This year marks the 40th anniversary of GIC. In celebration of this milestone, Made of Bold commemorates the founding leaders’ vision of forming an entity dedicated to managing Singapore’s reserves. These bold stories have laid the foundations of GIC’s values and purpose in securing Singapore’s financial future.
These bold stories are from the publication Bold Vision: The Untold Story of Singapore’s Reserves and Its Sovereign Wealth Fund.
A Singular Man
As the economic architect of modern Singapore, Dr Goh Keng Swee wrote many budget speeches and policies. But unbeknownst to many, he was largely responsible for the first chapter of the nation’s bold reserves management story.
After separation, Singapore was keen on establishing a Common Currency arrangement with Malaysia. However, the status of a piece of land at Robinson Road in Singapore became the focal point for dispute, leading the island nation to stand its ground and inevitably resulting in a currency split.
Donning A Straitjacket
Amidst challenging social, political and economic uncertainties, a young nation stood against conventional wisdom and established a currency board system. This decision built confidence in the Singapore dollar in the early days of nation-building.
The Sterling Raj
Singapore was at the mercy of sterling’s fate – it was obliged to hold its reserves in sterling but a devaluation of the pound would mean substantial foreign exchange losses for the small nation. The Sterling episode saw a heated exchange of letters between then-British Chancellor of the Exchequer Roy Jenkins and Dr Goh Keng Swee.
Dr Goh Keng Swee and his team circumvented a US-led embargo to buy gold with an ingenious and clandestine idea of using two halves of a torn dollar bill to verify the identity of the officials involved.
A Productive Interregnum
When MAS was formed in 1971, it started off with a blank canvas – an unheard-of mix of a quasi-central bank and a currency board. The institution was not just permitted to, but tasked to invest for returns and profit, which was a pioneering approach to investing reserves for returns at the time.
Genesis of an Idea
GIC was conceived in just 7 months – from a mere idea in Dr Goh’s mind to the day he issued the press statement to announce the establishment of a new investment company.
Today, GIC may be recognized as one of the top sovereign wealth funds in the world, but its story has a very humble beginning – the company’s first Managing Director began his tenure with only a desk. There was not even a chair, until he found one in an unused room.
It was quintessential Dr Goh Keng Swee: the conception of an idea that was compelling and visionary. Singapore, of course, was not the first country to establish an investment corporation to manage its reserves. But it was the first non-commodity exporting country to do so.
Dr Goh’s genius consisted in finding long-term solutions, rather than short-term palliatives, to problems. He was the first to identify the constellation of forces in play where Singapore’s reserves were concerned, to see their inter-connections, and to arrive at a solution that fitted Singapore’s needs and which was, moreover, years ahead of international practice. Nobody within or without the government had conceived of an organization like GIC before Dr Goh proposed it. Retracing the events that led to the founding of GIC illustrates yet again Dr Goh’s facility for thinking out of the box, for inventing a solution that was a game-changer, this time in the field of reserves management.
GIC was conceived within a time span of just seven months: between 1 August 1980, when Dr Goh was appointed chairman of MAS, and 27 February 1981, when he issued a press statement announcing the government’s intention to establish an investment company.
Those seven months were an intense and dramatic period for two organizations – one already in existence for 10 years, the Monetary Authority of Singapore (MAS), and the other, still just a glimmer in Dr Goh’s mind, the Government of Singapore Investment Corporation. He juggled simultaneously two different challenges during this period: restructuring MAS and laying the foundation of GIC.
When announcing his appointment, the Prime Minister’s Office (PMO) alluded to his role in establishing MAS. Dr Goh “would assess how MAS had developed against his own expectations”, the PMO statement said, and “will make his recommendations to the prime minister in 18 months’ time”. Accordingly, Dr Goh reviewed monetary policy and re-examined MAS’ approach to supervision of the financial system. But it was reserves management that he turned his attention to first. This was not surprising since it was principally because the cabinet had reservations about how MAS was managing the reserves that Dr Goh was posted there.
