Assoc Prof Jamus Jerome Lim asked the Prime Minister how much of the reported losses by MAS for FY 2022/2023 are attributable to (i) losses from currency interventions, (ii) changes in valuation, (iii) investment exposures and (iv) other sources.
The Minister of State for Trade and Industry (Mr Alvin Tan) (for the Prime Minister): Mr Speaker, Sir, may I have your permission to take Question Nos 23, 24 and 25 in today’s Order Paper together, please?
Mr Speaker: Please proceed.
Mr Alvin Tan: Mr Speaker, my response will cover the questions raised by Ms Hazel Poa, Assoc Prof Jamus Lim and Mr Don Wee in today’s Order Paper, as well as Mr Yip Hon Weng’s question filed for tomorrow’s Sitting. If Mr Yip is satisfied with the response, he may wish to withdraw his question after this session.
Assoc Prof Jamus Lim asked about the components of the net loss, including from the Monetary Authority of Singapore (MAS)’s currency intervention. MAS had explained in detail the constituents of its reported financial loss at its annual press conference in July, which I will reiterate here.
About 70% of the net loss was due to the negative currency translation effects of a stronger Singapore dollar. This is not due to currency intervention. The negative currency translation effects arise because the Official Foreign Reserves or OFR are held in foreign currencies but reported in Singapore dollars. Therefore, a stronger Singapore dollar will result in a lower value for the OFR when expressed in Singapore dollar terms. This currency translation effect does not have any bearing on the external purchasing power of the OFR or on MAS’ ability to conduct monetary policy.
The remaining 30% of the net loss was due to net interest expenses from MAS’ money market operations to mop up excess liquidity in the banking system. The net interest expense incurred on MAS’ money market operations to mop up this excess liquidity in the banking system was unusually large in the last FY due to two factors: the large volume of operations and higher interest rates.
The high volume of money market operations was necessitated by MAS’ interventions in the foreign exchange market to moderate the appreciation of the Singapore dollar. As MAS explained earlier, had it not done this, the Singapore dollar would have been too strong and, therefore, hurt the economy. While this currency intervention added substantially to our OFR, it created excess Singapore dollar liquidity in our domestic banking system which MAS had to remove and, therefore, incur an interest expense in the process.
Mr Don Wee asked if MAS plans to increase the interest yields and payments of Treasury Bills and bonds to curb losses and encourage a higher level of savings. Such instruments are issued by the Government and not by MAS. The interest rates payable on such instruments are not determined by MAS but are market-determined via auctions. As the interest rates of such instruments have increased in tandem with the rise in global interest rates, we have already seen a healthy pick-up in demand by the public.
Mr Yip Hon Weng asked whether there are plans to broaden the basket of currencies in which the OFR is held. The OFR is already held in a diverse range of currencies. As long as the Singapore dollar appreciates against these currencies, there will be negative currency translation effects. In the last Financial Year (FY), the Singapore dollar appreciated against every major currency. As MAS explained earlier, the effects of a stronger Singapore dollar cannot be hedged or diversified away.
Let me now respond to the Members’ broader questions on monetary policy.
Ms Hazel Poa asked about the benefits of a stronger Singapore dollar in view of the financial losses recorded by MAS. The appreciation of the Singapore dollar last year reflected the outcome of MAS’ tighter monetary policy to dampen inflation. This policy has been successful in curbing imported inflationary pressures. Let me explain how. Between May 2022 and June 2023, Singapore’s import price index had fallen by some 14%. This decline in import prices has, in turn, contributed to lower domestic inflation. On a month-on-month seasonally adjusted annualised basis, MAS’ Core Inflation fell from its peak of 9.1% in June 2022 to 2.2% in June 2023.
Mr Yip Hon Weng asked how MAS strikes a balance between managing inflation and incurring losses and whether these losses are anticipated. MAS’ monetary policy is focused purely on keeping inflation low and ensuring medium-term price stability. It does not take into account any potential impact on MAS’ profits because to do so would undermine its mission. This is similar to how other major central banks conduct monetary policy. Many of them have also reported losses arising from their monetary policy operations. MAS’ financial performance is a necessary consequence of its conduct of monetary policy.
The OFR is key in enabling MAS to conduct effective monetary policy. As a central bank, MAS adopts a conservative approach in its investments, with a significant proportion of its portfolio invested in liquid financial market instruments. Through a well-diversified portfolio and careful risk management, MAS expects to earn good long-term returns that are commensurate with its risk profile.
Finally, let me turn to Mr Yip’s question about the impact of MAS’ net loss on the Government’s budget position. MAS contributes to the Government’s budget in two ways.
