In 21/22 MAS lost S$7.4b due mainly to negative S$8.7b foreign exchange translation. I blogged on this and concluded “If the SGD8.7b revaluation loss of MAS, is a shocker, you ain't seen nothing yet." So here we are, the numbers for 22/23 are out and it is scary. In his press conference MAS Managing Director Ravi Menon assuaged fears in his calm demeanour and crystal clear explanation.
MAS Financial Statement shows (a) “net loss from foreign operations’ at S$20.8b (of which S$21.4b was due to foreign exchange translation losses and (b) ‘Investment, Interest and Other Expenses’ at S$13.2b (of which S$9b was due to interest expenses).
Forex Translation Losses of S$21.4b:
SGD tightening to reduce the impact of imported inflation caused appreciation of the local currency. SGD strengthened against the trade-weighed basket of currencies by 6.5%. When converting foreign assets back to SGD, they are now valued less, thus incurring losses.
MAS foreign assets are primarily its OFR (official foreign reserves) which is accumulated as a result of SGD tightening when MAS sells SGD to force rates down. The OFR is used in times when MAS needs to protect SGD by buying back thus propping the rates up.
MAS Financial Statement shows (a) “net loss from foreign operations’ at S$20.8b (of which S$21.4b was due to foreign exchange translation losses and (b) ‘Investment, Interest and Other Expenses’ at S$13.2b (of which S$9b was due to interest expenses).
Forex Translation Losses of S$21.4b:
SGD tightening to reduce the impact of imported inflation caused appreciation of the local currency. SGD strengthened against the trade-weighed basket of currencies by 6.5%. When converting foreign assets back to SGD, they are now valued less, thus incurring losses.
MAS foreign assets are primarily its OFR (official foreign reserves) which is accumulated as a result of SGD tightening when MAS sells SGD to force rates down. The OFR is used in times when MAS needs to protect SGD by buying back thus propping the rates up.
As I pointed out in my previous blogs, there is nowhere to run for central banks. They have to take the market risks. Hedging their forex exposures would have unwound the objective of inflation control in their forex market intervention. This was exactly how Menon explained it.
Thus the higher amount of OFR, the higher the exchange risk. Singapore has one of the highest OFR to GDP ratio of 70%+. A high OFR attests to the strength of a currency.
Translation losses is not a measure of MAS management performance since it is unavoidable.
Interest expenses of S$9b:
Menon revealed the S$9b is attributable to the funding cost of the OFR purchases. MAS forex market intervention to purchase foreign currencies create SGD which flows into the economy, increasing liquidity which is inflationary. Forex market intervention by MAS is sterilised by their open market operation with money market instruments like MAS bills and reverse repos. These are MAS borrowings which sucks back the liquidity from the market. Thus MAS purchase of foreign currencies are effectively funded by borrowings and there is a cost.
For 22/23 the interest expense hit the roof due to high volume of transactions and rising interest rates. A net additional purchase of S$42.1b of foreign currencies lifted OFR level to a high S$597.8b before a transfer of S$162.7b to GIC by issuance of RMGS (reserves management government securities). SORA (Singapore Overnight Rate Average) increased by 2% during the year.
Just as for translation losses, interest expense is not a measure of MAS management performance because it relates to management of the OFR to control inflation.
Investment income S$0.6b
As Menon explained, it is only this income segment that one can measure MAS management performance. Menon framed this as reasonably good performance when compared to a negative S$0.9m the prior year, a long term return of 11% over ten years, and in a year of extreme pressures on bonds and equities. Sounds very much Temasak-esques, but I think the facts are on Menon’s side. I would also add MAS is constrained to invest only in very liquid assets thus with lower yields.
Impact on Capital:and why I disagree with Menon:
Menon is right to stress that the huge translation loss of S$21.4b has no bearing on OFR and MAS ability to protect SGD. This is because the holdings of foreign currencies remain unchanged, it is only its value in SGD terms have gone down.
However, this is where I disagree as Menon employed PAP.-speak. Menon explained the translation loss and high interest expense are not causes for concern. This is well understood and accepted cost of central banks in a regime using foreign exchange rate to control inflation. He added what is important is capital adequacy and for this reason the MOF has injected S$25b to raise MAS paid-up capital of S$50b. Thus MAS is still in a very strong position to execute is mission of monetary policy of non-inflationary growth.