Dr Goh moved quickly to size up the central bank’s organizational capabilities and the operations. He began by interviewing the senior staff, one by one, privately, with no observers present. The interviews were taped, with the transcript of each session being reviewed and corrected by the interviewee himself or herself by the next day. Dr Goh would then pore over the corrected transcript, mark and underline the points that had caught his attention and scribble follow-up questions.
The interviews were taped, with the transcript of each session being reviewed and corrected by the interviewee himself or herself by the next day. Dr Goh would then pore over the corrected transcript, mark and underline the points that had caught his attention and scribble follow-up questions.
The interviews were “fact-finding” exercises for him. But some found the process, if not Dr Goh himself, intimidating. When he sensed his interlocutor was being too defensive or nervous, he would end the session quickly. With some officers, though, notably Koh Beng Seng, who would eventually be promoted to deputy managing director in charge of banks and financial institutions, and Elizabeth Sam, he conducted several interviews, gaining in the process an acute understanding of the organization’s operations and problems.
Although he had been away from the world of finance for 10 years, having been at defence and education in the 1970s, Dr Goh had kept himself apprised of developments in the financial field. More importantly, he had not lost that unerring “feel” of the Singapore economy, that intuition for what made it tick and how Singapore differed from other economies.
One example of this was in the field of monetary policy. In the early 1980s, central banks in the developed economies shifted their monetary policy framework to targeting the money supply. Later, because of innovations in the money and credit markets, they moved to targeting interest rates, a practice that still prevails. Dr Goh did not follow suit. Instead, he held that because of Singapore’s openness to trade and capital flows, the more effective lever of controlling inflation in the country was to target the exchange rate. That framework remains in place 30 years later, albeit with some refinements.
It would be another of Dr Goh’s singular insights about the Singapore economy that would have equally pivotal policy implications. This was his conviction, so firm it was as to be almost instinctive in character, that for various structural reasons Singapore would have a chronically high savings rate. It was this insight that led him to propose the founding of GIC.
Among the first steps Dr Goh took on arriving at MAS was to commission a team from the Management Services Department (MSD) of the finance ministry to “review the objectives, functions, organization and operations of MAS and Board of Commissioners of Currency (BCCS)”. The team was led by Chuang Kwong Yong, the then director of MSD, and included seven other members. On completion of the review, Chuang stayed on at MAS to carry through the organizational changes that Dr Goh had endorsed. One of the areas Dr Goh had asked the team to focus on was how “MAS’ investment expertise could be improved”.
Another step Dr Goh took was to travel to Europe in September 1980 to meet central bankers and commercial bankers on the issues that had been raised in his interviews of MAS staff and by the MSD team. He visited Zurich, Frankfurt and London. One meeting in particular was especially productive: Dr Goh’s reunion with his former London School of Economics (LSE) tutor, Sir Claus Moser, then with Rothschild Bank in London.
Moser was a German Jew whose family had fled Nazi Germany for London in 1936. He studied at the LSE, from which he graduated with top honours, and he returned to the school after World War II to do a doctorate in statistics. He eventually became a lecturer and then professor at the school, in which capacity he tutored Dr Goh when the latter was a doctoral student in the 1950s.
Moser would later gain renown for co-authoring with Lord Lionel Robbins what came to be known as the Robbins Report on Higher Education. He subsequently left academia to direct Britain’s Central Statistical Office, a post equivalent to being the chief statistician of the country. In that capacity, he served three prime ministers—Harold Wilson, Edward Heath and James Callaghan. In 1978, he joined Rothschild as deputy chairman.
Dr Goh and Moser had maintained intermittent contact with each other over the years. When Dr Goh informed him of his European tour, Moser invited him to visit Rothschild. Moser asked Richard Katz, then head of fixed income and currency at Rothschild, to join in the meeting with Dr Goh.
