More Losses at Temasek Holdings

Last week, Reuters reported that Temasek Holding's stake in NIB, a Pakistani bank, was estimated to have suffered a paper loss of around USD 400 million, out of a total of USD 540 million invested initially.  This was indeed bad news.  While I am not against Temasek Holdings per se, it is perhaps time to have a fundamental re-look at its mandate and to see if things can be changed so that the company better support the long-term survival of the country.

Firstly, if not already being practised, geopolitical risk analysis should be incorporated into the investment process.  In the case of Pakistan, that it was on its way to being a failed state was evident for a number of years even if we examine publicly-available information sources. As such, while such 'frontier countries' are suitable for private entities with large risk appetites, it may not be suitable for SWFs that are supposed to be trustees of national wealth.

Secondly, instead of focusing only overseas, could there be a possible shift inwards to look at higher risk investments inside Singapore that will help the country's longer term survival?  What I have in mind is the funding of technology projects that have longer payoff periods, such as converting our national energy infrastructure to one that has a significantly larger component for solar energy, as a way to mitigate the risks arising from dependence on imported natural gas for our electrical power generation.  Imagine how much solar capacity could have been added to our HDB estates if the billions lost in recent years were to be redeployed.

Both GIC and Temasek Holdings are institutions designed to prosper in the previous age where financial asses were on the ascendant.  With the impending approach of Round 2 of the Global Financial Crisis, where there is a significant risk of systemic financial collapse, it is likely that there will be a lot more heartache for Singaporeans arising from our SWF investments overseas. In the coming era, where resource scarcity and climate problems could limit economic growth, I feel that it is high time we prepare for a global environment where control of resources becomes much more important.

PM Lee on Food Security

The Singapore government appears to be well aware of the issues surrounding food security and the need to address how we will feed ourselves in the future.

The following is an excerpt of PM Lee's keynote address at the 7th IISS Asia Security Summit in 2008:

Besides a peaceful ordering of global power structures and institutions, countries must also work together to tackle trans-border common security challenges. One immediate issue of concern is food. People have long worried about food shortages, resulting from population growth outpacing food production. Human ingenuity has deferred this Malthusian prediction for more than 200 years, but it could still happen in the future. On the demand side, the world population is steadily increasing. Furthermore, with Asia’s rise, hundreds of millions of people are becoming more affluent and, as one minister put it to me, ‘They used to eat one meal a day. Now they eat two meals a day.’ That makes an enormous difference to their poorer compatriots and to poor people in many other countries in the third world. On the supply side, misconceived green policies to subsidise bio-fuels are encouraging farmers to grow corn for fuel instead of food, and squeeze the supply of food. In the longer term, gradually, climate change will lead to more extreme weather conditions, and likely reduce the supply of fresh water and arable land.

Over the next year or so, food prices may moderate with better harvests. In the longer term, the trends towards tighter supplies and higher prices will likely reassert themselves. This has serious security implications. The impact of a chronic food shortage will be felt especially by the poor countries. The stresses from hunger and famine can easily result in social upheaval and civil strife, exacerbating conditions that lead to failed states. Between countries, competition for food supplies and displacement of people across borders could deepen tensions and provoke conflict and wars. We are already experiencing a small foretaste of this today. The recent sharp rise in food prices, particularly rice prices, has led to riots and unrest in several developing countries. In vulnerable areas, such as in Darfur and Bangladesh, large numbers of people are moving across borders, often illegally, in search of food and water. It becomes part of the game. As one country says, ‘I am being blackmailed by my neighbours. They say, “Sell me one million tonnes at the friendship price or I will send you one million refugees”’. 

Even without a food crisis, movements of people like this have raised tensions and caused serious problems, as you can see in South Africa with the vicious xenophobic attacks on immigrants fleeing unstable regimes and desperate poverty in their home countries; from Lesotho, from Zimbabwe, and so on. They are now having to flee home because South Africans feel threatened and have viciously attacked them. In the event of a global food crisis, all of this will play out on a much bigger scale across the globe.

