Singapore CPF reforms can revive economy, equities market
Singapore can revive its economic engine and equity markets with Central Provident Fund (CPF) reforms. Tapping CPF cash to induce positive feedback loops between Singapore’s pension assets and capital markets can economically revive the domestic economy and mitigate the risks of income disparity in the post-COVID world.
Successful financial centres like New York City, London and Hong Kong enjoy major economic benefits, generating significant revenue through financial services. In 2018, Hong Kong’s financial services sector accounted for 20% of GDP and 7% of the workforce, compared to 13.9% of GDP and 5% of the workforce in Singapore.
However, Singapore’s strength in wealth management and banking does not meaningfully contribute to the real economy. “Do banking sector and stock market development matter for economic growth?” published in 2019 by Empirical Economics, illustrates how banking sector growth failed to contribute to real economic growth which sustains employment and businesses.
In contrast, domestic equities support can catalyse economic growth and enable a more even distribution of wealth. The capital market ecosystems of Hong Kong, Tokyo, New York, Seoul, Sydney, London, Amsterdam and other global cities have a cointegrating relationship between equity capital market development and economic growth.
Capital market sub-components involving mutual/pension funds, corporate bond, stock and government bond markets support capital market development, which drives economic growth. This also supports robust entrepreneur-enterprise ecosystems.
The economic history of Taiwan, Japan, South Korea and Germany highlights how pension assets in capital markets stimulate economic growth; support the growth of globally competitive domestic multinational corporations (MNCs); and establish a positive feedback loop between capital markets and the real economy.
Pension assets and other large institutional investors underwrite and sustain market liquidity on a long-run basis. Healthy public equity capital flows enable robust enterprise financing for businesses and facilitate healthy exits for investors, with post-IPO firms driving employment growth and expanding the overall tax base.
Such scale-up enterprises are engines of job creation. This virtuous capital cycle facilitates a capital market-economic growth nexus, with a major indicator of such growth being a robust market for initial public offers (IPOs), a domain where Singapore lags Hong Kong, Sydney, Bangkok and others.
Singapore lacks a comparable finance-growth nexus. In 2020, listed companies on its Singapore bourse declined to a low of 697, following 26 corporate delistings. 2020 is the second year where more businesses left Singapore public markets than joined it. Despite its strengths as a financial sector, its central banks focus on the growth of the banking and finance sector comes to the detriment of its domestic equities market.
Furthermore, this de-equitisation creates both political and socioeconomic risks. Besides imperilling Singapore’s entrepreneurial hub ambitions and stature as a global financial centre, excess corporate delistings can eventually give rise to anti-business sentiments, according to a 2016 study by Alexander Ljungqvist of the Stern School of Business.
Aligning CPF and Singapore development
Singapore’s CPF, with end-2020 balances of S$453 billion, does not underwrite liquidity in domestic equities. Rather, they are invested in Special Singapore Government Securities (SSGS) issued and guaranteed by the Government. Proceeds are managed by the MAS and GIC, which invests them abroad.
Yet, Singapore equities remain competitive in terms of annualised returns lacking domestic support. The FTSE Straits Times Index posted annualised total returns of 9.4% in 2019.
This aligns with STI’s 10-year average annualised total returns of 9.2% from 2009 to 2018. For comparison, the FTSE 100 posted annualised total returns of 7.75% for the period of 1984–2019, with annual returns of 5.3% for the 2015–2019 period. Average annual returns of the S&P 500 from 1957 through 2018 averaged ~8 per cent, factoring in inflation.
Studies like “Finance and Economic Growth in OECD and G20 Countries”, published by SSRN in 2015 and “Development of stock market and economic growth: the G-20 evidence”, published by the Eurasian Economic Review in 2018, highlights how a nexus exists between capital markets and economic growth that reinforces both. This nexus is deficient in Singapore due to policy choices by the public sector.
Reports from Stockholm-based Nasdaq OMX highlights how from 2006–2014, market-based financing drove Swedish growth. In the 2006–2013 period, listed growth enterprises posted annual job creation rates of 36 per cent, compared to privately-owned Swedish firms with 1.5%.
Fundamentally, companies that accessed equity markets with long-term risk capital experienced accelerated growth. Domestic savings were mobilised to benefit the Swedish economy. Growing the stock market expands employment opportunities while also expanding the income and corporate tax base of the government. This sustains economic vigour and retirement adequacy, given the returns generated for pension funds from such equity investments.
The economic history of Taiwan, Japan, South Korea and Germany highlights how pension assets in the stock market have stimulated economic growth and supported the growth of globally competitive indigenous multinational corporations (MNCs). This establishes a positive feedback loop between capital markets and the real economy while sustaining globally competitive domestic MNCs.
Unlike Singapore, these countries have varying degrees of self-sustaining indigenous productive capacity. Such countries have seen domestic MNCs emerge that can independently drive private sector growth and are decoupled from the state.
CPF Reforms
The necessary reforms are reducing mandatory CPF contributions; mandating strategic allocations of CPF funds to Singapore equities, and enabling investment savings accounts modelled on Sweden’s investment savings account (ISK, short for Investeringssparkonto) model. Singapore’s CPF is ranked among the 20 largest pension funds worldwide by assets under manaement (AUM) as at 2020, according to Willis Towers Watson.
As of Septembe 2020, Willis Towers Watson estimates that Singapore’s CPF has an AUM of US$315.857 billion. Allocating part of this to domestic equities can revive Singapore’s economic engine, reinforce its asset management sector and enhance employment. Such possibility is supported by the findings of “Pension Funds, Capital Markets, and the Power of Diversification”, a 2017 World Bank working paper.
