WHY YOU CAN'T BUY CHEAPER SOLAR ENERGY FROM RETAILERS

WHY MAS S$75B EXCESS FOREIGN RESERVES CANNOT BE SPENT ON SINGAPOREANS

7 Apr 2022 MAS announced it has transferred to the government S$75B excess OFR (Official Foreign Reserves). These are OFR in excess of their monetary policy management requirements. As a central bank, MAS do not undertake long term and risky investments. The government places these with the sovereign wealth fund GIC for long term investments with better yields.

As usual, such an event is followed by public outcry why with so much reserves, the government is reluctant to increase social spending and instead raise GST and other fees, especially at current difficult times. Government finance is sometimes complicated and the ordinary person does not understand this is not public money to be spent on them. I have kicked this dead horse several times, but I would like to share yet another primer, this time with simple graphics.

Fig.1 MAS buys foreign currency/sells S$

MAS manages the S$ exchange rates by setting a band within which it is allowed to move for each pair of currency. If there is an upward pressure on the S$ say for the S$/US$ pair, MAS intervenes in the FX market to sell S$ and buy US$. MAS pays for the US$ simply by crediting the reserve account of the counterparty bank with the S$. The counterparty bank transfers US$ to MAS account at the Federal Reserve in New York.

The MAS thus increases its foreign currency inventory (Official Foreign Reserve) with nothing. It simply credits a bank's account. This is commonly referred to as "printing" money. So technically, MAS has unlimited power to buy foreign currencies. Some people tend to see this as "money is for free".

On the other hand, to buy S$, MAS has to pay for it with real foreign currencies. MAS intervenes in the FX market to buy S$ when there is downward pressure on the local currency. Thus MAS needs to maintain a certain level of Official Foreign Reserves at all times.

Fig.2 Inflationary effect of 'printing' S$

Once the S$ is with the bank, it gets circulated into the market which increases the supply of money. Money gets deposited with banks and banks lend them out. Bank A lends to customer A who deposits at Bank B. Bank B lends to customer B who deposits at Bank C, and so on. This is called fractional banking and it has a multiplier effect on the supply of money. How much the money can multiply depends on the reserve requirements set by MAS. The reserve requirement means banks cannot lend out the full amount deposited with them. They need to keep a certain sum with MAS. If the reserve requirement is 10%, the S$1,000 can end up with S$10,000 through fractional banking.

Thus the 'printing' of S$ by MAS has a downside. Too much money supply creates inflationary pressure on goods and services. One of the key responsibilities of MAS is to ensure price stability. That means it has to find a way to negate the expansion of money supply when it purchases foreign currencies in its market intervention.

Fig.3 Sterilising the S$ 'printed' in market intervention

To remove from the market the S$ that was 'printed' to pay for the foreign currency, the central bank issues MAS Bills. These are S$ denominated  short term securities of 4 to 12 weeks. Investors buy these MAS Bills and pay through their banks which essentially means MAS debits the banks' accounts. The liability is recorded as a credit in the MAS Bills account. The S$1,000 is thus removed from the market, or sterilised.

The effect in the books is MAS has changed its liability from due to banks to a debt instrument, ie MAS Bills. In other words, the foreign currencies are actually funded by debt.

Fig.4 Transfer of excess OFR to government

MAS determines when to transfer excess OFR to the government. The Ministry of Finance issues RMGS (Reserves Management Government Securities) which are subscribed by MAS. RMGS are non-tradeable securities denominated in S$. They are issued solely as a mechanism for MAS to transfer excess OFR to the government.

MAS transfers the US$ to the bank in New York where GIC has their account. In MAS books, the asset has now changed from Foreign currency to Securities - RMGS. (There are other internal entries to deal with the dual currency transaction).

The excess OFR ends up with GIC to invest. In this example, GIC co-mingles the original OFR sum of US$1,000 into their investment portfolio. The currency risk is managed by GIC. What is important to note here is that the asset (investment) is carried in the books of GIC, but the ultimate liability, the MAS Bills, is in MAS books.

To put it bluntly, the GIC investments represented by this US$1,000 is not public money. The S$75 billion OFR transferred out of MAS into GIC is not for the goverment to spend.

Fig.5 Reserves and National Reserves

Reserves are sums of money that are set aside for specific purposes. These reserves include debt (various government securities) and national reserves (from accumulated budget surpluses, government land sales, and the original equities transferred to Temasek at its formation), This distinction is necessary because only the national reserves portion belong to the people of Singapore collectively.

How the national reserves can be spent is regulated by law. This prevents any political party, on winning the mandate to govern, to pursue frivolous fiscal policies.

The reserves from debt instruments cannot be spent. By law, money raised from the issuance of the various government securities cannot be spent. Those securities are not issued for fiscal purposes but for other specific objectives, eg SSGS and RMGS is for transferring CPF money and MAS excess OFR to GIC to invest

Closing words:

The S$75b transferred from MAS to GIC this month is not money the government can spend on Singaporeans. There is a debt on the liabilities side of MAS books to repay. Growth in the foreign reserves in MAS is not profits. Let's not criticise the government for not using this S$75B to help alleviate the people's problems.

