Monetary Authority of Singapore (Amendment) Bill

Order for Second Reading read.

1.43 pm

The Minister for Finance (Mr Lawrence Wong): Mr Speaker, I am taking this Bill on behalf of the Senior Minister and Minister-in-charge of the Monetary Authority of Singapore (MAS) and I beg to move, "That the Bill be now read a Second time."

As Singapore’s central bank, MAS conducts monetary policy to maintain medium-term price stability which is necessary for sustained growth of the economy. MAS conducts monetary policy by managing the nominal effective exchange rate of the Singapore dollar, the S$NEER, within a policy band. When global financial or economic conditions cause the S$NEER to be subject to significant strengthening or weakening pressures that are inconsistent with domestic price stability, MAS may intervene in the foreign exchange market to sell or buy Singapore dollars, to keep the S$NEER within the policy band.

The Official Foreign Reserves (OFR) plays an important role in the MAS’ conduct of monetary policy and support of financial stability. It gives confidence in Singapore's exchange rate-centred monetary policy framework, particularly during periods of speculative pressure or financial crises, when MAS will need to use its OFR to purchase Singapore dollar to defend the exchange rate.

Conversely, in periods of appreciation pressures on the Singapore dollar, MAS can also sell Singapore dollar in exchange for foreign currency to keep the S$NEER within the policy band. When this happens, MAS accumulates foreign assets and its OFR grows. MAS invests the OFR mainly in safe and liquid assets, so as to ensure that the OFR is available at short notice when needed – for example, to fend off a speculative attack on the Singapore dollar which could potentially undermine confidence in the Singapore economy.

Singapore's excess of domestic savings over investments and persistent capital inflows – in part, reflecting Singapore's triple-A credit rating and the abundant liquidity in global financial markets – have meant strong appreciating pressures on the Singapore dollar. If left unchecked, the S$NEER will strengthen much more than necessary to keep inflation low and stable. As MAS intervened in the foreign exchange market to dampen appreciation pressures on the S$NEER, it has been steadily accumulating OFR beyond that which it estimates is required to fulfil its monetary policy and financial stability mandate.

The optimal amount of OFR that MAS estimates it needs is currently around 65% to 75% of GDP. There is no strict formula to determine this range, but it takes reference from a range of internationally used measures of reserve adequacy that recognise the foreign currency needs of our small open economy that is heavily dependent on trade and financial transactions with the rest of the world. MAS has assessed that this amount of OFR should be able to provide a sufficient buffer against severe crises in the global economy and financial markets.

Today, the stock of OFR has grown to S$566 billion, or about 111% of GDP as at the third quarter of 2021. It is significantly above the range which I just mentioned.

It would be inefficient for MAS to hold on to OFR beyond its needs, because returns on the OFR will be limited by MAS' relatively safer and more liquid investment posture as a central bank. Indeed, it is for this reason that GIC was set up in 1981 to invest OFR that was not needed by MAS in longer-term, high-yielding assets rather than in liquid but low-yielding assets.

The transfer of OFR from MAS to the Government for management by GIC has therefore been a long-standing practice. For example, in 2019, MAS announced a transfer to the Government of S$45 billion of OFR after reviewing the optimal amount of OFR needed.

To date, transfers of MAS' OFR to the Government have been facilitated through a corresponding reduction in the Government's Singapore dollar cash deposits with MAS. In other words, there is a reduction of assets on MAS' balance sheet, which is matched by a reduction of liabilities.

However, this transfer mechanism is increasingly facing constraints. This is mainly because MAS' accumulation of OFR has in recent years persistently outpaced the growth of Government's deposits with MAS, which are not growing as quickly due to smaller fiscal balances. For example, if we want to bring the current level of OFR to the upper end of the optimal range, or 75% of GDP, about S$185 billion of OFR will have to be eventually transferred to the Government. This is far in excess of the Government’s current deposits with MAS.

So, we need a new instrument to effect the transfer of assets from MAS to the Government for long-term investment management. To be clear, this transfer of assets does not increase the total size of the Government’s reserves. It is about shifting assets from MAS to the Government as part of long-term investment management by the GIC.

The Bill sets out legislative amendments that will introduce powers in the MAS Act for MAS to subscribe for a new type of non-marketable security issued by the Government solely to facilitate such transfers of OFR that is not needed for MAS' mandate. This new security is called Reserves Management Government Securities (RMGS). The amendments will allow MAS to subscribe for RMGS issued by the Government under the Government Securities Act (GSA), as consideration for OFR that is transferred to the Government for longer-term investment management by GIC.

In introducing this Bill, MAS and the Government have sought to ensure that MAS' ability to fulfil its mandate is not affected. Two sets of safeguards have therefore been proposed in both the MAS Act and the GSA to tightly circumscribe the conditions for MAS’ subscription of RMGS and the Government’s issuance of RMGS. I will provide further details about each set of safeguards.

The first set of safeguards seeks to robustly address potential misperceptions of monetary financing, in other words, MAS financing the Government's spending. Currently, MAS is already prohibited under the MAS Act from lending to the Government or subscribing for Government securities, apart from limited exceptions, such as to conduct monetary policy or to develop the bond market in Singapore.

Similarly, there are existing safeguards under the GSA today, where the Government’s proceeds from borrowing are accounted for in the Government Securities Fund and can only be used for investments.

Thus, borrowings by the Government in the form of RMGS, will not increase the amount available for spending by the Government.

The Bill will add safeguards in the MAS Act and the GSA to avoid any misperception that RMGS will constitute monetary financing of Government spending.

First, the Bill will empower MAS to subscribe for RMGS for the sole purpose of facilitating the transfer of OFR to the Government and MAS can do so only if the subscription does not compromise its objective of ensuring medium-term price stability.

Second, the Bill will require MAS to use only foreign assets to subscribe for RMGS; and correspondingly, the Government to accept only foreign assets in exchange, to be accounted for in the Government Securities Fund. This draws a clear and direct link between MAS’ RMGS subscription and the transfer of MAS’ OFR to the Government and eliminates the possibility that MAS as a central bank creates Singapore dollars to finance Government spending.

The Bill will introduce within the GSA a separate net issuance limit for RMGS, which will be S$580 billion. Of this amount, about S$185 billion represents the amount which MAS will have to transfer to the Government in phases to bring the level of OFR back to the optimal range. The bulk of the remainder is estimated based on the expected pace of OFR accumulation in future years.

The separate net issuance limit differentiates RMGS from other types of Government borrowings. Transfer amounts and hence RMGS issuance depends on the accumulation of OFR which is driven mainly by MAS' conduct of monetary policy. This, in turn, is affected by financial market factors that can be uncertain. Having a separate limit for RMGS will ensure that the planned issuances of other Government securities and Treasury Bills are not affected should the issuance of RMGS be higher than projected. Conversely, it will also avoid creating additional unintended borrowing space for other Government securities and Treasury Bills, should RMGS issuance be lower than expected.

For transparency, MAS will publish the outstanding RMGS amounts each month. The Government Financial Statements will also state the total gross issuance and total gross redemption of RMGS, in addition to the outstanding RMGS amount. So, that is the first set of safeguards.

A second set of safeguards will preserve MAS' access to sufficient OFR to fulfil its mandate of conducting monetary policy and ensuring financial stability.

The Bill sets out in the MAS Act that any subscription for RMGS can only be made for the purposes of transfer of OFR in excess of the amount MAS considers necessary for the conduct of monetary policy. MAS alone determines the amount of OFR required to meet its mandate and consequently, the amount of OFR which can be transferred to the Government. The Government plays no role in this decision. Consequently, MAS also determines the amount and timing of its RMGS subscriptions to effect transfers of OFR, and the Government cannot independently effect a transfer of OFR from MAS.

The Bill also sets out in the GSA that RMGS will be issued subject to such conditions as to repayment and redemption as may be agreed between MAS and the Government. These conditions will safeguard MAS' access to sufficient OFR to implement monetary policy and support financial stability.

For example, MAS will have the right to redeem RMGS before maturity at par, to meet its OFR needs in support of the conduct of monetary policy and financial stability. We expect that the optimal amount of OFR held by MAS will comfortably meet its needs under most circumstances. Hence, MAS' redemption of RMGS before maturity will likely be needed to supplement OFR only in a tail risk event. When MAS redeems RMGS at or before maturity, MAS will be repaid in foreign assets.

These conditions will ensure that the RMGS on MAS' balance sheet can readily support MAS' ability to fulfil its mandate if necessary.