First, under the Net Investment Returns or NIR framework, the Government can spend up to 50% of the expected long-term real return on the assets invested by MAS, GIC and Temasek. NIR is based on the long-term expected returns of these entities and, hence, is not affected by their short-term performance. Accordingly, MAS’ reported net loss in the last FY has no impact on the NIR that is available to the Government.
Second, similar to other Statutory Boards, MAS makes contributions to the Government’s Consolidated Fund in lieu of corporate income tax. This is based on 17% of the net profit for the year, after offsetting cumulative losses from previous financial years. The Government recognises that MAS contributions will vary considerably from year to year and has, therefore, smoothened the revenue volatility by requiring the annual contributions made by MAS to be paid in equal proportions over a period of three years.
Given the net loss in FY22/23, MAS will not accrue a contribution to the Government’s Consolidated Fund for that financial year. Nonetheless, MAS will still make a contribution of S$0.4 billion to the Government’s Consolidated Fund in the current financial year, based on past profits. This smoothening formula has thus helped to mitigate the impact of MAS’ net loss on the Government’s budget.
In sum, MAS’ overarching mandate is to ensure macro-economic stability. As Deputy Prime Minister Lawrence Wong stated in this House on 1 August 2022, the Government does not expect MAS to deviate from its mandate to maximise its contributions to the Budget. MAS’ monetary policy has helped to deliver broad macroeconomic stability for over 40 years, as the basis for sustained economic growth and increases in real incomes for Singaporeans.
Mr Speaker: Assoc Prof Jamus Lim.
Assoc Prof Jamus Jerome Lim (Sengkang): Thank you, Speaker. One motivation behind my request for a breakdown in the numbers was because MAS had previously explained that it would strategically strengthen the Singapore dollar for the purposes of addressing imported inflation. This was a move that I supported and, in fact, Minister of State Tan has reiterated this MAS position that the Singapore dollar has, indeed, appreciated against every major currency.
That said, based on my understanding of the data, between January and July 2023, the movements of the Singapore dollar were essentially the converse of the US dollar. In particular, when there is a strengthening of the US dollar, the Singapore dollar would weaken and when the US dollar weakened, the Singapore dollar would strengthen.
In particular, for the US dollar two most recent peaks at the beginning of June and July, this broadly corresponded to troughs in the Singapore dollar-US dollar rates. This actually suggests to me that MAS was not really leaning that much against the wind; or if it did, it was not doing so with sufficient interventions that would have altered the overall US dollar trends. And, therefore, attributing losses, the 30%, that the Minister of State Tan mentioned, to sufficient interventions does not strike me as credible.
So, my follow-up question then is whether the MAS actually views this earlier strong dollar policy as successful and, if so, why in March it announced a decision to ease the Singapore dollar policy?
Mr Alvin Tan: Sir, I thank Assoc Prof for his supplementary question. I think it is really important to note that the Singapore dollar is trade-weighted against a basket of currencies, not just the US dollar. Therefore, you need to look at it as a whole basket of currencies. We look at it from very much over the long term.
First, on currency translation effects, I have explained that technically. The second is on currency intervention and as well as money market operations. Because the Singapore dollar was already on an appreciating trend and in addition to high savings rates as well as large volume of capital inflows, MAS also intervened by selling Singapore dollars and, therefore, moderating the appreciation rate. Had it not done so, then you could worsen inflation.
But when you sell Singapore dollars into the domestic banking system, you will then have to undertake money market operations. This is the normal conduct of central banking policy.
What the MAS then does is to sell Repos or MAS bills, of which it then has to pay interest payments on. And these interests, in line with global interest rates, have risen. And, therefore, when we issue an MAS bill, for example, we would have to pay a higher interest rate. That adds to that 30% account of the loss that we are talking about today.
So, just explaining the technicalities of how this works. Trade-weighted as well as why we need to conduct money market operations to moderate the appreciation of the Singapore dollar.
Assoc Prof Jamus Jerome Lim: If I may just quickly clarify my earlier supplementary question. I appreciate what Minister of State Tan shared about how the Singapore dollar is measured against a basket of currencies. But, in particular, could I confirm with him that MAS did, indeed, reverse its strong dollar policy in March of this year and, if so, what were the factors that led to its decision to subsequently make that reversal after making a case for strengthening the Singapore dollar?
Mr Alvin Tan: As I mentioned to the Member earlier on, it is again, it is measured against a trade-weighted basket of currencies. We have tightened monetary policy five times since 2021; and there was no such announcement.
Ministry of Trade and Industry
2 August 2023
https://sprs.parl.gov.sg/search/#/sprs3topic?reportid=oral-answer-3306
Office of the Leader of the Opposition 