IN DEFENCE OF MAS S$7.4B LOSSES - ALL CENTRAL BANKS HAVE NOWHERE TO RUN

The MAS announced a loss of S$7.4b for the y/e 3 Mar 2022. To many, it is shocking in the magnitude and the fact no one can really recall the MAS ever making losses in prior years. Whilst it's shocking to many, industry watchers were expecting this.

MAS Managing Director Ravi Menon did meet the press to present an ivory tower explainer. Symptomatic of a government used to go roughshod over the mass, the government made no attempt to explain to the ordinary man on the ground. With all sorts of bad news going on and massive losses of crypto failures, the stunning S$7.4b loss of the pre-eminent institution dismayed many. It cast a pall of gloom over the glittering city of achievements, like parents whose child is used to top performer suddenly failed a math test.

On social media, IBs are dead silent. Other disgruntled folks reacted in ignorance with calls for investigation, head chopping, and always the digression to hidden losses of national reserves in GIC and Temasek, etc.

Not surprisingly, the PAP cheer leader in social media, Singapore resident Polish blogger 'Critical Spectator', is tight-lipped. But most surprisingly, it was left to Leong Mun Wai, a non-constituency member of parliament from the opposition, to try to allay fear in his Face Book post "The MAS loss is no big deal". Leong is broadly correct in his post but there is a bit part that I disagree. I like to build on what Leong posted, and explain where I disagree. 

The biggest hit on the profit & loss for the year was from revaluation of foreign assets. The figure is hidden in the operating income line "Income/(Loss) from Foreign Operations [after transfers to/from provisions]" which registered a net negative S$4.7b. In the press conference, Menon mentioned the revaluation loss was S$8.7b. I find it disgusting that such a significant figure but the pally external auditors never considered it diligent to at least disclose in the Note To Accounts.

As with most central banks, the assets of MAS are primarily foreign, in the form of deposits with other central banks, and short term government securities. These are the official foreign reserves of the country. For financial reports, the assets are revalued resulting in a gain or loss. The foreign reserves are in various currencies, and as exchange rates move in different directions, there will be gains in some, and losses in others. For MAS, the net result was a revaluation loss of S$8.7b.

Currency	Rate 31 Mar 2021	Rate 31 Mar 2022	(+)/(-)	%
GBP	1.854000	1.787486	(+)	3.6
EUR	1.577400	1.500300	(+)	4.9
Yen	82.34281	89.8464	(+)	9.1
MYR	3.083000	3.103300	(+)	0.7
USD	1.345000	1.357856	(-)	1.0
CNY	4.871800	4.690100	(-)	3.7
HKD	5.781000	5.761240	(-)	0.4
IDR	10,830	10,567	(-)	2.4

Where SGD has appreciated against a currency, such as GBP, EUR, Yen and MYR, there will be revaluation losses because the assets in these currencies translated into SGD, now have a lower value. The reverse happens in the case, for example, of USD, CNY, HKD and IDR in which SGD depreciated against, there will be translation gains.

Leong wrote :" Of course, with perfect hindsight, the MAS trading team should have bought more US dollars, but that is too much to ask. But given more time, the MAS trading team should be able to make changes to its portfolio to mininise future exchange translation losses".

First, there is no trading team. MAS does not do forex trading. They make market intervention only as part of their open market operation to manage the exchange rate. And they do so by relaying buy/sell instructions to certain accredited banks so their presence is not seen in the market. Secondly, it's not about managing a portfolio. The quantum of the mix of currencies in the reserves is calibrated from the need to support the currencies in which Singapore deals with in both trade and financial transactions. For example, the more we deal in CNY, the more that currency will be in the reserves.

Leong wrote to calm fears "As has been demonstrated in the past, MAS normally generates an annual profit every year - 2022 is exceptional."

MAS maintains a huge foreign reserve. In terms of reserves to GDP ratio, it is one of the highest in the world. In aggregate terms, it is also massive, currently about SGD420 billion. With such a massive figure, a slight change in exchange rate will have significant impact on the revaluation P&L. The questions are then, why have such a large reserve, and why never suffered losses in the past, why only now?

Read: Is Singapore guilty of currency manipulation, buying up foreign currencies and building huge reserves to keep SGD under-valued?

Foreign reserves are needed so that MAS can provide the liquidity if there is a credit squeeze in respect of a particular currency. If there is no liquidity, then companies and the government may be forced to default on their obligations. Just like Russia recently was forced to default on some USD loan repayment not because they are bankrupt but that USD liquidity was denied to them.

How much is needed then? World Bank recommends 5-6 months of import needs, MAS thinks 65%-75% of GDP. MAS had 105% of reserves to GDP, one of the highest in the world. After transferring SGD75b to the sovereign wealth fund GIC, it is now about 95%, still very high by world standards.