Reporting to his executive committee on the meeting later, Moser noted that Dr Goh had sought “investment advice with regard to proposals for cash management and the structure of the investment department (of MAS)”. MAS, Dr Goh said, had been investing the reserves chiefly in short-term paper and bonds, and the returns generated were being eroded by inflation. Dr Goh had asked Moser and Katz how the reserves could be invested to achieve better real returns over the long term.
Katz replied that history showed that “equities achieved a return over and above inflation whereas cash and bonds did not”. Dr Goh reacted excitedly: “He sort of jumped at the remark”, Katz recalls, “and asked for evidence”. Katz referred to various studies and later sent Dr Goh several papers on the subject.
Dr Goh then asked how MAS’ investment department could be organized to invest in various assets, including equities. Katz suggested that an investment organization, separate from MAS, be formed to be responsible for long-term investments. There were “pragmatic reasons” for such a separation – chief among them, because central banking and asset management required “different types of persons”, Katz explained. He went on to note that he had advised an oil-exporting country in the early 1970s to set up such a company, though it was moribund from the start.
The discussion at Rothschild “stretched through the afternoon, lasting several hours” . At its conclusion, Dr Goh asked Moser and Katz to submit a proposal for a consultancy. He wanted them to focus on two areas: review the performance of various asset classes over different periods of time and recommend a portfolio for the long term; and propose the organisation and structure of an investment management company.
Moser and Katz accepted the task and co-opted a third person, Kate Mortimer, for the project. She had a reputation as “a financial advisor of daunting intellect”. Before joining Rothschild, she had worked at the World Bank and then at a think-tank for the Cabinet Office established by Edward Heath when he was prime minister. The think-tank was reputed as a “sort of gilded nursery for bright young things”.
In December 1980, the MSD team issued its report on MAS. A confidential document circulated only to the cabinet, it recommended that MAS should concentrate on two areas: develop Singapore as a financial centre and invest the reserves. Other areas extraneous to these functions could be whittled down or shed, the MSD team recommended, adding that MAS could reduce its staff strength by about 20 per cent without affecting its effectiveness.
As an example, the study recommended that MAS’ International Department could be reorganised to relinquish functions that would distract it from its investment focus. One such task that could be relocated was developing the Asian Dollar Market, the offshore market that attracted global financial institutions to operate in Singapore. This function could be transferred to a new department overseeing banking and financial institutions, the MSD team observed. The team also recommended the setting up of an investment research unit to improve investment performance.
The MSD review produced useful insights, but also fell short in certain areas. The finding that MAS had taken on more functions than warranted by its mandate was a fair one. So was the observation that the International Department could be re-organized for better focus. However, the report did not examine a core function of central banks: namely, monetary policy. Dr Goh would later acknowledge this deficiency and initiate the effort to develop a monetary policy framework based on the exchange rate. Furthermore, the report did not address the problems inherent in having a central bank manage long-term reserves. What was needed was more than a reorganization of MAS’ International Department. The mould had to be broken.
Within two months of the MSD report, Wong Pakshong submitted his resignation as managing director. Later, others among the management team also left. These developments captured the headlines in both the local and foreign press. Everyone assumed Dr Goh was doing little more than cleaning house at MAS.
It went largely unnoticed though that there had also been significant developments concerning reserves management. Though Dr Goh endorsed the bulk of the MSD report, Herman Hochstadt, then MAS deputy managing director, recalled him commenting that the report had “missed a very essential point”, namely, that “there must be a separate body to manage the reserves”. Having come to that conclusion, Dr Goh set the wheels in motion for the formation of such a company.
Dr Goh asked Prime Minister Lee Kuan Yew to be chairman of the new company. Lee was “not keen” to have this additional responsibility, but Dr Goh persuaded him. He argued that Lee’s appointment as chairman would signal clearly that the country’s reserves were so crucial as to merit the oversight of the prime minister himself. Ultimately, Dr Goh asserted, the head of government had to bear responsibility for deciding on the disposition of the reserves. It was therefore imperative that the prime minister be privy to all the discussions about the reserves.