In conclusion, Sir, this Bill will allow MAS to subscribe for RMGS issued by the Government for the sole purpose of facilitating continued transfers of MAS' OFR to the Government for longer-term investment by GIC. RMGS will enable such transfers to be sustained over the longer term.

While the Government will take on more debt as a result of RMGS, borrowing is not revenue and the introduction of RMGS does not increase what the Government can spend. The Government's approach towards borrowing remains unchanged – the Government's borrowings is for non-spending purposes with the exception of the recently introduced SINGA to finance spending on nationally significant infrastructure.

This Bill will also put in place safeguards to ensure that RMGS will not and cannot be used for Government spending, and that MAS will continue to have ready access to the transferred OFR to support MAS’ ability to fulfil its mandate as necessary.

Further, the nominal increase in Government debt through RMGS will be matched by an increase in assets, with no change in the Government’s net asset position. The Government continues to have a strong balance sheet with no net debt. RMGS does not change this, as all RMGS issuances are only used to facilitate transfers of assets for longer-term investments. Mr Speaker, Sir, I beg to move.

Question proposed.

Mr Speaker: Mr Liang Eng Hwa.

1.57 pm

Mr Liang Eng Hwa (Bukit Panjang): Mr Speaker, Sir, Singapore has always been an attractive destination for foreign investments; both direct investments and financial investments.

In 2020, despite being an uncertain and challenging year, EDB was able to attract direct investment commitments of $17 billion, very much keeping up to the trajectory for inbound direct investments.

On the financial investments front, the Singapore dollar denominated equity and debt market assets continue to attract significant capital inflows as investors take comfort in our solid sovereign ratings, our strong economic fundamentals and political stability. Coupled with the country's net positive savings, our local dollar persistently faced strong appreciation pressures.

In order to manage the Singapore dollar within a tolerated trade-weighted band, MAS would often need to intervene in the foreign exchange markets to moderate the rise of the Singapore dollar and as a result, accumulate a growing size of foreign currency, known as the Official Financial Reserves (OFR).

To many jurisdictions, this would be an enviable position or a happy problem to manage. It demonstrates the international markets' confidence in the Singapore’s economy, the securities that we issued and the Singapore dollar.

While this may be a happy situation, we need to manage a couple of related issues. Firstly, how much of the OFR does MAS needs to conduct monetary operations effectively and to ensure price stability and markets stability? In excess of that OFR, what do we do with the accumulated OFR which are in foreign currencies? How can we derive decent returns from these accumulated funds?

Firstly, on how much of the OFR should MAS hold. The Minister has just mentioned that the MAS, as at November 2021, holds S$566 billion of OFR. This is quite a significant increase from the year before of S$479 billion in December 2020. That is an 18% increase.

The current level of OFR represents more than 100% of the size of Singapore's GDP. The Minister mentioned that it is about 110% or 111% of the GDP.

MAS determines that the optimal level of the OFR should be about 65% to 75% of Singapore's GDP. I suppose this takes into consideration the size and the daily turnover of the Singapore dollar traded in markets and the ability to buffer against large and sudden outflows of capital that could result in extreme volatility in the Singapore dollar exchange rate. To serve this function of managing extreme volatility, the OFR are kept in cash or high-quality liquid assets so that it can be drawn upon immediately when the need arises.

Whether in absolute amount or relative to the GDP or on a per capital basis, our OFR stock would be among the highest in the world. So, there are no real merits to further add to the stock of the OFR if the optimal level is already more than adequate to manage monetary operations and to tackle markets' tail risk events.

Besides, we also have two other pots of national reserves managed by GIC and Temasek, which could further shore up confidence and strength in Singapore's financial position.

While the OFR amount is regularly published, I would like to take this opportunity in this Second Reading to ask the Minister to share on the framework under which the OFR are managed. What are the liquidity and risk guidelines and is there a target return for MAS in managing the OFR? Also, how often does MAS review the optimal level of OFR to hold and do significant economic or market risk events such as a regional currency crisis immediately trigger upward adjustments of the OFR?

Sir, this Bill empowers MAS to subscribe to the RMGS issued by the Government in consideration for the OFR to be transferred to the Government and thereafter for GIC to manage. With this transfer, the excess OFR can be invested in portfolios with longer-term horizons and relatively more risky assets so as to achieve higher returns than what MAS can deliver.

This instituted transfer mechanism sharpened the clarity of the role between MAS, which primarily focuses on price stability; and GIC, which invests for longer tenures and take on higher risks for higher returns. So, on this aspect, I have two further questions for the Minister.

Would the excess OFR that is being transferred to GIC be managed as a segregated pot from the rest of the financial reserves that GIC manage? My second question is, would the returns from these excess reserves contribute to the annual NIRC?

As to whether the Government could use the RMGS proceeds to finance Government spending, I am satisfied that the current legislative safeguards, namely the GSA and the current amendments to the MAS Act, are adequate to prohibit that. In addition, the Constitution also requires the Government of the day to balance the budget over its term of Government. Sir, with that, I support the amendments.

Mr Speaker: Assoc Prof Jamus Jerome Lim.

2.03 pm

Assoc Prof Jamus Jerome Lim (Sengkang): Mr Speaker, the Monetary Authority of Singapore (Amendment) Bill is complementary to the earlier Government Securities (Debt Market and Investment) Act, which was debated in this House late last year and on which I had previously spoken.

The present Bill introduces important institutional safeguards consistent with this Government's overall approach of designating different accounts for distinct financial functions that are designed to inhibit the purchase of Reverse Management Government Securities, or RMGS, for the purposes of either monetising Government expenditures or financing fiscal deficits. It also embeds several related amendments to the Government Securities Act.

As with the earlier legislation, the stipulations in this Bill are largely technical in nature. The Bill will allow the transfer of official foreign reserves, or OFRs, in excess of what is required by MAS for the conduct of monetary policy to the GIC for management. As long as we accept the premise that such excess reserve accumulation is reasonable, then their transfer to management by GIC is likely to be sound and potentially more efficient.

Mr Speaker, I am not opposed to this Bill, but I will offer some brief comments and questions about several aspects of the Bill proper before moving on to question the premise that our present status quo for reserve accumulation is reasonable.

MAS protocol currently adopts a threshold where OFRs in excess of 65% of GDP are regarded as excessive. I understand that this threshold is not established in law and is operationally determined. Yet clause 15A indicates a cap aggregate amount of $580 billion, which by article 144(a) of the Constitution, requires a Parliamentary resolution to overturn. I am not opposed to this, of course, but I am left wondering why such a specific limit would need to be hard-coded into the letter of the law since the functional use of RMGS purchases are, in any case, limited to reserve management purposes rather than fiscal expenditure.

One is also left to wonder how the 65% or, for that matter, the $580 billion threshold was determined. Would these two amounts be consistent at all times? After all, a 65% of GDP will continue to increase in absolute terms as the economy continues to grow whereas the dollar amount would not. Would this mean a need for periodic revisions to the $580 billion?

I would also add that since 2010, Singapore has been party to the Chiang Mai Initiative while the Federal Reserve has also extended temporary dollar financial swap facilities to Singapore since the Global Financial Crisis in 2008. Does the threshold already account for the additional extra liquidity available as a result of these swap arrangements?

Conversely, the abundant liquidity conditions currently in place resulting from large-scale asset purchases due to unconventional monetary policy operations such as quantitative easing appear globally to be steadily receding. The Federal Reserve Bank has already announced tapering operations, many central banks have already begun the process of low interest rate normalisation and markets already anticipate tighter liquidity conditions to set in around the middle of this year. Would the threshold be sufficient if we are no longer living in a world of abundant liquidity?

Sir, the meta-question that this Bill poses, however, should also, in my view, be asked – why are our foreign exchange rate reserves accumulating as rapidly as they are?

The official reason furnished by MAS in its explanatory brief accompanying this Bill, is that appreciation pressure on the Singapore dollar is the result of "positive net saving and persistent capital inflows arising from abundant liquidity in global financial markets." But this only begs the question of why we appear to be resisting such appreciation pressure of which excess accumulation is but the consequence.

The standard explanation is that MAS is mandated to pursue an exchange rate policy aimed at mitigating the effects of excessive short-term volatility in the real economy. But minimising short-term volatility does not by any means preclude a steady appreciation – or depreciation, for their matter – over time.

Mr Speaker, emerging economies in the process of development exhibit exchange rates which, after correcting for inflation, tend to appreciate over time. This is especially the case for countries that have experienced rapid economic growth as Singapore has since Independence. Yet, remarkably, our real effective exchange rate – that is, the average rate relative to our major trading partners – while waxing and waning over the decades has remained remarkably close to the level that prevailed in 1970.

