Me On Money Matters

Senior Minister of State (National Development and Education) Grace Fu gave this update in Parliament on Monday, in response to a question from Nominated MP Eunice Olsen.

Since Dec 1 last year, the amount that town councils can invest in non-government stocks, funds or securities has been capped at 35 per cent of the sinking fund.

Holland-Bukit Panjang invested about 6.7 per cent of its total funds available for investment in the structured products, and Pasir Ris-Punggol, about 2.6 per cent.

The sinking funds are used to pay for long-term or cyclical expenditure, such as replacing lifts, pumps and pipes, re-roofing, and repairing and redecorating blocks.

The funds are also used to pay for lift upgrading, so that residents pay a smaller percentage of the total lift upgrading cost.

The sinking fund is distinct from the operating fund, which is used for short term expenditures.

Ms Fu said town councils need to invest their funds prudently so that the accumulated funds are not eroded by inflation.

The investment guidelines - which her ministry has no plans to change - seek to achieve an optimal balance between reasonable returns and financial prudence, she added.

She noted that investments in stocks, funds or securities must be on the advice of a qualified person, such as an investment adviser holding a licence under the Securities and Futures Act, and an approved bank or a merchant bank approved as a financial institution under the Monetary Authority of Singapore Act.

The 16 town councils manage more than $1 billion in sinking funds.

But, he added, 'we are bracing ourselves for more retrenchments and rising unemployment'.

For this year, Mr Lim foresees the possibility of a retrenchment level of 'around 10,000 or less, and an overall unemployment rate of below 3 per cent'.

But this is conditional on companies being 'socially responsible' and not taking the short cut of axing jobs before implementing other cost-cutting options, he added.

In the first nine months of this year, about 6,000 jobs were lost while more than 200,000 jobs were created. Next year, jobs lost will likely outnumber jobs created.

Economists like Mr Leong Wai Ho, of investment bank Barclays Capital, pointed out that in 1998, 'we were fortunate to be able to export our way out of the slowdown'.

This time, the turmoil is worldwide, not confined to Asia. 'This suggests we are headed into rougher seas, and the voyage could be a longer one,' he said.

'The longer it lasts, the greater the pressure on corporate margins, the larger the likelihood that retrenchments could exceed what we saw in 1998.'

The treasury research head at United Overseas Bank, Mr Jimmy Koh, noted that in 1998, the countries affected accounted for only 10 per cent of global gross domestic product.

'Now, the countries affected account for 50 per cent of global GDP.'

Like most economists interviewed, he finds it difficult to predict how long it will take for the crisis to blow over.

Most economists are concerned about whether companies will move too swiftly and trim the excess workers accumulated in the last three years.

During this period, companies had been hiring aggressively in the face of strong economic growth.

Now, they may decide to downsize, said Citigroup economist Kit Wei Zheng.

But he cautioned against cutting jobs too fast as 'Asia is still the growth area'.

Like Mr Kit, Mr Kevin Ong, consulting leader for human resource consultancy Towers Perrin Singapore, does not foresee companies laying off workers at the first sign of trouble.

'Companies have learnt their lessons from previous downturns not to do so,' he added.

A survey his firm did last month shows reducing headcount is the least favoured cost-cutting tool of companies.

Most prefer to freeze hiring, cut travel and entertainment spending, and give lower pay increments.

'Companies will try to hold on to their staff and adjust the variable pay portion, such as bonuses and the monthly variable component first,' he said.

It has emerged that the notes were linked to some of the biggest names to be battered by the global crisis, including US mortgage giants Freddie Mac and Fannie Mae and two banks in Iceland, which is virtually bankrupt as a nation.

According to notices posted on the New York bank's website on Friday, Standard & Poor's has cut the ratings of the underlying assets tied to Series 9 and 10 from AA to CCC-.

The drastic ratings downgrade was attributed to 'unprecedented events in the financial markets' which caused a writedown of the 'outstanding principal amount of the underlying assets' held by Pinnacle Performance as notes-issuer.

The underlying assets of the notes are synthetic collateralised debt obligations (CDO) securities, which backed the issuer for its obligations to noteholders and other secured creditors.

And because of the writedown, a mandatory redemption event has occured, meaning the assets of the notes would be sold, with investors getting only a 'pro-rata share' of the sales proceeds.

But the online notices hinted that noteholders are likely to not get any money back.

'Given the current market values of the underlying assets and the credit default swap transaction, we anticipate that investors will lose all of their original principal investment,' according to notices on the Morgan Stanley website.

An investor who called The Straits Times on Friday morning said: 'Terrible things have finally happened. Please help us! Get the MAS to intervene like how they did for Minibonds.'

Rumours of the plummeting value of the two notes have been circulating among investors here in recent weeks.

Industry sources and Pinnacle Notes investors said they were expecting an announcement by Morgan Stanley on Thursday that the two notes are now worthless.

The paranoia follows the fall of various structured products like Minibonds and DBS High Notes 5, linked to what used to be the fourth largest US investment bank, Lehman Brothers.

After Lehman filed for bankruptcy protection on Sept 15, investors in Singapore and Hong Kong cried foul after learning that their investments in complicated Lehman-linked products had fallen in value.

Lehman was again mentioned in the fallout of Pinnacle Notes Series 9 and 10.

A list of FAQs or 'frequently asked questions' prepared by Pinnacle Performance for distributors here explains that the principal writedown of the underlying assets, is due to credit events that have occured to reference entities related to it.

And those reference entities included Lehman, Fannie Mae and Freddie Mac, and Iceland's Kaupthing Bank and Landsbanki Islands.

Fannie Mae and Freddie Mac, which owned or guaranteed nearly 31 million US home mortgages were bailed out by the US government on Sept 6, while Kaupthing Bank and Landsbanki Islands were seized by Iceland's regulators last month.

Investors anxious to find out more about the fate of their investments in Pinnacle Notes Series 9 and 10 are advised to contact the sellers of the notes here.

Series 9 and 10 were sold at institutions and brokerages like DMG Securities, Hong Leong Finance, Kim Eng Securities, OCBC Securities and UOB Kay Hian October last year.