OECD countries highlight mandatory pension contribution rates for average earners at 18.4%, with social insurance contributions and mandatory private pension contribution rates averaged 22.9% for combined employee-employer contributions. Singapore’s mandatory pension contribution amounts to 37%, the highest globally.
Given the discontinuity in with wages not matching living costs, arguably a global problem, Singapore should cap CPF contributions at 25%, to bring it closer to OECD standards. Reducing CPF contributoins can also increase the discretionary income of Singaporeans, which can drive domestic consumption and investment versus remaining static in CPF accounts.
Secondly, maintaining a strategic allocation of CPF to domestic equities — following the example of European pension funds — would track the positive European experience seen in hubs such as Amsterdam, Frankfurt and Zurich. Mercer’s “European Asset Allocation Survey 2019” notes this is maintained, given its roles in supporting domestic economic growth, following the German example. “Stock Market & Economic Growth: An Empirical Analysis of Germany”, published in the Business & Economic Journal in 2010, highlights this.
Thirdly, the Swedish investment savings account scheme (ISK), launched in 2012 to streamline individual management of financial assets securities, is another model. Able to be opened through most Swedish banks by individuals, the ISK has become a crucial channel for distributing funds in Sweden’s growing asset management sector. It has also boosted the share of Sweden’s household wealth of corporate profits.
This is as per the findings of “Capital taxation and investment behaviour: A study of how the introduction of ISK taxation in Sweden has affected households’ investments.”, a Linnaeus University bachelor thesis published in 2018.
“The Promise of Market Reform: Reigniting America’s Economic Engine”, a 2018 Nasdaq white paper, noted increased longer-term savings and contributed to the substantial growth of IPOs in Nasdaq Stockholm in 2014–2016.
Closer to home, the Thai stock market’s success as the most liquid in Southeast Asia through most of the 2010s is linked to capital flows Long-Term Equity Funds (LTFs) and Retirement Mutual Funds (RMFs), and broad investor literacy. Different LTFs and RMFs managed by Thai asset managers, distributed directly or through affiliated bank branch networks, expanded investment exposure for the Thai public.
And according to “Determinants of economic growth in Hong Kong: The role of stock market development”, published by Cogent Economics & Finance in 2018, Hong Kong’s policies to promote stock market development enhanced its economic growth. In fact, in end-2019, about 35% of Hong Kong’s pension assets from its Mandatory Pension fund (MPF) were allocated to domestic equities.
Fundamentally, reforms modelled after these precedents can reinforce Singapore’s financial services sector, enhance financial sector growth and CPF returns, as well as drive greater employment.
Sociopolitical risks
The sociopolitical risks of lacklustre Singapore equities and delistings have broad implications for the city-state and its social contract, according to the findings of “The Incredible Shrinking Stock Market: On the Political Economy Consequences of Excessive Delistings”, a 2016 European Corporate Governance Institute (ECGI) working paper.
Corporate delistings reduce public exposure to corporate profits and can undermine popular support for business-friendly policies. A shrinking stock market triggers a “chain of events that leads to long-term reductions in aggregate investment, productivity, and employment”, inducing a vicious cycle where “citizen-investors” lose access to a significant share of corporate wealth.
Company delistings shrink public equity, which can precipitate political shifts. Shortfalls of public investment into domestic equities — low liquidity — strengthen delisting incentives. This reduced public share of corporate wealth reduces incentives for pro-business government policies and widens wealth disparities. The public policy then increasingly favours workers to the detriment of investors and entrepreneurs, which risks reducing aggregate investment.
This vicious cycle shrinks the rice bowl for the whole of society. Workers may gain a larger portion of that shrinking rice bowl in the form of higher wages as government policy shifts to favour them.
But the economy then suffers a declining supply of publicly traded equity, with the diminished profits and market values of remaining listed firms reducing incentives for entrepreneurs and the private sector. This initiates a persistent cycle driven by anti-business sentiments and socioeconomic inequality that impacts the corporate, public and household sectors.
Already, Singapore is subject to growing income inequality, though the matter is complex. It has increased in absolute dollar terms, though has actually improved for low-income workers. in 2018, this segment experienced the fastest wage growth since 2007. The city-state also enjoys lower income inequality than the U.S. and China, but higher income inequality than South Korea and Japan. It also demonstrates better intergenerational income mobility compared to other developed nations like the U.S. and the U.K.
The richest 10% of households saw monthly income per household member grow from S$8,571 in 2007 to S$13,215 in 2017. The poorest 10% of households experienced income growth of S$219 for the same period, suggesting an income gap between the highest and lowest income earners taht grew by 54% from S$8,236 in 2007 to S$12,661 in 2017.
Reforms that enable Singapore’s household sector to more actively access corporate wealth via public equities, coupled with strategic CPF allocations to its domestic equities, are one method to revitalise its economic engine and constrain growing inequality through the use of the stock market. Creating new opportunities for domestic enterprise can also profit its public, corporate (private) and household sectors
Singapore has demonstrated economic robustness over its history, with a globally integrated, sophisticated economic infrastructure underwritten by mechanisms to mobilise capital and rule of law. But continued neglect of its capital markets ecosystem — particularly the equities market — and further corporate delistings risks its status as a financial centre and ambitions as an Asian tech hub, widening its wealth gap and compromising its social compact.
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