While we were still a middle-income country, this may have been a viable development strategy. However, in as much as we remain an open economy reliant on competitive exports, we must not forget that there is also a flip side to such exchange rate undervaluation. Not only does this drive up the cost of the intermediate goods our manufacturers use as inputs to production, it also indirectly impoverishes our consumers who must now face higher prices for the Nike shoes, Samsung TVs and Apple iPhones that we import from elsewhere.

This is all the more so in the current macroeconomic environment. Singapore's headline inflation rate, as we discussed earlier during Question Time, touched 3.8% in November, the highest in more than eight years.

Now, this should be unsurprising given how much of our goods and services are in fact imported and as the Minister of State Low Yen Ling as well as Minister Indranee mentioned, global inflation is likely to remain elevated due to a mix of supply constraints, tight labour markets in certain segments and heightened fuel prices. Indeed, both MAS and MTI have themselves acknowledged that this state of affairs is "likely to continue in the near term".

I am not, of course, the first to suggest that our real exchange rate may in fact be undervalued. In 2019, the US Treasury first placed Singapore on a watch list for currency manipulators, a position that it maintained in its latest iteration released in April last year. Other observers using more rigorous assessment criteria have posited the same thing. I would, at the very least, urge additional introspection and research by MAS on whether there is in fact a potential undervaluation of the Singapore dollar, and to publish and share with the public the results of such research. If so, perhaps the Government will consider whether a true gradual appreciation of the Singapore dollar – which would in turn indirectly mitigate much of the excess OFR problem that is a major motivation behind this Bill – might eventually be warranted, especially for an economy at our current stage of development.

Mr Speaker: Mr Leong Mun Wai.

2.12 pm

Mr Leong Mun Wai (Non-Constituency Member): Mr Speaker, our huge national reserves are the pride of our nation. But few Singaporeans know the size of our reserves and how the reserves are accumulated, managed and spent.

The reserves are actually accumulated through a mechanism which operates on a few key principles put in place in the 1980s by the late Dr Goh Keng Swee. The mechanism essentially uses our large pool of domestic savings to soak up the foreign money that flows into Singapore because of its strategic position as a trade and financial centre of Southeast Asia since the late 19th century.

This mechanism has worked well and will put us in a strong financial position for generations to come. However, this MAS (Amendment) Bill that we are debating today will violate a key principle of this mechanism laid down by Dr Goh and runs the risk of compromising the mechanism altogether.

That principle stipulates that the Government must purchase foreign reserves from MAS with Government deposits, which is essentially the cash owned by the Government or the nation. As the amount of Government deposits equals the excess savings in our economy, the accumulation of foreign reserves is limited by the size of the excess savings as envisaged by Dr Goh.

However, this Bill opens up the possibility of the Government accumulating foreign reserves through simply getting MAS to print Singapore dollars. This is effected through clause 2 of this Bill, which deletes and substitutes section 23(6) of the MAS Act, to allow the MAS to subscribe to the Reserve Management Government Securities (RMGS) although section 23(5) states that MAS shall not directly subscribed for any securities issued by the Government or any public authority.

Hence, this is a major change in the conduct of a monetary policy. In layman's term, while MAS cannot do quantitative easing in the past, it can potentially do so – and I say potentially, not necessarily so – if this Bill is passed.

So, let us bear that in mind, as I proceed through my speech today. My speech today will start off with explaining the reserve accumulation process and the dangers of the RMGS and then ends with a call on the Government to be more transparent about our national reserves.

The reserve accumulation process. The Government, specifically MOF, oversees the reserve accumulation and management process, but it is the MAS and GIC which are the operating entities. MAS as central bank of Singapore has the power to print Singapore dollars as and when the need arises. MAS is also the banker for the Government, holding the nation's cash in the form of Government deposits. MAS buys and sells foreign currencies with Singapore dollars on the Foreign Exchange Market to manage the value of Singapore dollar. When foreign currencies are bought, they become the Official Foreign Reserves (OFR) of MAS.

Under our reserve management arrangement, MAS will keep OFR up to a stipulated amount for managing the Singapore dollar. The stipulated amount currently is about $325 billion. Foreign reserves in excess of the stipulated amount will be transferred to GIC. GIC is a 100% Government-owned investment company formed in 1981 to manage the excess foreign reserves as an endowment fund for Singaporeans.

Unlike the OFR, an endowment fund can invest in more long-term and risky investments to achieve a higher return. As substantial assets have been transferred to GIC over the years, GIC holds most of our national reserves. The balance is held by Temasek Holdings, which is not involved in the reserve accumulation process explained here. The OFR under MAS is also technically not considered part of our national reserves. Given our position as a financial centre of Southeast Asia, there is usually a net inflow of foreign money year after year. So, the MAS has ample opportunity to accumulate foreign reserves. The MAS can utilise the Government deposits or increase the supply of Singapore dollars to accumulate foreign reserves.

In the past, the foreign reserves were mainly accumulated using Government deposits. We have substantial Government deposits because it is actually our huge excess domestic savings, channelled into the public coffers through the CPF system and the structural Government surpluses derived from land sales and a whole range of indirect taxes and public services fee. Accordingly, the accumulation of reserves is limited by the amount of excess savings we have.

So, what do we do when the inflow of foreign money far exceeds the amount of the Government deposits or our excess savings? We can decide not to accumulate any more reserves or to continue accumulating. If we choose the former, then we will have to either allow our Singapore dollar to appreciate further or to implement new policies to control the inflow of foreign money.

If the Government wishes to continue accumulating foreign reserves, MAS will have to print new Singapore dollars since there is no Government deposits to pay for it. This seems to be the case in 2020 and 2021. When MAS probably increased the Singapore dollars to absorb the sudden surge in foreign money inflow. This in turn has caused the accelerated rise in property prices from 2022 to today.

The large foreign reserve increases in 2020 and 2021, amounting to more than $180 billion in total, pushed the OFR to $566 billion by end 2021, far exceeding the targeted OFR limit of $325 billion. So, the excess has to be transferred to GIC. However, under the present rule the foreign reserves cannot be transferred from MAS to GIC if the foreign reserves were not paid for by Government deposits.

The Government and MAS, a central bank, are independent operating entities, operationally. And the Government cannot take assets away from MAS without paying for it. As the Government has no money to pay, we are debating this Bill today to allow the Government to pay with an IOU. Hence, this Bill allows the Government to create a new class of IOU, called the Reserve Management Government Securities (RMGS) to pay for foreign reserves to be transferred from MAS to GIC.

This Bill does open up the possibility for the Government to pressure MAS to print more Singapore dollars to accumulate foreign reserves and then buy them over from MAS with RMGS. Needless to say, this runs the danger of a collapse in monetary and fiscal discipline, leading to hyperinflation potentially. Hence, we recommend that there should be a strict annual RMGS, issuance limit, annual limit incorporated into the Bill, as a new check to reduce the potential dangers described above.

The $580 billion limit for the RMGS proposed in the Bill is far too large and is not on an annual basis. So, the first question I want to ask is we appreciate all the safeguards that the Minister for Finance had explained just now about preventing monetisation of Government spending. However, can the Minister explain what is the difference between the monetisation that you are explaining and the fact that in 2020 and 2021, we have accumulated assets, additional assets of close to $200 billion and at the same time, on the other hand, we have been spending for the COVID-19 packages. So, is this not indirectly monetisation of Government spending?

Next, I shall touch on the transparency of our national reserves. The Government has always been unwilling to state officially the size of our national reserves; often citing national security as a reason. This reason, however, does not hold water. This is because the Government actually reports our country's financial position every year in a report entitled the Government Financial Statement (GFS). However, a few of us – busy and pressured Singaporeans – know of this report. Because yearly, up to 2020, only one hard copy of the report was available at the National Library. This report went online only after 2020 on SingStat.

On the other hand, we can assume that the intelligence agents of foreign countries would not have missed this piece of information. Thus, it is rational that the Government announces our national reserves, or at least the financial assets reported in the GFS in the mainstream media every year so that Singaporeans will get to know about it.

So, my second question is, does the Government still think that there is a need to keep our national reserves figures confidential?