After Lee agreed to be chairman, both he and Dr Goh got down to the business of deciding on the composition of the rest of the board. Integrity was the paramount criterion. Directors would be privy to sensitive information about the company’s investment intentions. It was essential to “get people who would not take advantage of their knowledge of our funds and what we are going to do, (so as) to invest on their own accounts”, recalled Lee later. But this consideration also meant that potential directors, especially those from the private sector, could conceivably find their latitude in business activities severely curbed. Mindful of this consideration, Lee and Goh began their search for directors among ministers and senior civil servants. Then, they looked for “people outside”. Lee thought it was vital to have some representation from the private sector to assure the financial community and the public at large that the new company was being managed well.
In February 1981, the Rothschild team of Moser, Katz and Mortimer arrived in Singapore to vie for a consultancy. The team had worked hard for months to prepare their proposals, having visited Singapore earlier to gather information. It would be a boost for Rothschild if it were to win the consultancy as three other prominent financial institutions were competing for it.
There were two rounds of interviews, the first conducted by a panel chaired by Dr Goh and including ministers who were to be directors of the new company, among them Hon Sui Sen, Goh Chok Tong, Dr Tony Tan and S. Dhanabalan.
The interview was searching and thorough, Moser recalled. Dr Goh and he had become “rather close personal friends over the years”, according to Moser. They shared common interests like music and they would go to the opera together at the Royal Opera House in London whenever Dr Goh was in town. But “there was no sign of friendship” at the interview; “it was bloody tough”. Dr Goh led the questioning, quizzing the team as to how an investment company could be structured and organized.
After the interview, Moser and his colleagues were shown to a room to wait for the panel’s decision. They were nervous, for they did not think they had done particularly well. After about an hour, they were summoned back. Dr Goh informed them that the panel had decided to appoint them as consultants but the decision had to be confirmed by the prime minister. Dr Goh emphasised that it would be the prime minister who would have the final say on the appointment. The Rothschild team was scheduled to meet Lee that same evening at 5pm.
It would be an interview that each of the three would recall vividly. Mortimer, in reminiscing about the interview with her friends, was reported to have said she felt “like a rabbit transfixed by a snake”. Katz recalled that he was already a senior director at Rothschild by 1981 and had met an enormous range of people in authority by then. Yet, he too had been unprepared for the “very direct, very testing questions and the sheer incisiveness and ferocious intelligence” of the prime minister. For Moser the interview would become inextricably linked in his memory with a boast that he had uttered in order to soothe the nerves of his colleagues as they entered the prime minister’s office. “I’m used to dealing with prime minister”, he had said breezily. He was to discover that his experience of British prime ministers Wilson, Heath and Callaghan was no preparation for Lee.
Moser expected the meeting with Lee to be “a formality”. After all, he had come with Dr Goh’s recommendation. There was also, he told himself, the “terrific reputation” he had acquired through his work in statistics, both in government and in academia. It was all to no avail, Moser recalled ruefully, as Lee “demolished (him) with one question” by zeroing in on his lack of experience in investments. Moser added that after a short exchange, during which he became “more and more nervous”, Lee turned his attention to Katz, the investment expert in the team.
Katz recalled that he was subjected to a similarly sharp interrogation. Lee asked him about his achievements at Rothschild, his views of the financial markets and of the countries and entities he had advised. Katz remembered “very vividly” how Lee had brushed aside his reluctance to divulge whom his clients were by retorting that he could get the answer himself “in five minutes with just one phone call”. In the event, Lee did not press Katz further for specific names but was content with a breakdown of Rothschild’s clients by regions.
