd invest money so that they would maintain price stability.
Central bankers aren't the people you'd go to invest money. Not in their proverbial DNA. Along with that, fund managers are paid differently. They're paid lavishly based on returns. Paying the people who manage money 10x in the same office as the central bankers would be bad.
So, they had to split the investment and central banking functions of the MAS. In 1981 the GIC was born. It wasn't the world's 1st sovereign wealth fund. But it was the 1st for a non-commodity exporter. This was new for the world to see
The inside story of the GIC being set up is more interesting though. Goh Keng Swee wanted a "feel" for the management. So, he had taped interviews which were confidential and the interviewee had the chance to correct the transcript. Then he read through them and asked more
questions. Getting a feel for a bureaucracy is hard. Getting them to change their way of thinking is harder. But he did it it, and that is something which I found very surprising in the story. But anyway, in 1980 GSK had gone to the UK to understand how to manage reserves and
met his former tutor at the LSE Baron Moser at Rothschild investments. GSK and LKY decided to take that firm as their adviser, but the interview process was not a cakewalk at all. Moser remarked that LKY was a PM of " a power and directness which (they) had never experienced"
Then Goh made a change that was unusual. Going back 13 years, he decided to have some reserves for "monetary" purposes like defending the currency, and some for "investment" purposes. https://twitter.com/darpyu/status/1286329771844988929
The investment reserves were to managed by the GIC, of which LKY was Chairman. This was to show how seriously they took the investments with the PM being responsible for it directly.