According to the GFS for Fiscal Year 2020, the total financial assets managed by the Government and belonging to all Singaporeans have grown from $1.35 trillion in 2019 to $1.4 trillion in 2020. Our reserves have continued to increase in 2020 despite the largest drawdown of $53 billion in the history of our nation to combat the COVID-19 pandemic. Our national reserves have continued to increase because we continue to accumulate new foreign reserves to the tune of about a $100 billion a year for 2020 and 2021, as explained just now. On top of that, we also earned net investment return of about $40 billion for each of those years. By my estimate, the total financial assets will increase further to $1.5 trillion in Fiscal Year 2021. Hence, it is puzzling, why the Government keeps insisting on raising more taxes when our foreign reserves are substantial, still increasing and earn good returns every year.

Mr Speaker, in conclusion, I would like to emphasise three points.

One, the Government should disclose the size of our national reserves to Singaporeans or at least confirm the information that is already made public. It should also account for the accumulation management and spending of the reserves.

Two, given our huge national reserves which are still growing and giving a good investment return, our country's financial position is healthy and there is no need to raise additional tax revenue through the GST. Many Singaporeans continue to ask me how about Government expenditures? So, many of them would like to know how the Government has spent the $100 billion for the COVID-19 packages. I will request the Government to submit a full report to Parliament during the Budget Debate on 18 February before it asks Singaporeans for more money through the GST hike.

Three, there is an economic cost in accumulating reserves too, as what Assoc Prof Jamus Lim also said just now. It is best to stick to Dr Goh's prudent style of reserve accumulation. Printing money to acquire foreign reserves, allowed under this Bill, will carry with it a big economic cost. Hence, if we really need this Bill, there should be at least an annual RMGS issuance limit incorporated into this Bill as a check on the Government. The proposed $580 billion limit currently provided in the Bill is far too large and is not an annual limit.

Mr Speaker, notwithstanding our concerns, we still support the Bill to give our Government maximum leeway in managing our financial affairs. But we request the Government to seriously take note of our concerns and not allow monetary and fiscal discipline to be weakened by this Bill.

Mr Speaker: Prof Hoon Hian Teck.

2.29 pm

Prof Hoon Hian Teck (Nominated Member): Mr Speaker, Sir, at one level, this Bill simply seeks to address a technical issue: to provide an alternative mechanism for the MAS to transfer to the Government the excess of Official Foreign Reserves (OFR) above the level that is required for it to perform its function of carrying out an exchange rate centred monetary policy to achieve price stability over the medium term. The OFR that are transferred to the Government is for long-term management by the GIC.

Currently, transfers of MAS OFR are mediated through a corresponding reduction in the Government's cash deposits held at MAS. However, with smaller fiscal balances in recent years, leading to a situation where the Government's cash deposits are not growing as rapidly as the MAS' accumulation of OFR, the current mechanism for transfer faces a constraint. The new mechanism proposed under the amendment Bill overcomes this constraint by providing for the transfer of the MAS OFR through a subscription to the Reserves Management Government Securities (RMGS) issued by the Government.

Two questions arise. What has caused MAS to systematically accumulate OFR over these decades? How do we prevent the perception that the new mechanism offers the Government the means to conduct money finance fiscal policy?

On the first question, Singapore's high private savings rate alongside the constitutional requirement that the Government must achieve at least budget balance over its term of office has meant that the country's holdings of net foreign assets – that is the excess of our gross assets over our gross liabilities – have steadily increased over the years. When the Government does run a budget surplus over its term of office, which it has, the public saving augments the stock of reserves and boosts the country's net foreign assets. Net foreign assets denominated in foreign currency, such as the US dollar, has higher real purchasing power when measured in terms of domestic GDP because some of the goods and services consumed by Singaporeans are non-traded.

And in the classroom, we give the favourite example of haircuts. Transport costs are too high to make it worthwhile to travel to another country to get a haircut, so haircuts become a non-tradable activity.

Through this channel, an increase in net foreign assets tends to be associated in statistical analysis with a depreciation of the real effective exchange rate. So, there is the nominal effective exchange rate of the Singapore dollar, that is, how many Singapore dollars to buy a US dollar in the foreign exchange market; and then, there is the real effective exchange rate, which really measures Singapore's general price level relative to the general price level of its trading partners when measured in the same currency. So, when Singapore's cost of living goes up, we have a real exchange rate appreciation. Correspondingly, when things are cheaper in Singapore, because haircuts are not tradable, we have a real exchange rate depreciation.

The channel I just refer to suggests that what you might call the valuation effect, tends to be negatively associated with our net foreign assets. Other channels, such as more rapid productivity growth in the manufacturing sector compared to the productivity growth in the non-traded goods sector, might exert pressures for a real exchange rate appreciation.

So, if you have the manufacturing sector able to robotise and so on, and its productivity goes up, whereas the non-traded sector, apart of the retail sector, which largely will be selling to only domestic customers and their productivity is not growing as much, then the fact that the manufacturing sector is experiencing higher productivity growth will push up the wage rate, but workers are free to move in the job between the factory and in the retail sector. So, there is an upward pressure in the retail sector, that is non-traded, also to pay as high a wage, whereas productivity has not gone up, so if unit labour costs goes up and therefore the non-traded good price tends to go up. And for that reason, this channel leads to a real exchange rate appreciation.

Another channel that can cause a real exchange rate appreciation is the rise of domestic investment, because a part of investment such as building infrastructure, tends to be non-tradable. And that rise in domestic investment also tends to raise the real effective exchange rate. That is a real appreciation.

So, there are all these factors that can cause the real exchange rate to go up or to go down.

Broadly speaking, a statistical analysis done with data quarterly from 1983 to 2018 has shown that, largely speaking, around about 1985, which was when Singapore experienced its recession, the real exchange rate was high. In other words, high appreciation. It somewhat declined down to the early 1990s and then began to rise again until the Asian Financial Crisis, came down again around to about 2005, and since then, has been rising.

Nevertheless, despite these forces that I have just mentioned that can cause real exchange rate appreciation or depreciation, with Singapore experiencing steady capital inflows, alluded to by Minister for Finance, including short-term capital inflows, has meant that the nominal effective exchange rate of the Singapore dollar has faced upward pressure to appreciate beyond the equilibrium real effective exchange rate. In other words, in the absence of the MAS intervention in the foreign exchange market, the Singapore dollar would tend to become overvalued.

In accordance with the MAS exchange rate monetary policy framework, its intervention in the foreign exchange market to dampen these pressures and keep the nominal effective exchange rate of the Singapore dollar within the policy band and conceptually that means trying to aim for what you think is the equilibrium real exchange rate, has led to a steady accumulation of OFR.

On to the second question. The explanatory brief put up by MAS at the First Reading of the amendment Bill has been at pains to make clear that there are safeguards to ensure that the new mechanism to be put in place does not lead to de facto money finance fiscal policy, that is, to let the central bank lend money to the Government to finance its spending and fiscal deficits. First, the amendment Bill requires that MAS can subscribe to RMGS solely for the purpose of facilitating the transfer of OFR and that its subscription does not compromise MAS' ability to achieve medium-term price stability.

Second, MAS will only be able to use its foreign currency asset to subscribe to RMGS. In other words, the RMGS cannot be used as a tool to print money to pay for Government spending. The safeguards in the MAS (Amendment) Bill will complement the existing safeguard in the Government Security Act under which the Government proceeds from borrowing, can only be used for investment and market development purposes.

Mr Speaker, Sir, the theory of economic policy suggests that there should be as many policy instruments as there are economic objectives and the application of the policy instruments to achieve these objectives should be based on their comparative advantage. Our being a small, open economy means that the management of the nominal exchange rate – I think that was very much in the thought of Dr Goh Keng Swee – serves well the purpose of achieving medium term price stability. And we have the record to show for it, because other than the spike of inflation in 1973 and a smaller spike in 1979 during the oil crisis, we largely have maintained very stable inflation rate, below 2% per annum.

Structural policy, such as the implementation of Industry Transformation Maps, helps to raise the economy's underlying rate of productivity growth. This in turn, contributes to growth of national income as a mature economy, because as a mature economy, it is not going to be capital deepening that will raise the standard of living. A large part of what would contribute to our steady growth of income will have to come from productivity growth. But with the growth of national income, we have an expansion of the tax base. Fiscal policy in setting the tax subsidy structure contributes to economic inclusion.

So, painting with a broad brush, we have three economic objectives: maintaining medium-term price stability, achieving an underlying economy wide productivity growth and facilitating economic inclusion with an assignment of three policy instruments: an exchange rate centred monetary policy, structural policy and fiscal policy respectively.

With this policy mix, we can continue to exercise fiscal prudence, ensuring that we have the fiscal resources to pay for our recurrent spending and thus free MAS to focus on its function of maintaining medium-term price stability without facing the pressure of monetary financing. Sir, I support the amendment Bill.

Mr Speaker: Mr Derrick Goh.

