Singapore is now far richer

So Singapore went right at it, and today the country has not only caught up with Switzerland in most senses – it is now actually pulling quickly ahead. According to the IMF, Swiss GDP per capita in 2010 was a healthy USD 41,663, but Singapore’s was 56,522 – 36% higher. Furthermore, Singapore’s tax rates and unemployment was lower than Switzerland’s, and its exports higher. It was therefore no coincidence that it was Singapore that during the recent crisis came to the rescue of UBS, which Singaporeans now sometimes as a friendly joke refer to as “Union Bank of Singapore” – How things change!

All of this raises the question whether it is now increasingly Switzerland that should look to Singapore for inspiration rather than the other way around. If it does, I think it can find at least one great idea to pursue. Singapore has a sovereign wealth fund (two in fact; GIC and Temasek, managing approx. USD 500 billion in total). Switzerland doesn’t have any, but I think it should.

Reserve currency status

Let’s start with some facts. Because of Switzerland’s healthy finances, the Swiss Franc is to a limited degree used as reserve currency by other nations, and this status will probably increase. During the last 50 years the US dollar has had a very dominant status as global reserve currency, but this is actually an abnormality. Prior to this period, there were always several big reserve currencies.

A reserve status has several advantages for Switzerland. First, when a country can print money that other nations use, it enjoys what you call “seignorage benefit”: the fact that you only have to pay the printing costs of the money (which may even be purely electronic), whereas other nations pay for them with goods, services, financial assets or real assets. Seignorage is the ultimate business, and one that America has benefitted massively from for during the last century.

There are at least two other advantages of reserve status. One is that it makes it easier for the country and its companies to issue bonds denominated in their own currency, which removes concerns of currency fluctuations and in the case of a sovereign issuer reduces the risk of default (the central bank can buy its governments bonds) and thus reduces risk premiums. Funding is simply easier and cheaper if you are or live in a country with reserve currency status.

Furthermore, reserve currencies will typically also see yields come down during market crises, which acts as domestic economic stimulus at convenient times.

However, there also seems to be a downside related to the demand for the Swiss Franc: during times of crises, it typically appreciates – sometimes massively - which hurts Swiss export companies exactly at the times where they may already be struggling with slowing demand. Switzerland can counter this upwards pressure through purchase of foreign currencies, but this has sometimes led to huge losses as the appreciations continued.

The case for a Swiss sovereign wealth fund

The alternative approach would be to print more money and place it in a sovereign wealth fund, which would make long term investments in equities, hard assets, and other investments such as private equity, etc. The investments should primarily be done at times where there were excessive inflows of money into Swiss banks – in times of crises and panics, in other words. The dynamics would almost always work to Switzerland’s benefit since the buying pressure on the Franc always peaks at the times where distress where assets are cheapest. In summary, to create a sovereign wealth fund in Switzerland would create the following benefits:

• Currency stabilization. It would be a very powerful instrument to stabilize the Swiss currency. A strategy of printing money and buying foreign assets involves unlimited firepower – there is no upper limit to how much of it you can do. People might worry about the inflationary consequences of printing money, but as long as these are absorbed as reserve currency and used for purchases abroad, there isn’t any problem, only a huge opportunity.
• Yield generator. A fund that primarily invested in foreign assets when the Franc was strong and the assets cheap, would in my opinion easily be able to generate average annual yields of approx. 7-10% (for comparison, Singapore´s funds have averaged approx. 7 and 15% return over the last 20 years, respectively). This means that if, for instance, the fund size was CHF 250 billion (roughly equal to half of Singapore’s combined funds), the annual income would be 17-25 billion CHF.
• Investor confidence. During the coming decades, where many OECD countries will struggle with government debts, Switzerland would stand out as a country that could be trusted for the long term. This would inspire confidence in the business community and among high network individuals and entrepreneurs.
• Confidence in Swiss banks. As recent events have reminded us, banking is largely a question of confidence, and the confidence in Swiss banks would increase if Switzerland had a sovereign wealth fund with the power to step in as investor, should it be needed.
• Negotiation leverage. Switzerland is often bullied by other countries and has little defense in such situations due to its unaligned status and lack of critical natural resources. If a Swiss sovereign wealth fund owned strategic positions in major companies abroad, this would give it more clout in such situations.

To me, the case for a Swiss sovereign wealth fund is very compelling. One way of looking at it is this: would you argue that Singapore shoudn´t have made their sovereign wealth funds? – that it wasn´t a good idea that they had hundreds of billions in assets as they entered the recent fiscal crises? If not, then how would you argue that Switzerland shouldn’t?