MAS AMENDMENT BILL WILL MAKE SINGAPORE HOLD HIGHEST PUBLIC DEBT IN THE WORLD

Mark my word. Singapore will soon hold the highest public debt in the world. But it's not what you think.

MAS and price stability :

One of the main responsibility of MAS is to maintain price stability in the country. Instead of managing the prices of each product and service, MAS does this by focusing on one single price - the SGD exchange rate.

Some central banks, like the US Federal Reserve Bank, manage inflation using the interest rate. Others, like MAS, manage by the exchange rate. On a day-today basis, the spot rate is a function of supply and demand, ie the liquidity of SGD has an important function. The spot rate is highly volatile. MAS manages by allowing the rate to move within a band. When the rate moves to the upper band, MAS intervenes in the market to buy foreign currency (sell SGD), thus bringing the rate down. On the other hand, when the rate moves to the lower band, MAS intervenes to sell foreign currency (buy SGD), which forces the rate up.

In the long run, the SGD exchange rate is a function of how the Singapore economy performs. As Singapore is a floating rate regime, the MAS allows the SGD to find its equilibrium. It does not, and cannot, control the exchange rate in the long run.

Where does MAS get the money to settle the market intervention purchases :

To buy the foreign currency is no problem for MAS. E.g. when MAS purchases USD from a bank, it pays SGD by simply crediting the bank's Reserve a/c with the central bank. MAS creates the SGD out of nowhere. This is digital money 'printing' by the central bank. The counterparty bank remits the USD to MAS' a/c with the Fed at NY.

However, to sell the foreign currency, eg Yen, MAS must first have the Yen in its account with the Bank of Tokyo, the Japanses central bank. MAS pays Yen from its account at BOT. To receive the SGD, MAS debits the counterparty bank's Reserve account..

Intervention in the forex market is part and parcel of MAS's monetary policy management. This requires MAS to take care of 2 critical issues. (1) In practical terms, MAS has unlimited capacity to buy all the foreign currency it needs since it pays for them simply by "printing" SGD out of thin air. Unrestrained "printing" of SGD is inflationary as too much money circulating in the economy puts downward pressure on its value. MAS must control the amount of money in circulation caused by "printing" SGD to pay for the foreign currencise.
(2) MAS must always hold substantial balance of foreign currencies at all times.

Sterilising the SGD "printing":

MAS mops up the SGD 'printed' in its market intervention operation by a process called 'sterilisation'. This is done by issuance of MAS bills. Banks and investors purchase these SGD securities which are settled by MAS debiting banks' Reserve a/c with the central bank. This nullifies the inflationary effect on SGD "printed", or in central banking lingo, the SGD is "sterilised". There is no increase of money in circulation.

In effect, foreign currency purchased are funded by debt in the form of MAS bills. Hence MAS has an increase in assets (foreign currence) counter-balanced by an increase in liability (securities, ie debt).

How much foreign currencies should MAS hold:

To answer this question, one needs to know the purpose for forex reserves. It is (1) to influence the SGD exchange rate as described above; (2) to maintain confidence in the SGD (which is fiat, a currency not backed by anything); and (3) to backup balance of payments of the country (this is the international inflow and outflow of funds out of various activities like trade, investment, remittances, aid, foreign-currency debt servicing, other financial activities etc.)

MAS holds these foreign currencies so the economy can absorb any external shocks. By experience, MAS takes the view an optimum size is about 65%-75% of the GDP. Based on 2020 GDP of SGD459b, the holdings should be SGD298b to SGD344b. This works out to about 7 months of Singapore's import.

Official Foreign Reserves (OFR) :

MAS invests these foreign currency holdings in liquid foreign assets as very short term investments. This include deposits with other central banks in demand accounts (which earns no interest), overnight and short-term deposits, foreign Treasury bills/bonds, Special Drawing Rights, and Gold. The aggregate of these is known as Singapore's OFR.

There is a holding cost to keeping all these foreign currencies. Firstly, the market intervention may incure exchange losses. Secondly, there is debt servicing which may be higher than the interest received on the short term investments.

Country Reserves :

Every country has revenue, mostly from taxes. Lucky countries have income from natural resources like oil. Each year, excess revenue over expenditure goes to build up the country's reserves.

Singapore is unique in 2 aspects. (1) By law, Singapore government cannot borrow to fund expenditure. The government cannot have a deficit budget. It is in the happy position of having budget surpluses all these years. (2) The proceeds of government land sales cannot by spent. All these funds are transferred into the national reserve.

The MAS is the government's banker. The Ministry of Finance deposits all incoming money into its account at MAS and periodically transfers surpluses to GIC or Temasek to invest.

The national reserve is state funds, which is public money. It belongs to Singaporeans collectively. It is managed by GIC and partly by Temasek.