2.41 pm

Mr Derrick Goh (Nee Soon): Mr Speaker, Sir, the MAS (Amendment) Bill introduces the use of Reserves Management Government Securities (RMGS) to facilitate the management of Government reserves. These amendments will help in the deployment of reserves that are in excess of baseline Official Foreign Reserves (OFR) to optimise returns for Singapore. This is a good step to take as it will also reduce MAS' exposure to translation effects from its foreign currency holdings.

The introduction of new safeguards along with the amendments to the Government Securities Act will help ensure that RMGS will be solely used for the purpose of transferring OFR. The safeguards will provide assurance to the public that RMGS cannot be used for Government spending.

Given the above, I seek two clarifications from the Minister on this Bill.

One, today MAS has a stated position of maintaining OFR of at least 65% of GDP to which it deems sufficient to defend against speculative pressures. One can expect the exact percentage to be confidential and vary, depending on the conditions of the financial markets. If more RMGS is issued, on average one can expect higher investment but lower liquidity cushion to manage the Singapore dollar exchange rate in times of financial market stress. Conversely, if the size of RMGS is lower, the higher will be MAS' liquidity cushion.

As MAS being our central bank alone determines such levels independent of the Government, can Minister explain how this independence is maintained since MAS' board comprises largely of our Government Ministers who have roles and responsibilities on both sides?

Secondly, Minister Lawrence Wong earlier mentioned about the tail risk situations. Assuming a higher level of OFR is required to conduct monetary policy, it appears that MAS can redeem RMGS from the Government on demand. If so, can Minister explain how the mechanism ensures fairness between central bank, which may need more liquidity during periods when markets are under financial stress and the Government, or GIC, which has invested the RMGS funds in longer-term assets and may have to potentially sell assets under market stress conditions?

Mr Speaker, Sir, notwithstanding the above clarifications, I support this Bill.

Mr Speaker: Mr Don Wee.

2.44 pm

Mr Don Wee (Chua Chu Kang): Mr Speaker, Sir, we have a happy problem of official foreign reserves (OFR) outpacing the growth of Government deposits in recent years, that we need to adjust our transfer mechanism through this Bill.

Putting aside the pandemic, Singapore could continue to have a high savings rate because of its tradition of prudent fiscal policy and the mandatory contributions all working Singaporeans make to their CPF accounts. Given Singapore’s positive net savings and persistent capital inflows, the nominal exchange rate often tends to appreciate more than is required to keep inflation low and stable.

MAS accumulates foreign assets on average in the process of managing the Singapore dollar within its policy band even as it sells foreign assets during times of stress on the Singapore dollar.

I would like to ask: what is the desired level of liquid assets which MAS should have in order to maintain the floating parity of the Singapore dollar? Should a sweeping mechanism be imposed so that excess reserves can be transferred to GIC once the OFR reaches a threshold, say 70%? Excess reserves should be managed by GIC as long-term investments and yield more returns. Thus, there is an opportunity cost when the transfer of reserves is delayed. How was the 65% threshold being derived and should it be reviewed or should the OFR be multiples of the highest annual outflow of capital which Singapore had experienced in the past decade?

I understand that MAS invests the OFR in a well diversified portfolio. Would the Minister share with the House how much of green bonds and green equities does it have in its portfolio? Can green investments be increased further? Can MAS invest in more green instruments, especially those which are issued in Singapore? Can the Reserves Management Government Securities (RMGS) be invested into green and sustainability-related instruments?

Were the official foreign reserves valued at cost or market price? I am confident that MAS' accounting conventions adopted conformed to international accounting practice.

It is important that the people know the approach taken to value Government assets. Valuations should be derived from prudent principles and not based on optimistic assumptions to inflate asset values.

Has MAS' investment approach been to invest its reserves for returns? Will it be reducing its holdings in US dollars and GBP and diversified into other currencies?

MAS seeks to smoothen wide fluctuations in the exchange rate by intervening in the currency markets, selling Singapore dollars if the currency is deemed to have appreciated too much or buying Singapore dollars if the currency has been beaten down too much. Mr Speaker, Sir, in Mandarin.

(In Mandarin): [Please refer to Vernacular Speech.] Reserves management is a multi-objective and a multi-generational effort. The OFR serves as a buffer against bad times and as a Singapore dollar stabiliser. MAS, like Members in this House, are custodians of our reserves and we owe a duty of care and responsibility to the current and future generations of Singaporeans. I thank the MAS officers for their hard work in extracting the optimal yield while minimising risk.

(In English): I support the Bill.

Mr Speaker: Mr Louis Ng.

2.47 pm

Mr Louis Ng Kok Kwang (Nee Soon): Sir, this Bill provides a much needed solution. Since 2016, foreign reserves managed by MAS have grown by an average of 11% each year, outpacing our GDP growth. MAS needs only a fraction of these reserves on hand to manage our domestic price stability. The rest of it would be better utilised by our GIC, our sovereign wealth fund, to maximise investment returns.

This Bill provides a framework for that transfer to happen. The framework delicately balances the need to maximise investment returns with the need to give MAS enough flexibility to maintain price stability. That said, I have four points of clarification.

My first point is on the definition of excess foreign reserves. Since 2019, MAS has said that it does not need more than 65% of GDP in foreign reserves to achieve its goal of maintaining medium-term price stability. Can the Minister share details on the reviews MAS has conducted in order to arrive at this calculation? What scenarios and factors did it consider? Given that the 65% has not changed in the past three years, can the Minister share how regularly MAS plans to review the amount of foreign reserves it needs?

In addition, does MAS envision the scope for this 65% to be further reduced and for a greater proportion to be channelled for GIC investments? This is given the fact that even in the worst months of the Asian Financial Crisis and the Global Recession, we saw very minimal, if any, decrease in foreign reserves managed by MAS. Of course, I understand future crises and currency speculation may demand unusually high amounts of foreign reserves to combat.

This brings me to my second point on worst-case scenarios.

In 2019, when MAS transferred $45 million to the Government for GIC to invest, MAS stated, "In the event of an extreme adverse scenario, the foreign reserves held by the Government are also available to ensure that MAS operations are not compromised."

Can the Minister share how foreign reserves held by GIC and Temasek would be availed to MAS in the event of such an extreme adverse scenario? By design, GIC and Temasek's assets are less liquid and higher risk. So, it seems unclear how the amount of foreign currency envisioned as necessary in such an extreme scenario could become quickly available.

My third point is about the redemptions of the RMGS by MAS. Can the Minister explain what role will the Government play in setting conditions for the redemption of the RMGS by MAS? Senior Minister Tharman Shanmugaratnam had said that MAS will have "sole discretion to redeem the RMGS for foreign assets before maturity and without penalty." Yet, section 15B(2) of the amended Act states that the Minister's agreement will be required in setting conditions surrounding a repayment and redemption of RMGS.

This seems to contradict the notion that MAS will have sole discretion. It opens the door for a future Minister to institute a penalty for early redemptions or, indeed, any other kind of condition. Can the Minister share why the Bill does not provide MAS with sole discretion on redeeming the RMGS prematurely and without penalty? What conditions does the Ministry expect to set in relation to the repayment and redemption of the RMGS?

My fourth and final point is about the $580 billion limit. Section 15A(2) of the amended Act limits the Government from accepting more than $580 billion of foreign reserves from MAS. Can the Minister share how it decided on $580 billion as the limit? What purpose does the cap serve? What are the principle and methodology by which the Government has set the $580 billion as the cap?

In summary, I hope the Minister can clarify how MAS reached its definition of excess foreign reserves, how liquid GIC and Temasek's foreign reserves are, what role the Government will play in constraining MAS' RMGS redemptions and how the $580 billion limit was determined.

Sir, notwithstanding these clarifications, I stand in support of the Bill.

Mr Speaker: Mr Saktiandi Supaat.

2.52 pm

Mr Saktiandi Supaat (Bishan-Toa Payoh): Mr Speaker, Sir, this Bill will empower MAS to subscribe for reserves management government securities, or RMGS, issued by the Government. RMGS will help to facilitate continued transfer of official foreign reserves, or OFR, to the Government for longer-term investment with GIC. The goal is to help to promote financial stability.

I wish to seek the Minister's clarification on some issues.

First, the optimal OFR amount needed to support MAS' mandate is currently defined as being at least 65% of GDP. I understand that MAS reviews this amount regularly. As it is a key threshold in this arrangement for the RMGS bond issuance, do we expect this threshold to change over time? If so, what are the key variables that may shift this ratio?