SINGAPORE SANCTIONS RUSSIA - A BETRAYAL OF FIRST PRINCIPLES IN FOREIGN RELATIONS

Some time in 2009 Lee Kuan Yew met with Dr Mahathir in Kuala Lumpur. The issue of water supply was discussed. There have been different versions of whether LKY threatened war if Malaysia cut off our water life line. Dr Mahathir had said no such threat happened. In his memoir "From third world to first world" LKY had this to say of that meeting:

"He was direct and asked what we were building the Singapore Armed Forces for. I replied equally directly that we feared that at some time or other there could be a random act of madness like cutting off our water supply which they had publicly threatened whenever there were differences between us … In the agreement [Singapore-Malaysia Separation Agreement], the Malaysian government had guaranteed our water supply. If this was breached, we would go to the UN Security Council. If water shortage became urgent, in an emergency, we would have to go in, forcibly if need be, to repair damaged pipes and machinery to restore the water flow. I was putting my cards on the table. He denied that such precipitate action would happen. I said I believe that he would not do this, but we had to be prepared for all contingencies.”

In another interview at another time LKY said if the Malaysians breached the Water Supply Agreement, "it means war" because water is a matter of life and death.

Thankfully, friendly relations between our two countries prevailed. I broach this issue to discuss 'first principles' in foreign relations. Suppose Malaysia cut off the water supply and Singapore invade Johore to secure the pipelines. Would Foreign Minister Vivian Balakrishnan then say our invasion is justified? Cutting off the water supply is the "casus belli" - an act or event that provokes or justifies a war. We act on the principle of self-defence from an existential threat by the Malaysians breach of obligations grounded in a legal contract. Surely all Singaporeans whether PAP or opposition supporters, whether pro-Ukraine or pro-Russia, would share a single opinion that the invasion of Johore is justified because their life depends on it.

The Russian invasion of Ukraine has narratives normalised by blistering lies of western media. It is as if Russians woke up one morning and decided on the invasion. What is the casus belli for the Russo-Ukraine war? Most folks are shallow on the background history and simply take the official line of an angelic helpless Ukraine invaded by a dictatorial Putin who holds Russian irrenditist views. Ukraine has a hotch potch demographic with divisions along religious and language fissures, with Catholics and Ukrainian speakers on the West, and Eastern Orthodox Church and Russian speakers in the East and Crimea. The western region has a strong presence of ultra-right wing elements of neo-nazis with its Azov battalion, and Azov Youths which is practically a movement. Nazi symbolism of the iron cross, wolfsangel and sonrendah are everywhere. The conflict between the West and the East started in 2014 when President Yanukovych rejected the deal to join the EU.  Maidan Revolution erupted, with  assistance from George Sorros and CIA. The West has rained thousands of missiles on the East for 8 long years. Russia has fought 2 terrible wars against Nazi Facisim where millions perished and Western Ukrainians fought for Germany. Into this mess comes the interference from New World Order elites and corrupt US officials that forment unrest to have their own man installed in the presidency. Add to this the secretive US biolabs and the ambition of Ukraine to join Nato.

Crimea was an independent Khanate under the influence of the Ottoman Empire 500 years ago. In the 1770s a weakened Ottoman Empire ceded control of Crimea to Russia. During the Soviet era, Crimea was passed over to several administrations but mainly under Russian Republic of SSR. Finally in 1954 Nikita Kruschev transferred Crimea administratively to Ukraine. In 1991 after the collapse of USSR, Ukraine became an independent state with Crimea as part of it. However, Crimea had an independent constitution that allowed its parliament to decide on their own sovereignty. In 2014 following a referendum where 97% voted to break away from Ukraine, Crimea returned to Russia's fold. Western press had the world believe Russia annexed Crimea by force. Following this, Ukraine made several provocative intrusions into Russian waters in the Black Sea where they had their naval bases. Russia reacted with great restraints in these provocative naval intrusions.

What indeed was the casus belli for Russia to invade Ukraine? Does Russia have no right to a view on national security threats? This is not to deny that Ukraine has a right to view a Russian threat and want the Nato umbrella. What it means is that it's complex and our tiny little island is in no position to really take a stand. It is more difficult than the Schleswig-Holstein question, a long ago territorial dispute between Denmark and Germany which British Prime Minister Lord Palmerstone famously joked what the conflict was all about: "Only three people have ever really understood - the Prince Consort (of Queen Victoria), a German professor, who has gone mad, and I, who have forgotten about it".

Singapore Foreign Minister Vivian Balakrishnan explained the sanction on Russia is not taking sides, but an act on principles. “..., unless we, as a country, stand up for principles that are the very foundation for the independence and sovereignty of smaller nations, our own right to exist and prosper as a nation may similarly be called into question.”