The mistakes people make about Singapore National Reserves:

In trying to quantify Singapore national reserves, many make 3 common mistakes:
(1) They assume GIC investments are all national reserves. It is not. GIC manages the government's reserves, and funds from Special Singapore Government Securities. These SSGS funds are Central Provident Fund money which the government invests on behalf of the CPF Board. Since GIC co-mingles the invesment, there is no way to determine, on valuation basis, how much of the investments are national reserves and how much belong to CPF managed funds.
(2) They include OFR as part of national reserve. It is not. The OFR is simply liquid foreign assets MAS maintains to manage their monetary policy.
(3) They exclude government deposits with the MAS. The central bank is the government's banker. The Ministry of Finance deposits incoming funds with MAS. These deposits would include surpluses and land sales proceeds not yet transferred to GIC. That is, a portion of the MOF's deposit with MAS are national reserves.

Three misconceptions in MAS' increase of OFR :

(1) The economic success of Singapore caused the increase in OFR. This is not completely correct. A currency strengthens or weakens against another has much to do with their trading patterns and balance of payments relationship. Take Philippines for example. Its huge diaspora of overseas workers remit a massive USD30b home.
(2) Investors and businesses poured in massive foreign currencies for SGD assets. This is totally incorrect. The Foreign Exchange market is the biggest financial market in the world. It is bigger than all the other financial markets combined.  Singapore is an important financial centre. In 2019 Singapore was ranked 3rd in the world with average FX volume of USD633b per day. The 5 top currencies traded in Singapore are USD, JPY, EUR, AUD and SGD in that order. The daily volume of SGD traded in 2019 was USD57b. To have a sense of perspective, this was a hefty 42% increase from 2016. But the reality is trade and economic activies driven forex deals form a very low volumn. As high as 90% of the trades are actually driven by speculative and hedging activities.
(3) The increase in OFR means Singapore wealth has increased. This is wrong. This increase is simply due to MAS managing its monetary policy. It does not represent increase in national wealth as a popular foreigner called 'Critical Spectator', an avid supporter of PAP, once erroneously claimed Singapore grew richer by over S$200b with S$160b from increase in OFR.

Transfer of OFR to GIC :

When OFR is in excess of requirements, MAS can technically invest it in better yielding longer term and higher risk assets. However, MAS is a regulatory body, not an investment agency. This acess OFR is transferred to GIC to better manage the funds. The transfer is by set-off against MOF deposits with MAS. Thus MAS sees a reduction in asset (OFR) and liability (Government deposits).

This has been mentioned as a transfer of OFR to GIC which led most people, such as Critical Spectsator, to hold an incorrect view that OFR is government reserves, it is wealth. The view is a misinterpretation from a wrong perspective. Remember, MOF deposits at MAS comprises of revenue receipts, and budget surpluses (inclusive of land sales proceeds) not yet transferred to GIC. It is the surplus component of MOF deposits that is being transferred to GIC. In other words, it is a fiscal decision, the normal transfer by the government of its surplus. MOF makes a withdrawal and MAS liquidates some OFR assets to fund the cashout. Fundamentally, it is a case of MOF transferring its surplus to GIC, not MAS transferring OFR to GIC. 

This procedure imposes a limitation on the amount of OFR that MAS can liquidate. It depends on the quantum of surplus that the government has deposited at the MAS. This has led to a situation where MAS' excess OFR cannot be fully liquidated, causing it to be left invested in low-yielding assets.

Proposed MAS Amendment Bill :

This is where the MAS Amendment Bill comes in. It seeks to remove the need for government surplus to be built up for the MAS to liquidate excess OFR.

The proposed procedure will see the MOF issuing foreign currency RMSG (Reserves Management Singapore Security). MAS subscribes directly for these instruments and pays for it using the OFR which MOF then transfers to GIC.

What this means to MAS is a replacement of one asset class with another. Excess OFR is replaced by RMSG, which is a debt from the government. The government will then better invest excess funds in higher yield assets under GIC. The instrument is purely a technical way to work the process as they are non-marketable and reside only in the books of MAS. The SGD580b cap on RMSG issuance is basically just an administrative number.

The proposed legislation provides the transparency that the process is purely a monetary and not a fiscal initiative. It is not about MOF creating debt to fund expenditure. The decision for timing, quantum and currency of RMSG to be issued is for MAS to make, as well as redemption requests.

Blurring the Reserves in GIC :

Those who are seeking to determine the real worth of Singapore reserves will have to appreciate that the investments of GIC will be funded by 3 components -- CPF funds, RMSG funds and surplus + land sales proceeds. Only the 3rd component qualify as national reserves.

In case of need when OFR has fallen below required threshold, MAS can initiate the redemption of RMSG and move foreign currencies back to beef up OFR numbers. That call may well require GIC to make forced sales of long term assets, quite possibly with losses.

Singapore as the highest indebted country :

Singapore is currently ranked 5th country with the highest public or national debt. With RMGS in play, Singapore will soon overtake Japan with the dubious honour of becoming the highest indebted country in the world. But don't loose sleep over this. Like Japan, the national debt is all mostly domestic. In Singapore's case, the national debt is mostly SSGS (from CPF money) and RMGS (OFR money from MAS). Both of these are money that the government, by law, cannot spend away.