To avert a serious problem, we need a multilateral cooperative effort. Individual countries need to upgrade productivity and infrastructure in their farm sectors. International agencies like the World Bank and the UN Food and Agriculture Organisation need to promote research and development in agro-technologies to develop higher-yielding and climate-resistant crop varieties using the full power of modern bioscience, and, inevitably, using genetic modification techniques. Through the Doha Round, countries must work together to keep agricultural trade free and fair. Only then will farmers everywhere have the right market signals and incentives to produce more food to meet increased demand. If countries pursue greater self-sufficiency and try to keep food production and food output within their own borders, they will cause greater international tensions because the prices will become more unstable, food importers will scramble to secure their own supplies, and poor countries will suffer not just greater privation, but famine and starvation.

From this excerpt, we can see if the recent uprisings in North Africa and the Arab world would likely not have surprised our government, given that the link between food insecurity and social unrest.

Now I wonder what our government officials are thinking about the potential for instability in China. :)

European Crisis - No Way Out

PM Lee, at the recent G20 summit in Cannes, urged European leaders to adopt policies conducive to growth as a long-term solution to the sovereign debt crisis there.  My guess is that he was being polite and needed to say something encouraging after Singapore had been invited as an observer.

The fact of the matter is that there is no way out of the Eurozone debt crisis.  This has been a problem 40-years or more in the making.  Furthermore, based on traditional economics, the fact of Europe's aging population argues against any possibility of economic growth as a viable option for dealing with the debt problem.  When we add to this the fact of energy dependence and racial issues there, the lack of a realistic solution becomes crystal clear.

Now the only question is when the thing will blow up global stock markets, which appear to have been successful in pretending that the problem has a solution, thus far.  It has often been said that the stock market is for kids, and that the real adults play in the bond market.  I guess that must be true given the divergence in these 2 key markets.

Demographics and Economic Crisis

The anti-population mainstream media has been doing some hand-wringing over the arrival of the 7th billion person on this planet, and warnings about environmental and food crisis have been flowing non-stop.  Not unexpectedly, intelligence service Stratfor has provided a piece on this matter via its Geopolitical Diary service. What was different was that Stratfor argues that we are on the verge of a population decline with the advanced countries leading the way via their aging populations.

One part of the article that resonated with me was the following:

Demography drove economies to this condition in the 1990s, when credit (and thus growth) increased. In the 2000s, mature workers produced a good deal of excess capital. The 2010s find the global economy correcting itself after 20 years of excess-capital-driven growth — at the same time as mature workers are retiring and leaving their capital-supplying role.

A darker period is likely to dawn by the 2020s. Most of those high-wage earners will have retired — they will no longer supply capital and instead will depend on the state to issue their pensions. The cost of capital will invert strongly. The generation born between 1964 and 1979 — characterized by its low numbers — will be responsible for supplying capital. They will not only have to fund the younger generations but will also have to support the pensions and geriatric-support programs created by their predecessors. Since the developing world’s aging process lags about 30 years behind that of the developed world, this same generation will act as the primary capital suppliers to the entire world. 

The developing world started to age too late. Its countries will lack enough mature workers to generate the capital needed to replace that which can no longer be imported from the developed world. The developing world will experience the financial challenges of the developed world, without having built up the infrastructure and industrial base the developed world has had for three generations. Such capital scarcity threatens to halt growth across the poorer parts of the planet. It will also make for strange bedfellows: the only hope the developed world’s ’64-’79 generation will have to meet their bills is to import more taxpayers. Perhaps the most unexpected outcome of population patterns is that the developed world will have a massive interest in attracting immigrants

The significance of the aforementioned for me is that while I disagree with the government's immigration policies as they now stand, one can see that if Stratfor's analysis is correct, Singapore is already quite ahead of the curve in terms of preparing for the darker future postulated.

As some commentators have noted, we could well be in the midst of a Kondratieff winter.  If that were the case, this dynamic of aging population in the developed world will have very serious repercussions for the global economy.  I suspect that those Singaporeans currently paying $100K COV for bigger HDB flats and $75K for a COE will not have too happy a future.

Importing Electricity

The local media reported that Singapore is looking to import electricity from other countries in the region.  Perhaps this is a prelude to tapping potential new nuclear power capacity that may come online in neighbouring countries, especially in view of the fact that natural gas production in both Indonesia and Malaysia are expecting to fall in the coming years.

But whatever it is, I think it is a step in the wrong direction, since it is moving us towards a greater dependence on imported energy rather than greater resilience through stimulating domestic alternative energy production.  It is disappointing that the government appears not to be willing to prepare us for a future where the holders of energy resources will gain political and economic power, and where importers like Singapore will be increasingly at their mercy unless we take active steps to mitigate the risks.