I'm not quite sure how Mr Heng actually phrased it, but this is how online media Theindependent.sg framed it : "The remaining S$22 billion will be financed by loans. Writing off the loan as a “fiscally neutral” funding model, Mr Heng said: “Loan capital, which we expect to be repaid in the future and is hence fiscally neutral, makes up $22 billion of the total COVID-19 package.”"
This has raised alarm bells and social media is awash with the question who is providing the loan to the government.
Some thought it could be from our retirement savings. CPF Board collects our contributions and invests in SGS (Singapore Government Securities). The money goes to GIC, the sovereign wealth fund, to invest. For the government to take back that money from GIC to fund the budget is wrong at a few levels. Firstly, I'm sure it breaches some statutes. Secondly, if that is the case, how can it be 'fiscally neutral'? Thirdly, that would required GIC to do some fire sales on their investments to cough out the money, and realise substantial losses as investment valuations are down across the board.
Some thought the government will partner with banks to provide the funds. But do the banks have sufficient liquidity? S$22B is no small change. Where will the banks borrow from when a market in crisis is always low in liquidity? Everybody needs lots of money.
By 'Fiscally neutral' Mr Heng was referring to the S$22B support being non-monetised. Meaning the government is not taking on debt to fund the expenditure. Then he refers to 'loan capital' which is expected to be repaid in future years. The citizenry is puzzled, where is the money coming from? Mr Heng was obviously referring the S$22B as loans to SMEs, not about government borrowing from anybody.
Either Mr Heng has no time for opposition members' querries, or he thinks everyone is too dumb to understand the financial dealings involved.
The answer is very clear. Just like the Fed and central banks of many countries all over the world, it's the Monetary Authority of Singapore to the rescue. The MAS will step in to provide the liquidity and build up their balance sheet. In derogatory terms, its money printing season. Perhaps that's why Mr Heng did not want to elaborate.
In normal times, MAS is tasked with maintaining monetary policy, which in basic terms, is balancing the various monetary aggregates, with a view to ensure price stability in the economy. One of their tools is 'open market operation', which is the buying and selling of government securities. If there is too much liquidity in the market, it sells securities to take money out of circulation. If market is low on liquidity, it buys securities, which pours money into the market.
All banks maintain reserve accounts with MAS. When it buys securities, MAS credits the reserve account of the seller's bank, and debits the govt securities account. By simply crediting the bank's reserve account, it puts money for the bank to use. Thus it buys securities and paid nothing for it. Money is created this way.
In a crisis situation, such as the current covid19, the market is short of liquidity. MAS has stepped up its open market operation and bought up more securities in the past few months. It has printed lots of money.
Just pumping out money is not the final solution, because in crisis times, risks are higher, and banks pull back on their lendings. A low liquidity and shrinking credit has the economy cornered. This is where the Ministry of Finance has to step in and work with MAS. The Fiscal meets the Monetary.
MAS does not lend directly to corporations. It lends to banks only as a lender of last resort and very short term overnight loans to help banks in their daily liquidity requirements. This is because a central bank cannot put its capital base at risk which would impact confidence in it with serious ramification.
For this covid19 financial assistance, the scheme works like this. Mr Heng has 2 aid programmes - the SME Working Capital Loan and the Temporary Bridging Loan schemes. Participating banks will lend to qualifying corporations based on their own risk assessments and interest rates. Whether the loan is covered by debt insurance or not, the government assumes up to 80% of the credit risks. Means the government guarantees 80% of the loans.
The MAS has to make sure of the availability of money market funds to support the scheme. It creates a MAS SGD Facility for lenders to draw on. These schemes are administered by Enterprise SG which is the special purpose vehicle. When a bank makes a loan to a corporation that qualifies under the scheme, it draws on this MAS facility via Enterprise SG. In its books, MAS will debit it's asset account MAS SGD Facilty and credit the reserve account of Enterprise SG's banker. Enterprise SG transfers the funds to the lending bank, who credits their borrower's account.
The effect is MAS printing S$ to fund these financial aid programmes. The loans to the lending banks are booked in Enterprise SG. MOF takes 80% of the risks, thus MAS capital remains unexposed.
The loans have a max term of 5 years. Should there be defaults, MOF will have to pay the lending banks for its share of losses. When it comes to paying for such defaults, the outlay will then turn up as out of budget expenses. Budgets are based on cash accounting, not accrual accounting. There is no provision for losses on loan defaults. Thus Mr Heng is correct, loan losses will not appear in budgets. It will, however, show up in the govt's Revenue and Expenditure Statement in the year of the write-off. Mr Heng is betting that these corporations will survive the crisis.
Does it mean MAS will print the entire S$22B? The answer is NO. Because a significant sum of the corporations borrowings will be in US$. The MAS has a US$60B swap arrangement with the US Federal Reserve Bank. MAS will draw on this with a spot purchase of US$ and a forward sale to unwind it at some future date. The spot and forward rates are the same, thus there is no exchange risk. But there is a cost by way of a small fee. The Fed holds their S$ reserves with the MAS. To pay for the US$, MAS simply credits the Fed's account in MAS' books. To this extent, MAS has also printed new S$, but this will not be in circulation as the Fed has no use for it.
There are two things we the citizenry should be concerned. And I suppose the opposition as well as ruling party members, should satisfy themselves with :
1. The money printing, further expanded by the multiplier effect of fractional banking as the banks' loans get out into the market, will increase money supply substantially. How inflationary will this be?
2. This is the reason why we have regulations and regulators. In crisis situations such as this, the regulators step in to clear up the mess. However, since the government bears 80% credit risk, tax payers' money is at risk. We hope the schemes will be applied judiciously and normal credit assessments prevail. It is not a scheme to bail out failed and insolvent corporations to relieve entrenched elites of their financial losses. It is a liquidity problem that the scheme tries to alleviate. Corporations lacked the cashflow because credit in the market has dried up, but they remain solvent and can survive with some help. Are the schemes properly designed for this. More importantly, are there safeguards to minimise abuse?
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