I note that there will be a separate RMGS issuance limit, which allows for greater transparency on RMGS proceeds and clearer segregation from other Government securities and treasury bills. Can the Minister share what is the RMGS limit and what is the maturity period or duration of the issued RMGS bonds?

The Government will accept only foreign assets in exchange for RMGS issuance to draw a clear and direct link between RMGS issuance and transfer of OFR. This is meant to be an additional safeguard against monetary financing. However, in the case where the OFR falls below 65%, there will be a need for intervention. MAS cannot sell its RMGS holdings to other entities unless the Minister for Finance consents. So, RMGS cannot be used to raise funds from the market. Can the Ministry clarify how rigorously this policy will be enforced and under what circumstances might the Minister give consent?

Next, how can RMGS be liquidated to meet the transfer of foreign reserves back to MAS for intervention purposes? If MAS redeems RMGS bond before maturity at par to meet OFR requirements and support the conduct of monetary policy, how much loss can the Government provision for?

Next, since the transactions would be denominated in other currencies, would this make us more vulnerable to foreign exchange risks? Taking the US currency, for example, will MAS be overly exposed to the US dollar holdings in its assets? Given the inclusion of RMGS item in the MAS balance sheet with the passing of this Bill, can I seek the Minister to share what are the plausible worst-case scenarios from both an accounting, fiscal and market perspectives involved in undertaking these RMGS issues in the MAS balance sheet?

My last question concerns the impact on net Singapore dollar liquidity. Would the accumulation of RMGS on the MAS balance sheet over time have any indirect effect on the liquidity of the Singapore dollar in the medium to long run? As we continue with "leaning against the wind" activity as part of our band basket and crawl managed float, will this new RMGS introduction affect our overall sterilisation activities and net liquidity flows into the financial system in the medium to long term?

In addition, MAS' total RMGS holdings will be published monthly for transparency. This is a good thing for financial analysts and the informed public who wish to have a more in-depth understanding of our financial situation. But can I clarify if there are plans to release higher frequency data going forward and, if so, will it reveal too much information to market participants and thus infer our foreign exchange intervention activities?

The specifications in the Bill are clearly spelt out to segregate RMGS from other Government securities and treasury bills. RMGS cannot be used to finance Government spending and neither can its proceeds be spent. So, it would not have any impact on our fiscal plans. Nonetheless, the current transfer mechanism faces constraints as the accumulation of official foreign reserves persistently outpaces the growth of Government deposits in recent years.

This would be righted with the new RMGS mechanism. However, it is important to correct misperceptions that the policy is about financing the Government's spending and fiscal deficits. Notwithstanding these clarifications, Mr Speaker, I support the Bill.

Mr Speaker: Minister Lawrence Wong.

2.56 pm

Mr Lawrence Wong: Mr Speaker, Sir, I thank the Members of the House who have shared their views on the Bill and who have supported it. Members' comments and queries can be categorised into a bucket of different issues and I will address them in turn.

First, on MAS' management of the OFR. Mr Liang Eng Hwa, Mr Louis Ng, Mr Saktiandi Supaat and Mr Don Wee have all asked questions about how the optimal amount of OFR is determined and how MAS reviews this.

MAS regularly reviews and updates the optimal amount of OFR for its needs. In its reviews, MAS uses a range of internationally used reserves adequacy measures within a general cost-benefit framework to assess the required amount of OFR.

From a benefits perspective, the OFR provides MAS with the means to protect the functioning and stability of the economy against shocks. So, MAS takes reference from historical episodes of such significant domestic and international disruptions to compute the OFR that is necessary to safeguard stability and confidence.

From the cost perspective, MAS recognises the opportunity cost of holding reserves in liquid financial instruments on its balance sheet in terms of the higher returns forgone, if these assets had not been invested in longer-term assets by GIC.

As Singapore's economic and financial linkages with global markets continue to expand and deepen, the OFR required should broadly keep in line with GDP and complement the structural factors underpinning Singapore's macroeconomic and financial soundness. Based on these considerations, MAS has, therefore, assessed that the OFR of 65% to 75% of GDP is adequate to meet its needs and OFR above this amount will then be transferred to the Government to be managed separately.

As we have repeatedly said, this is not a new idea. The point about transferring excess OFR to GIC for long-term management is not new at all. It is the very reason why GIC was set up in 1981. So, when Mr Leong Mun Wai talked about a departure from the principles that Dr Goh Keng Swee had set up – there is no departure. This is completely in line and consistent with the founding principles upon which we do reserves management.

There is also the question on the framework under which MAS manages the OFR.

MAS manages the OFR with the primary objectives of maintaining confidence in Singapore's exchange rate-based monetary policy framework and securing macroeconomic and financial stability. The key elements underpinning this OFR management framework are robust risk management, including an appropriate liquidity profile and a well-diversified asset allocation across geographies, asset classes and currencies. These elements serve to produce a resilient portfolio and safeguard the OFR's availability to support MAS' conduct of monetary policy.

Subject to these elements, MAS seeks to achieve good long-term returns on its OFR and that would include taking steps to manage longer-term risk like the impact of climate change. In that regard, MAS would look at a range of instruments including green instruments which Mr Don Wee had mentioned. Both the risk management approach and asset allocation are approved by the MAS Board and reviewed regularly.

Mr Don Wee also asked if MAS values the OFR at cost or market price. MAS publishes OFR data on a monthly basis and the published OFR is valued at cost. This reflects our conservative accounting approach as a central bank.

The next set of questions pertains to risks that RMGS may pose to MAS' operations and balance sheet. Mr Derrick Goh asked how MAS' autonomy can be ensured when subscribing for RMGS. Let me state very clearly. MAS has always been operating independently within the Government. MAS' principal objective of maintaining price stability is stipulated in the MAS Act. Under the law, MAS' Board of Directors is responsible for the policy and general administration of MAS' affairs and business, and in upholding the MAS Act, ensures that MAS conducts monetary policy to meet its price stability mandate.

With the introduction of RMGS, MAS continues to retain autonomy over monetary policy because it is MAS, not the Government, that initiates the subscription of RMGS. Furthermore, MAS can only subscribe for RMGS to facilitate the transfer of OFR beyond what it requires to conduct monetary policy and ensure financial stability. MAS would also have the right to redeem RMGS before maturity at par, to meet its OFR needs and carry out its mandate. So, these safeguards are all set out very clearly in the Act.

Mr Saktiandi asked about foreign exchange risks. RMGS transactions are between entities within the Government. At the whole-of-Government level, there is no change in our total foreign reserves and no additional exposure to foreign exchange risk.

For MAS, its subscription for RMGS will result in a change in assets from OFR denominated in foreign currency to RMGS denominated in Sing dollar. This reduces the exchange rate risk for MAS by lowering its foreign exchange exposure. Correspondingly, the exposure to currency fluctuations, along with the returns on investments, are in turn borne by the Government, inherently as part of its larger portfolio of investment placed with GIC.

Mr Saktiandi also asked if the accumulation of RMGS on MAS' balance sheet over time will affect the level of liquidity in the banking system and consequently, MAS' monetary operations. Basically, MAS' accumulation of RMGS on its balance sheet will not impact Sing dollar liquidity and by extension, MAS' sterilisation activities. This is because MAS uses only foreign assets to subscribe for RMGS and does not create or use Sing dollar in the process.

On the frequency of published data, MAS will publish its RMGS holdings on a monthly basis. This is aligned with the frequency for the publication of OFR data, which is in line with international standards.

I would like to assure Mr Saktiandi that the publication of RMGS data does not undermine the effectiveness of MAS' foreign exchange intervention operations. Changes in the OFR are influenced by other factors besides intervention operations and transfers to the Government. These include changes in the stock of Foreign Exchange swaps as part of MAS’ money market operations to manage liquidity in the banking system, investment gains or losses on the OFR and currency translation effects on the OFR.

In addition, data on Singapore's foreign exchange intervention operations is already separately disclosed. MAS publishes its net purchases of foreign exchange from intervention operations on a six-month aggregated basis, with a three-month lag from the end of the period.

So, this addresses questions relating to risks to the MAS.

The third set of questions is on the characteristics of RMGS, such as its maturity and early redemption features.

Mr Louis Ng and Assoc Prof Jamus Lim queried about the basis and purpose of the $580 billion issuance limit. In fact, they thought that there might not be a need for such a limit. On the other hand, Mr Leong Mun Wai suggested to tighten and have an annual limit.

As I explained in my earlier speech, the $580 billion limit is sized based on two factors: one, the amount of OFR that MAS currently needs to transfer to the Government to bring the level of OFR in MAS back to its optimal amount; and two, the expected pace of OFR accumulation in future years.