The interview took about 30 minutes and ended with Lee telling the Rothschild team he had decided to appoint them for a six-month trial period. The team had no doubt that it was Lee who made the decisions. The three left the room “sweating” and “shaken”. Both Moser and Katz acknowledged, though, that Lee had been fair and civil. It was “absolutely right” that he had asked them these searching questions, Moser was to recall for this book; Lee had impressed them “as a prime minister of a power and directness which (they) had never experienced”.
The Rothschild consultancy comprised three parts. Two parts concerned MAS: assisting it in the reorganization of its International Department and reviewing the investment portfolio of MAS and BCCS. The third part of the consultancy required Rothschild to advise on the organizational structure of the new investment company and to suggest a long-term asset allocation, together with the timing of the shift from cash to the desired portfolio.
On 27 February 1981, Dr Goh released a press statement. It was the first public intimation of the drama that had occurred since he became chairman of MAS.
The “root of the problem”, Dr Goh said, was that MAS and BCCS had been managing the reserves under their charge in a manner more suited to countries in chronic deficit. Singapore, by contrast, would probably have “regular surpluses” in its balance of payments. There was no need to concentrate the reserves in liquid assets in excess of what would be “required to meet the legal obligations of the currency board or the resources needed by the MAS to manage the floating parity of the Singapore dollar”, the statement added.
These excess reserves should in fact be managed as long-term investments, with the aim of gaining from capital appreciation. The government had thus decided that funds beyond what was required to manage the currency would be transferred in stages to an “Investment Corporation” wholly owned by the government. The statement went on to say that the prime minister would be the chairman of the board of directors of the new company, and named the other directors.
The press release was characteristic of Dr Goh’s style: succinct to the point of being terse, never trite, and deserving of close scrutiny. But alas, most journalists missed its implications. They overlooked the significance of the recommendation to establish a new investment corporation and dwelt instead on the sensational staff changes at MAS. They failed to see that embedded in the short statement were four profound insights - insights that would mould how Singapore has managed its reserves.
First was Dr Goh’s allusion to the “regular” financial surpluses that resulted in balance of payments surpluses. Dr Goh would, on other occasions, use the term “chronic surplus” to describe Singapore’s situation - a phrase that conveyed well the idea that there were deep forces accounting for Singapore’s high savings rate and hence surpluses. As Dr Goh saw it, Singapore would continue to have a high savings rate because of its tradition of prudent fiscal policy and the mandatory contributions all working Singaporeans made to their Central Provident Fund (CPF) accounts. History has proven him right. The national savings rate in Singapore has ranged between 35 and 50 per cent of GDP over the last 40 years. In highlighting Singapore’s structural propensity towards high savings, Dr Goh was underlining the need for a radical change in the approach to reserves management.
Second was Dr Goh’s recommendation that the reserves be allocated to two “pots” or portfolios: one, to manage the Singapore dollar exchange rate and to provide the BCCS with the resources to back the Singapore dollar; the other, to be invested in long-term assets for capital appreciation. This idea harked back to Dr Goh’s exchanges with Roy Jenkins in 1967 when he had propounded the then startling thesis that there were “monetary reserves” (what was needed to back the currency) and “non-monetary reserves” (what could be invested for long-term gain). This distinction between two categories of reserves – one to be kept liquid and the other to be invested in relatively illiquid assets – gave reserves management an extra degree of freedom.
Third was the decision to set up an investment corporation to manage the second pot, the “non-monetary reserves”. The decision arose from the recognition that “investment portfolio management and the management of the float required different approaches”, as the statement put it. Singapore did not originate the idea of having an investment entity separate from the central bank, but it was nevertheless still regarded as an unconventional practice. Commentators at that time did not appreciate the significance of the move.
And fourth was Dr Goh’s recommendation that the prime minister himself chair the board of the new company. The company would have the distinction of being the only one in Singapore with ministers as its directors and the prime minister as its chairman. That alone would signal the importance the government attached to the endeavour. As a result, over the years, ministers have acquired an appreciation of global financial markets and the returns and risks arising from investing. This was precisely as Dr Goh had intended.