But why build such high reserves? Well, persistent trade surplus all these years meant a huge inflow of currencies and MAS had to mop up the liquidity to prevent the SGD rate to break through the official band that currencies are allowed to float. So MAS kept buying foreign currencies to keep SGD rate down, ie under-valued, which makes our exports cheaper. Periodically, MAS has to tighten the SGD by letting it strengthen a bit at a tine. This is called a peg crawl. The SGD rate kept crawling up over the years, against most currencies. The appreciation had been gentle over the years as inflation was within control. So the revaluaton impact on P&L was not significant. In 2022, inflationary pressures caused MAS to tighten SGD 4 times within the financial year. The headwinds of global inflation is very strong in the current economic environment. We see high appreciation of SGD against some major currencies, resulting in massive revaluation losses.

Many fail to understand the reserves has a carry cost because a big portion of the foreign currencies are purchased with debt. This is in the form of MAS bills and FRAs issued to sterilise the SGD printed to acquire the foreign currencies. As at 31 Mar 2022 this debt was SGD230 billion. The cost of this debt is high but again, this is hidden in the financial statements. A statement commentary indicated the Total Expenditure of SGD2.8 billion was due largely to interest on this debt. If we assume an interest rate of 1% p.a., the carry cost of the reserves work out to SGD2.3 billion. 

The reserves are not magic profits that Critical Spectator and his crowd thinks. I debated a few times in Critical Spectator's obsequious echo chamber of opposition haters who subscribe to the idea the reserves are profits. If you ever debate there, you need to have an attitude of Illegitimi non carborundum.

There is a way for central banks to provide foreign currency liquidity. That is to make swap arrangements with other central banks. MAS has several of these arrangements in place. This diminishes the necessity for a standing high reserve and associated carry cost, as well as risk of revaluation losses. However, in a systemic credit crunch, the swap facility may not be availed. In the case of MAS, with or without swap arrangements, it continues mopping up foreign currencies with its managed float policy.

Leong wrote : "An exchange translation loss is a paper loss ........... The paper loss may disappear in future if the foreign currency appreciates against the Singapore dollar."

The term "paper loss" trivialises the seriousness of the matter. What it implies is that yes there was a loss, but there was no resources expended. Well actually, SGD has already been spent to acquire the currency asset. The revaluation loss is to recognise the loss now rather than to wait for the time when the asset is consumed. So feel the pain, it is for real.

Leong is technically right that when the foreign currency appreciates against SGD in the future, the losses may be wiped out. In the short term, on a day-to-day basis, exchange rate volatility indeed means the revaluation numbers fluctuate up and down. But the long term trends could be one directional. For example, will we see SGD/MYR rate back to 1:1 or the SGD/Yen to 1:300? My guess is we probably have to kiss most of the SGD8.7b loss for good.

Leong wrote : " Even if that does not happen (the currency appreciating against SGD), the return from the foreign currency assets will eventually cover the exchange losses. ............ As the MAS is expected to continue to make investment income and gains, these will usually cover the translation loss over the next few years."

Yes, Leong is right. This year, there was an investment income of SGD4b to cushion the SGD8.7b revaluation loss. So supposing next year there is no change in valuation, which means no revaluation losses/gains, and investment income remains unchanged, there will be a positive SGD4b in "Net Income from Foreign Operations". The 2022 loss can be recovered in a couple of years. But don't forget things are not so rosy. There is a carry cost as explained above.

In defence of MAS, you need to understand this. Every company that has to deal with foreign currencies has to manage the exchange and interest rate risks. They do so by some form or hedging or making sure they do not have a currency asset-liability mis-match. MAS is not a for-profit entity. Its job is to manage the monetary policy of the country. As such, it has to maintain reserves and take on the market risk and the carry cost. MAS has to do national service and bear the brunt. Ditto all other central banks in the world.

The real reason why we should not worry about this loss is the financial strength of MAS. It's General Reserves of SGD22.5b was more than enough to absorb the net loss of SGD7.4b. The capital is intact and equity is still strong at SGD41b.

The one thing I'm happy to see is the MAS observed Inter'l Financial Reporting Standards and took revaluation losses in stride. There is no monkeying around like the Federal Reserves which has, as at Q1 of this year, a marked-to-market loss of USD430 billion not recognised in the P&L. Their capital has been wiped out several times over.

.Read : How the Federal Reserves use creative accounting to hide massive revaluation losses that has completely wiped out their capital

Central banks' monetary actions expose them to market risks. All western country central banks went down the same path of 2 decades of Quantitative Easing, printing money to pour liquidity into their markets, and near zero interest rates. This was engineered to revive the economy after 2008 financial crisis. They all now need to raise interest rates to fight global inflation. All will suffer colossal losses when they mark-to-market their bloated balance sheet that is full of securities. If the SGD8.7b revaluation loss of MAS is a shocker, you ain't seen nothing yet.