We have set this limit so that the Government can administer and monitor the size of the RMGS issuance. Having such a limit will provide transparency to Parliament, which serves as an additional layer of check. Yes, indeed, we could have done away with it completely but we thought that it would be prudent and will provide an additional layer of check for the Government to come back to Parliament to raise the limit should the need arise. Any such further increase to this limit will have to be justified by the Government and approved by Parliament and President.

Mr Saktiandi also asked about the maturity period for RMGS issuances. The purpose of issuing RMGS is to facilitate the transfer of OFR for longer-term investment. As such, all RMGS will be issued by the Government with a 20-year tenor, which is aligned with GIC's long-term investment horizon.

Mr Saktiandi noted that there may be periods where the OFR falls below the optimal range and may need to be topped up. He asked how RMGS could be liquidated to meet MAS’ needs and whether there may be circumstances under which MAS might transfer its RMGS holdings to other entities, with the consent of the Minister for Finance.

The answer to this is that the optimal amount of OFR which is, as I said, sized at 65% to 75% of GDP, is not an insignificant amount and is expected to meet MAS' needs comfortably under most circumstances. To date, there has not been a crisis where MAS' OFR has fallen below this threshold. So, MAS’ OFR will only need to be topped up in a highly unlikely crisis of unprecedented scale, or what we call a "tail-risk event".

Should such a situation arise, MAS will have the right to redeem the RMGS before maturity at par – meaning at full face value of the RMGS regardless of market conditions – to meet its OFR needs. When MAS redeems the RMGS, the Government will transfer an equivalent amount of foreign assets to MAS, supplementing the OFR on MAS’ balance sheet. With the Government standing fully behind all the RMGS, we do not envisage that MAS will need to transfer its RMGS holdings to other entities to raise funds from the market.

That is why clause 15B(2)(a) of the Bill, which Mr Saktiandi referred to, prohibits MAS’ transfers of RMGS holdings to other entities without consent from the Minister for Finance. This upholds the intent of the RMGS by restricting MAS’ transfers of RMGS holdings to other entities to very exceptional and extreme situations, as determined by the Minister. To be clear, even if such a transfer were to take place, the effectiveness of the proposed legislative safeguards including those to prevent monetary financing, would not be diminished, irrespective of the entities owning the RMGS.

I think there was also a question whether a future government can introduce conditions that compromise MAS’ ability to redeem RMGS and why the Bill does not provide for MAS with the sole discretion on redeeming the RMGS prematurely and why allow the Government to do so. I think Mr Louis Ng asked this.

The Government will not be able to compromise MAS’ ability to redeem RMGS. As I explained earlier, the terms for issuance of RMGS, including its conditions as to repayment and redemption, will need to be mutually agreed between MAS and the Government. Operationally, MAS and the Government will set the conditions to give MAS the right to redeem RMGS at par before maturity, meaning it can exercise this right at its discretion.

The Government may choose to redeem RMGS before maturity if it has excess Singapore dollar liquidity. Allowing the Government to do so does not compromise MAS. MAS will not be worse off because the amount of OFR held remains unchanged.

Several Members asked how RMGS will affect GIC’s investment and liquidity management, including the implications if RMGS is redeemed before maturity at par to meet MAS’ OFR needs and how the foreign reserves managed by GIC could be made available to MAS in such a scenario.

I would like to assure Members that the introduction of RMGS and its early redemption provision will have minimal impact on how GIC invests and manages its liquidity. The introduction of RMGS facilitates the transfer of OFR not needed by MAS to the Government for longer-term investment by GIC. As I said, the mechanism may be new but the transfers of such OFR is not new. In short, how GIC will invest the transferred OFR is not expected to deviate from existing practice because such transfers have been happening since the formation of GIC.

GIC manages the transferred OFR and other Government assets in accordance with its mandate given by the Government. As a long-term investor, GIC will look at long-term opportunities including sustainability opportunities and green investment opportunities, which several Members talked about.

The existing arrangement between MAS and the Government already ensures that foreign reserves held by the Government are available to support MAS’ operations if the need arises. The Government has in place processes to withdraw assets from GIC for various needs. Therefore, liquidity needs pertaining to RMGS are already catered for.

Even in the unlikely case where the redemption exceeds what had been catered for, the Government can still repay MAS with assets which qualify as OFR. So, there is no need for GIC to liquidate assets prematurely just to raise cash to repay MAS, in the event of early redemption.

Next, there was a question by Assoc Prof Lim on whether or not MAS deliberately keeps the exchange rate low for competitiveness reasons. Let me state quite categorically, MAS does not do that. MAS' aim is price stability over the medium term. We are quite clear that keeping the Singapore dollar artificially weak is unsustainable and not in Singapore's interest.

The real exchange rate, not the nominal but the real exchange rate, is the outcome of price adjustments in Singapore's economy relative to that in other partner economies. So long as monetary policy here is set pre-emptively with the objective of medium-term price stability, then the real exchange rate will in time be in line and appropriate to economic fundamentals. And we fully intend for that to be the case.

Mr Leong Mun Wai, besides some of the points which I had addressed, set out quite a number of points which I found quite puzzling. It is almost as though he had not read the full text of the Bill or listened to what I had said earlier. Because I had set out very clearly in my opening speech that there are all these various safeguards and provisions which ensure that there is no room for monetary financing with this new RMGS mechanism. This is not a major departure at all. This is simply a new mechanism to facilitate the transfer of excess OFR from MAS to the Government for long-term investments by GIC. Such transfers have been happening since 1981 when GIC was formed and continue till today except with a new mechanism called "RMGS".

I thank Prof Hoon for explaining this very clearly and I would urge Mr Leong to listen to Prof Hoon's explanations of why our OFR had increased in recent years due to MAS' intervention operations to dampen appreciation pressures on the Singapore dollar and why this is not at all monetary financing in the way he had imagined. We do not intend to do any form of monetary financing and there are safeguards in the Bill to ensure this does not take place. So, the hypothetical scenarios that Mr Leong had set out in his speech about hyperinflation, monetary financing, these will not arise.

Finally, let me talk about what all this means also for fiscal policy because there were various questions about this, including what Mr Liang Eng Hwa asked on whether the returns from the transferred OFR would contribute to Net Investment Returns Contribution (NIRC).

The transfers of OFR not needed by MAS to the Government, as enabled by RMGS, should have a slight positive impact on the NIRC over the long term. This is to be expected because GIC has a higher return-seeking portfolio than MAS. Having said that, this increase is not expected to be significant, at least in the short term. Under the Net Investment Returns Framework, or NIR Framework, changes in the net asset base are smoothed over time. Any longer-term returns would also take time to materialise.

Our medium- to long-term fiscal projections have already built in this practice of continuous transfers to get back to the optimal range and have accounted for the higher expected return from OFR being invested by GIC.

That said, it is also possible that we will face a structurally lower rate of return on our investments over the long term. This is due to the significant headwinds in the external environment, including elevated debt, moderation in growth, ageing populations and low productivity in many countries. We have explained this in this House on several occasions and it is consistent with reports by well managed long-term global funds.

Furthermore, investments come with risk and there will be volatility from time to time. There is no guarantee that NIRC will always be increasing every year.

At the same time, on the spending side, on the expenditure side, we do expect expenditures to go up. Just as a comparison from 2006 to 2010, our spending was about 15% of GDP. That is 2006 to 2010. A decade later, from 2016 to 2020, we are looking at 18% of GDP; 3% of GDP increase, which is about $15 billion.

And we do expect that to increase further in the coming years. So, we will have to continue to rely on both NIRC and other revenue measures to meet our growing fiscal needs. Having diverse sources of revenues will also give us the confidence to plan ahead for the long-term growth of Singapore. And I will elaborate on these issues in the coming Budget. This is not the occasion to talk about fiscal projections. I just wanted to give an explanation in response to the questions that were raised.

On transparency, a point that Mr Leong Mun Wai mentioned, in fact, a lot of information has already been put out in the public domain about how we manage reserves, about the different entities that look after our reserves – Temasek, GIC, MAS – their investment approaches. A lot of information is out there for serious analysts to understand how reserve management is done in Singapore and we will review and continue to see how we can put out more useful information to inform the public. But we do maintain the view that it is not in Singapore's interest to put out the full information on how much reserves we have. The reserves are ultimately a strategic asset against a whole range of emergency contingency scenarios. We can never predict what these scenarios will be.

