In a Nov 7 Facebook post ex-GIC economist Yeoh Lam Keong commented on 2 issues. One related to the budget surplus which I covered in my previous blog. His second point was about national reserves which is what I address here.
Yeoh's post received a POFMA, the government's response is here.
Tan Kim Lian substantiated Yeoh's claims about the quantum of fiscal surplus and challenged the government to POFMA him. Tan seems to want to wear POFMA as a badge of honour. I had a bit of discourse with a commenter when I pointed out where I think Tan got it wrong. Unable to convince the commenter, I said I had brought the horse to the water and cut out. To which he responded he await the POFMA. He meant if Tan receives the POFMA, then I was right, if not, then I was wrong. I have no intention of clipping anyone's ego, but I am certain the government confines the issuance of POFMA only to those they feel whose views impact the public. Yeoh, being an ex-GIC economist, obviously carry that stature, that being the reason for the POFMA.
Although a POFMA seems like an imposing big cane of the government, there are no penalties. Make no mistake, opinions without malice is perfectly fine. POFMA recognises this. Despite the clout of POFMA I am glad for the exchanges for everyone learns something of national interest, hopefully. As a matter of fact, for its perceived notoreity, POFMA provides the publicity to spread the understanding.
In the same vein of furthering learning, I like to share my views on the government's clarifications in the POFMA.
MOF : "(7) In his Facebook posts, Yeoh also expressed his view that “our reserves” would grow very strongly (i.e, at “the rate of $50-$100 bn a year”) for the next 5 to 10 years because of balance of payment (“BOP”) surpluses, leading to higher Net Investment Returns Contribution (“NIRC”) derived from the reserves, over the medium to longer term."
"(9)(a) ... while BOP surpluses correspond to an increase in OFR assets, this increase in OFR assets does not result in an equivalent increase in the Reserves. This is because the increase in OFR assets may be matched by increases in MAS’ liabilities."
The NIRC is in relation to GIC and Temasek. The size of the investment portfolios and the earnings for the year of the sovereign wealth funds do not matter. NIRC is based on the expected long term rate as computed by the ministry and applied on the net assets (ie equity) of the 2 companies.
BOP surpluses means Singapore sells more to the world than it imports. More foreign currencies flow in to buy our goods and services. MAS mops up the foreign currencies to prevent a SGD appreciation. MAS purchase of foreign currencies are always sterilised, meaning it is with debt in the form of securities such as MAS bills. So BOP surpluses end up with MAS having more forex reserves and more liabilities, ie no increase in equity. MAS transfers forex reserves that are deemed in excess of their needs for monetary policy management to GIC for longer term investments. This increases the GIC investment portfolio. Just like MAS, GIC has increase in assets but also increased liabilities to MAS. There is no increase in GIC equity. Bottom line is, BOP surpluses do not translate to increase in the country's reserves.
Hence, Yeoh actually got it wrong on 2 points. (1) Increase in BOP does not lead to increase in reserves. (b) Increase in GIC investments does not lead to increase in NIRC.
MOF : "(8) The Constitution defines the “Reserves” as the total assets less total liabilities (i.e. net assets) of the Government and other entities specified in the Fifth Schedule to the Constitution, such as the Monetary Authority of Singapore (“MAS”). [1] The assets include the Official Foreign Reserves (“OFR”) held by MAS."
This MOF description left out something and is ambiguous in another.
(a) Entities include all statutory boards and all companies and organisations owned by the various wings of the government and stat boards. The numbers are extensive.
(b) The statement here leads one to think the OFR is a component part of the reserves. The OFR is a massive figure so a mistake of definition is significant when one envisions the reserve aggregate. The net assets of MAS forms part of the reserves. Suppose MAS has total assets of $100 of which $90 is OFR, and liabilities of $70. The reserves of MAS is only $30. The OFR of $90 is within the $30 reserves. Majority of folks make the mistake of assuming the entire OFR is reserves.
How much is our reserves?
I have reiterated in all my previous blogs on the national reserves. The book value of our reserves can be aggregated in a matter of a couple of days by aggregating the equity of all the entities of the government.
What are our assets that make up the reserves?
The reserves, as defined in the Constitution, is a conceptual aggregate. One cannot go out and pick out all the assets physically and specifically that make up the national reserves.
GIC and Temasek investments do not all belong to us
All social media posts and comments I have come across, without fail, incorrectly refer to the investment portfolios of the sovereign wealth funds as reserves. In all my blogs I have always pointed out these are not all reserves. Only the net assets form the reserves. Of the funds flowing into SWFs to be invested, those belonging to us are from land sales and budget surpluses.
President Ong Teng Cheong and the 56-man years engima
Most Singaporeans bo-chup about searching for truth and keep harping on a badly beaten and maligned horse. It's a 1999 story when President Ong spoke at a press conference of how the Accountant-General had told him it would take "52 man-years" to produce the value of the full list of physical assets of the Government. The misinformed continues to believe the government refused to provide the president with the size of the reserves arguing it will take 56 years to compute.
Very briefly, the truth of the matter is Ong asked in 1992 for information regarding assets owned by the government. He was provided the info within 2 months. Ong then asked for the value of the assets. As his job was to protect past reserves, Ong reasoned it was necessary to know the asset valuation in a change of government. That was when the Accountant General advised him it would take '56 man-years' to compute.
Detractors completely mis-understand the meaning of '56 man-years' as 56 years and are still absolutely blur as to the whole context of the matter.
Ong held the press conference to declare he will not stand for re-election due to his disagreements with the government's actions on certain issues as regards past reserves, where his opinions did not align with the government's. In this episode, it is heartening to note Ong took his responsibilities as the guardian of past reserves seriously, had the temerity to question the government, and not to stand for re-election as his opinions differed. That is the Confucianist gentleman of integrity and conviction and why Singaporeans love him. Unfortunately, Ong was an architect by training, and his dissent with the government's position was predicated on accounting principles that he could not accept. There was no hanky-panky. The government was absolutely above board. The Finance Minister Richard Hu explained everything in detail here.
MOH : "(9)(b) "Second, it is speculative to suggest that MAS’ OFR will continue to grow at the same rate as historical BOP trends. While MAS has had a steady accumulation of OFR in recent years, this took place during a period of unprecedented monetary easing globally. The same monetary conditions are now turning with global central banks tightening monetary policy aggressively. Trends in OFR accumulation will change against this evolving global monetary backdrop."
One particular prolific Facebook contributor, an ardent PAP fanboy, never fails to blow trumpet how a well managed Singapore attracts inflows of foreign currency which causes MAS to mop them up to prevent appreciation of SGD. Whilst that is true, MOH explanation here shows clearly there is an exogenous causality to the appreciation of SGD. The monetary easing of foreign central banks also has an upward pressure on the SGD. MAS buys foreign currencies to press the SGD rate down. Result - MAS holding of forex reserves, ie OFR increases. Whilst the uniformed thinks that's good since more OFR means more reserves (wrong, as explained above) and increased investments in GIC, the downside is MAS carries a huge currency exposure, which in 2021/22 suffered a massive $8.7b loss in exchange.
Conclusion:
I have blogged on reserves in the past and my writings have been consistent and in keeping with the government explanation above. So once and for all. let's not refer to the investment portfolios in GIC and Temasek as our reserves. Neither is the forex reserves of MAS. Only a portion of our reserves are in those portfolios. I think I have been the lone voice in social media to have stressed this point for years.
However, we can refer to them as reserves in the accounting sense which identifies funds not available for general spending but set aside for some specific purposes.
Read: My old blog where I explained what is national reserves
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