I see here Menon in PAP.-speak. Of cause massive losses are a concern because it diminishes capital. In 2021/2022, the huge S$8.7b loss was not an issue because MAS had massive general reserves to absorb it. This year, MAS has brought forward general reserves of S$15.1b. The S$30.8b has wiped out this general reserve and reduced equity to S$9.3b which would have shaken the international financial market. By injecting S$25b capital, MAS now has net equity of S$34.3b, still in a very strong position.
To those who agree S$30.8b loss is not a concern:
There are many who accept Menon’s narrative the loss is not a concern, notably from pro-establishment side. My good FB friend non-partisan Tan Kim Lian seems also inclined toward this view.
To these good folks I ask, where did the S$25b to top up MAS capital come from? The capital injection was transacted in March 2023 so it is off budget. Has any member of parliament asked about this?
The translation loss did not suddenly occur at year end when they prepare the financial statements in SGD. Recall last year I said about the S$8.b FX losses that you ain’t seen nothing yet? If I could see it last year, of course MAS is well aware of what is to unravel. It goes without saying the government had to prepare for recapitalising MAS well in advance. Do you think this has anything to do with die die must increase GST and other fees/rates?
To those who think translation losses is a paper loss:
There are many who think this way. For example, Leong Munwai once said "An exchange translation loss is a paper loss ........... The paper loss may disappear in future if the foreign currency appreciates against the Singapore dollar." In my long discourse some time back with Jamus Lim, I believe he also shares this sentiment.
This is not exactly wrong. In the short term when rates are volatile but within a band, translation differences even itself out. But over a long term pronounced trend, the translation differences are unlikely to unwind. Do you expect GBP/SGD back to 8.000 and SGD/MYR to1.1000?
Money has been expended to acquire the foreign currencies. The losses are real and wealth is lost as capital is reduced. This MAS event serves to illustrate the point.
Past reserves utilised:
When the S$30.8b losses are charged off against general reserves, MAS dug into past reserves. I wonder if President Halimah is aware of this. MAS now has a negative general reserves of S$15.7b.
Menon pointed out MAS has to make good the general reserves before it can then return to contributing future net profits to budget.
Chances of recovering the translation losses:
For MAS to make translation gains again would depend on the depreciation of SGD. Endogenous factor is the weakening of our trade numbers, ie lesser exports than imports, or trade deficits. Exogenous factor would be interest rate policies of our trade partners. Our major trade partners are China, Hongkong, Malaysia, US, Indonesia, Taiwan. S Korea, Japan, in that order.
Where do you see are the currencies to strengthen against SGD? The dedollarisation of USD will see it weakened, and with it the CNY peg will also see a weaker Chinese currency. A Trump 2024 win may see USD weakening pace a bit slower, a Biden win, or other nut progressive Democrat like Gavin Newsom, will see a quicker pace of USD depreciation.
There is not much signs the SGD will weaken in the short term.
Asset translation vs currency revaluation:
Finally, a few words on a pet topic of mine. How do banks actually account for changing values due to exchange rate volatility. There is a mis-understanding that visits even the top peer levels of the profession. This is the problem that motivated me to write the book advertised below.
Almost everyone, including accounting professionals, tend to think the translation loss occurred on 31 Mar 2023 when MAS reported its foreign currency holdings into its functional currency SGD. In practice, this is not how it works.
All foreign exchange transactions create open currency positions and upon settlement cause currency mismatches which are reflected in currency position accounts. These currency position accounts are revalued everyday. This has the same effect as a daily valuation of the entire assets and liabilities of the bank’s books. That's why I mentioned MAS knew about the exchange loss situation well in advance.
Menon’s presser:
You can watch Menon’s full press briefing here.
Menon’s explanation fully affirmed a lot of points I brought up in previous posts listed here.
In Defence of MAS S$7.4b Losses -- Central Banks Have Nowhere To Run (22 July 2022)
Again, did Singapore grow richer by S$235b during the pandemic? - (26 Jul 2021)
Tiktok video brags Singapore grew richer by more than S$200B during pandemic. It's hogwash and here's why. - (17 Jul 2021)
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