It is not just about an economic or financial crisis. It could be a natural calamity. It could be a pandemic, as we have experienced. It could be war. It could be actions taken by a hostile external actor. A whole range of contingency scenarios and emergencies for which we will not know how much resources we need to respond.

So, we believe that it is still in our national interest to maintain this strategic asset, not to have to disclose everything fully, but to have some discretion on our part and to be able to use these resources decisively and effectively when such an emergency arises.

In summary, Sir, this Bill creates a more sustainable mechanism to facilitate MAS' transfer of OFR above what it requires to the Government for longer-term management by GIC. As I have repeatedly highlighted, safeguards will be put in place to circumscribe tightly the issuance and subscription of RMGS by the Government and MAS respectively, so that RMGS is used only for its intended purpose.

I would like to assure Members of the House that with the introduction of RMGS, MAS will continue to have access to sufficient OFR to meet its needs and that the Government's approach to borrowing has not changed and will remain prudent and disciplined. With this, I beg to move, Sir.

Mr Speaker: Clarifications? Mr Leong Mun Wai.

3.19 pm

Mr Leong Mun Wai: Thank you, Speaker. I have two questions for the Minister for Finance. One is, yes, we may not need to announce another number for our national reserves. But would he agree that every year, when the Government financial statements are published, the mainstream media should report our country's statement of assets and liabilities? Meaning, the $1.4 trillion of financial assets, for example, will be announced in the public. That is one question.

The second question is, can I ask what is the average rate of reserve accumulations in the past and what is the expected reserve accumulation going forward? Because when he described that this round, we probably have to transfer $200 billion, use up the RMGS limit, about $200 billion dollars to transfer the assets to GIC, we are still left with $380 billion. And he said that in a few years' time we will be accumulating – I mean, that is what I hear from what he said – that will be a lot of reserves to accumulate, you know? Another $380 billion. That is why I have suggested that we should reduce the limit. Okay, two questions.

Mr Lawrence Wong: Mr Speaker, on the first question, MOF will put out all relevant information pertaining to the Budget and to the Government's financial position. I think it is for the media to decide what they want to report. And it is for analysts to also dive deeper into the statistics and to see if they want to produce analytical pieces around them.

But where the Government is concerned, we already put out a lot of information, as I mentioned, every year during the Budget, after the Budget. And we will continue to review what additional information we might put out that will be useful.

On the second point, we have set the limit, as I mentioned earlier, for the issuance of RMGS on two counts, looking at the amount that would have to be transferred over a period of time to get the present OFR to the optimal level and also, bearing in mind that there will be future accumulation in future years. No one can predict what rate this future accumulation will be, it will depend on so many conditions, for example, conditions in the financial markets. So, it can go either way because you may have appreciating pressures, you may have depreciating pressures, and MAS will have to intervene accordingly in order to maintain price stability.

But we have put in our best estimates and we think that $580 billion is a sensible figure for the next few years. Should that threshold be reached, then, as I mentioned, we will come back to Parliament to explain why we might need more, why we might have to raise the limit and it is for the Government to justify the case and for Parliament and President to approve. And so, this provides that additional check.

In fact, as I mentioned just now there were some calls from Assoc Prof Lim and Mr Louis Ng to say no limit is needed at all, because they understood the reasons why we are making this transfer, they know that it is sensible and they also appreciate that there are already sufficient safeguards in legislation that would not allow MAS or the Government to engage in monetary financing.

So, from that point of view, you might not even need a limit, but we talked through this and felt that it would be prudent to do so to provide an additional layer of check and that is why we have that figure in the Bill.

Mr Speaker: Mr Leong.

Mr Leong Mun Wai: Speaker, I would still like to ask the Minister again. I am actually puzzled when he says that there is no departure from the current way we are doing things.

So, currently when we buy foreign assets, MAS buys foreign assets from the market, MAS uses Government deposits, right? So, if in the future, we do not have Government deposits, which I have explained in my speech, those are our excess savings, if in the future, our excess savings come down drastically and we do not have excess savings to buy the foreign reserves, MAS will have to buy the foreign reserves with Singapore dollars, right?

So, that will be a very different way of managing our monetary policy going forward. So, that is a major departure. Especially when he suggested a $580 billion limit, that means over the next few years — okay, let us say $380 billion left after the current transfer and you use it over five years, for example. Then, you will be talking about $70 billion accumulation of reserves every year. That is a big amount.

I do not know the number, but probably, currently, we are accumulating at about $30 to $50 billion a year, right? So, you say that we do not have the excess savings anymore and on top of that you are accumulating $70 billion, that is a big amount.

Mr Lawrence Wong: Mr Speaker, I think Mr Leong is mistaken. The excess OFR that MAS accumulates or the OFR that is accumulated by MAS is primarily the result of MAS' intervention operations, particularly to manage the appreciation pressures on the Singapore dollar because of capital inflows. And when this happens, it accumulates foreign exchange.

Under present circumstances, without RMGS, MAS will transfer its excess OFR to the Government and there will be a corresponding reduction in Government deposits. That is today's mechanism. The excess OFR is MAS' excess OFR. But because the pace in which the Government deposits is accumulating has been quite slow because we are running smaller fiscal surpluses, they will not be able to do the corresponding reduction in Government deposits and that is why this new mechanism allows MAS to use its excess OFR to subscribe to RMGS.

In either case, it is MAS initiating the action. It is not Government initiating the action. It is MAS that initiates this action, this transfer of excess OFR. And in both cases, it is the excess OFR that MAS has accumulated through its intervention operations, that is transferred to the Government. In the first case, through a deposit transfer; in the second case through an RMGS instrument. But in both cases, it is a transfer of excess OFR to the Government, which will then be put to GIC for investment management over the long term.

That is why I said this process of transfer is not new. If you read the book that GIC recently published, you will see Dr Goh referring to monetary reserves and non-monetary reserves. Non-monetary reserves are the excess OFR that we are talking about which MAS has and then it transfers to the Government. In the first instance, through a transfer of Government deposits; in the second instance, through RMGS, which we are proposing.

The mechanism may be new, but the transfer of excess OFR is not new at all. It is something that we have been doing since 1981. And in that sense, is not a departure from our underlying philosophy and principles of reserve management.

Mr Speaker: Mr Leong.

Mr Leong Mun Wai: Mr Speaker, pardon me, I would still like to ask the Minister for Finance. My understanding of how MAS operates in the market seems to be different from his. The issue is not about OFR. The issue is, when MAS accumulates foreign reserves, accumulates foreign assets, or now we can call foreign reserves, what does it use to buy the reserves in the first place, right?

In the past, we have excess savings. So, MAS has a lot of Government deposits on its balance sheet. So, it can use the Government deposit to buy the foreign reserves first; and then, it transfers over to GIC and reduces both the assets and liabilities at the same time.

But if you do not have enough Government security deposits on the balance sheet of MAS, then, when MAS accumulates the foreign currencies, or foreign reserves, what does MAS use? I would like to ask the Minister for Finance, what does MAS use to buy the foreign assets?

Mr Lawrence Wong: Mr Speaker, I do not intend to engage in a very technical discourse here. I will just repeat my point. In both instances, MAS uses its excess foreign reserves, excess OFR. Like I said, in the first instance, it is done through a transfer of excess OFR and corresponding reduction in Government deposits; but in the second instance, we are proposing for MAS to use its excess OFR to subscribe to the RMGS. There is no creation of new money in this process.

Mr Speaker: Mr Leong.

Mr Leong Mun Wai: Mr Speaker, this is not the right understanding of the process, you know. I can invite other Members in this House to comment on this. When MAS buys foreign assets from the market, MAS needs to pay for it. If there are no Government deposits to pay for it, MAS will have to print more Singapore dollars to pay for it. So, that will have a different effect on our economy. You cannot say there is no departure from the current way of monetary policy operations.

Mr Lawrence Wong: Mr Speaker, I am happy to have other independent views because somehow Mr Leong does not believe me. I do not know how I can convince him otherwise that he is, indeed, mistaken. But he would have heard Prof Hoon explaining the mechanism quite clearly. There is no creation of new money in this process. MAS is using its excess OFR to subscribe to RMGS. It is not printing new monies. It is very clear. I have said it repeatedly: the safeguards are in legislation. I do not know how else I can persuade Mr Leong otherwise and if he prefers for a third party to express views, so be it. I am happy to have other voices share their opinions as well.

Mr Speaker: Would anyone else like to add some enlightenment to this discourse? If not, I will put the question for the Bill to now be read a Second time.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. – [Mr Lawrence Wong].

Bill considered in Committee; reported without amendment; read a Third time and passed.