How is this unilateral act to sanction not against the principles of neutrality that Singapore has always stood for. In the "annexation" of Crimea in 2014, Singapore strongly condemned the Russian action (despite the referendum). In 1963 Singapore held a referendum to join Malaysia. Should it similarly be said Singapore was annexed by Malaya? 

Realpolitik is a system of politics or principles based on practical rather than moral or ideological considerations, or even some international laws. Henry Kissinger and Richard Nixon were the primary proponents of this approach which led to decisions for acceptance of a defeat of the Vietnam War, Detente in the Cold War, and rapprochement with Communist China.

Heaven forbid that one day a foreign country invades Singapore. Minister Vivian has us believing that countries will come to our assistance because we have been goody-two shoes with principles of international laws on national sovereignty. The cold dispassionate fact is, in realpolitik, first principles of foreign relations stand on the shaky pillar of national interest. The only consideration for all countries is what's in it for them. Every country acts in its own national interest. One understands why Kishore Mahbubani refers to the 'naive' in one of his wonderful articles on foreign relations.

 

Lord Palmerstone said about 160 years ago : "We have no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow."  This famous quote has been paraphrased in so many ways by so many equally famous personality. French President de Gaulle kept it short : "No nation has friends, only interests."

Scholars of foreign relations have looked at national interest in world politics in terms of three major objectives of security, economic development and community interest. It is multidimensional and therefore a careful analysis of policy impact is required. Are there AI applications that can unburden the decision making? Not likely due to its qualitative and stochastic nature. Scholars have been trying to develop decision making models that help.

Let's look at these 3 major objectives and see how Singapore stands in relation to the Russo-Ukraine war and our sanction.

'Security' deals with the territorial and physical integrity of Singapore. Weak nations pursue alliances but Singapore does not, prefering to be a neutral state. Our defence doctrine is based on adopting national service to build a civilian army to make up for lack of manpower, and acquire the latest defence technology for hardware advantage (thus higher defence budget spending). Strong defence capability is a deterrence which means lower likelihood of onset of war, or a shorter war duration, if ever. Ukraine is 8,600 km away, events there present no threat here.

'Economic development' is the pursuit of free trade, open markets and foreign direct investments. In this regards, try to do a Singapore-Russia vs a Singapore-Ukraine analysis. Trade with Russia is not significant, but it has been growing substantially by more than 10% annually in the past few years. Last year, Singapore signed FTA with the EAEU or Eurasian Economic Union (comprising of Russia, Armenia, Belarus, Kazakhstan and Kyrgyzstan) which has a combined GDP of US$5.1T compared to Singapore's US$340B. With this FTA, the EAEU countries were primed to enter the huge Asean market using Singapore as the Hub or gateway. The EAEU are also in the process of setting up their regional reserve currency. Warmer climate is now making Russian agricultural production in abundance. Russia is 3rd largest producer in oil and 2nd in gas. With their shift away from Europe as energy supplier, how might all related services and financing of the industry be like in future? As for Singapore's membership in the Artic Council, the role and opportunities is unlikely to remain unaffected. Compare this to Ukraine which has a GDP of US$155B, no FTA with Singapore, and far less trade.

'Community interest' is the building of a shared sense of values and identity among countries. Countries having similar ideologies, institutions, or interests tend to develop somewhat similar policies. In the context of Asean, these values pull us together. Singapore's unilateral sanction of Russia broke ranks. Moving away from neutrality and siding with rich Western nations certainly do not sit well with other Asean member countries. Something is lost. It's called TRUST.

Realpolitik deals with realism. Is national interest really national? The national interest of a country is often hijacked by the interest of power plays of various actors. In Ukraine, the interests of philantrocapitalism of Sorros, US elites like Mitt Rommey, John Kerry, Nancy Pelosi, Biden Crime Family are all at play. This is not a nuanced claim that the Singapore decision have been driven by some personal interests, but it is not very clear whether it has been a policy aligned and synchronised to the New World Order agenda. But what is very clear is the sanction on Russia is not an act on First Principles in foreign relations.

The myopic view of the war is an unprovoked Russian invasion of Ukraine. The bigger picture is a clash of giants, of the West (EU, Canada, US, New Zealand & Australia) against Russia/China. It is a New World Order grouping, a diminishing economic power against a new rising empire. Lee Kuan Yew would have read the situation differently from our current leadership for he was an avid believer of Machiavelli. In a clash between two major powers, Machiavelli's advice to small principalities was never to take sides. Betting on the loosing side has consequences. In this current war, the more astute action is a vocal disapproval of the Russian invasion but encourage the two sides to negotiate for peace. The majority of countries took this step. Singapore sabre-rattled with the sanction. The Russians aren't shutting down the water pipelines in Johore.

Related blog:
Singapore too trigger happy to sanction Russia for goose-stepping into Ukraine