Implications of Strong Singapore Dollar on Monetary Authority of Singapore's Losses, Exposure to Investment Risks and Moves to Encourage Higher Level of Savings

23 Ms Hazel Poa asked the Prime Minister what were the benefits of a strong Singapore dollar policy that recorded S$30.8 billion in losses last year by the Monetary Authority of Singapore.

24 Assoc Prof Jamus Jerome Lim asked the Prime Minister how much of the reported losses by MAS for FY 2022/2023 are attributable to (i) losses from currency interventions, (ii) changes in valuation, (iii) investment exposures and (iv) other sources.

25 Mr Don Wee asked the Prime Minister in order to maintain a strong Singapore dollar policy and to curb losses, whether MAS has plans to increase the interest yields and payments of its Treasury Bills and bonds so as to encourage a higher level of savings.

The Minister of State for Trade and Industry (Mr Alvin Tan) (for the Prime Minister): Mr Speaker, Sir, may I have your permission to take Question Nos 23, 24 and 25 in today's Order Paper together, please?

Mr Speaker: Please proceed.

Mr Alvin Tan: Mr Speaker, my response will cover the questions raised by Ms Hazel Poa, Assoc Prof Jamus Lim and Mr Don Wee in today's Order Paper, as well as Mr Yip Hon Weng's question filed for tomorrow's Sitting. If Mr Yip is satisfied with the response, he may wish to withdraw his question after this session.

Assoc Prof Jamus Lim asked about the components of the net loss, including from the Monetary Authority of Singapore's (MAS) currency intervention. MAS had explained in detail the constituents of its reported financial loss at its annual press conference in July, which I will reiterate here.

About 70% of the net loss was due to the negative currency translation effects of a stronger Singapore dollar. This is not due to currency intervention. The negative currency translation effects arise because the Official Foreign Reserves (OFR) are held in foreign currencies but reported in Singapore dollars. Therefore, a stronger Singapore dollar will result in a lower value for the OFR when expressed in Singapore dollar terms. This currency translation effect does not have any bearing on the external purchasing power of the OFR or on MAS' ability to conduct monetary policy.

The remaining 30% of the net loss was due to net interest expenses from MAS' money market operations to mop up excess liquidity in the banking system. The net interest expense incurred on MAS' money market operations to mop up this excess liquidity in the banking system was unusually large in the last FY due to two factors: one, the large volume of operations; and two, higher interest rates.

The high volume of money market operations was necessitated by MAS' interventions in the foreign exchange market to moderate the appreciation of the Singapore dollar. As MAS explained earlier, had it not done this, the Singapore dollar would have been too strong and therefore hurt the economy. While this currency intervention added substantially to our OFR, it created excess Singapore dollar liquidity in our domestic banking system which MAS had to remove and, therefore, incur an interest expense in the process.

Mr Don Wee asked if MAS plans to increase the interest yields and payments of Treasury Bills and bonds to curb losses and encourage a higher level of savings. Such instruments are issued by the Government and not by MAS. The interest rates payable on such instruments are not determined by MAS but are market-determined via auctions. As the interest rates of such instruments have increased in tandem with the rise in global interest rates, we have already seen a healthy pick-up in demand by the public.

Mr Yip Hon Weng asked whether there are plans to broaden the basket of currencies in which the OFR is held. The OFR is already held in a diverse range of currencies. As long as the Singapore dollar appreciates against these currencies, there will be negative currency translation effects. In the last FY, the Singapore dollar appreciated against every major currency. As MAS explained earlier, the effects of a stronger Singapore dollar cannot be hedged or diversified away.

Let me now respond to the Members' broader questions on monetary policy.

Ms Hazel Poa asked about the benefits of a stronger Singapore dollar in view of the financial losses recorded by MAS. The appreciation of the Singapore dollar last year reflected the outcome of MAS' tighter monetary policy to dampen inflation. This policy has been successful in curbing imported inflationary pressures. Let me explain how. Between May 2022 and June 2023, Singapore's import price index had fallen by some 14%. This decline in import prices has, in turn, contributed to lower domestic inflation. On a month-on-month seasonally adjusted annualised basis, MAS' Core Inflation fell from its peak of 9.1% in June 2022 to 2.2% in June 2023.

Mr Yip Hon Weng asked how MAS strikes a balance between managing inflation and incurring losses and whether these losses are anticipated. MAS' monetary policy is focused purely on keeping inflation low and ensuring medium-term price stability. It does not take into account any potential impact on MAS' profits because to do so would undermine its mission. This is similar to how other major central banks conduct monetary policy. Many of them have also reported losses arising from their monetary policy operations. MAS' financial performance is a necessary consequence of its conduct of monetary policy.

The OFR is key in enabling MAS to conduct effective monetary policy. As a central bank, MAS adopts a conservative approach in its investments, with a significant proportion of its portfolio invested in liquid financial market instruments. Through a well-diversified portfolio and careful risk management, MAS expects to earn good long-term returns that are commensurate with its risk profile.

Finally, let me turn to Mr Yip's question about the impact of MAS' net loss on the Government's budget position. MAS contributes to the Government's budget in two ways.

First, under the Net Investment Returns (NIR) framework, the Government can spend up to 50% of the expected long-term real return on the assets invested by MAS, GIC and Temasek. NIR is based on the long-term expected returns of these entities and, hence, is not affected by their short-term performance. Accordingly, MAS' reported net loss in the last FY has no impact on the NIR that is available to the Government.

Second, similar to other Statutory Boards, MAS makes contributions to the Government's Consolidated Fund in lieu of corporate income tax. This is based on 17% of the net profit for the year, after offsetting cumulative losses from previous financial years. The Government recognises that MAS contributions will vary considerably from year to year and has therefore smoothened the revenue volatility by requiring the annual contributions made by MAS to be paid in equal proportions over a period of three years.

Given the net loss in FY2022/2023, MAS will not accrue a contribution to the Government's Consolidated Fund for that financial year. Nonetheless, MAS will still make a contribution of S$0.4 billion to the Government's Consolidated Fund in the current financial year, based on past profits. This smoothening formula has thus helped to mitigate the impact of MAS' net loss on the Government's budget.

In sum, MAS’ overarching mandate is to ensure macroeconomic stability. As Deputy Prime Minister Lawrence Wong stated in this House on 1 August 2022, the Government does not expect MAS to deviate from its mandate to maximise its contributions to the Budget. MAS’ monetary policy has helped to deliver broad macroeconomic stability for over 40 years as the basis for sustained economic growth and increases in real incomes for Singaporeans.

Mr Speaker: Ms Hazel Poa.

Ms Hazel Poa (Non-Constituency Member): I thank the Minister of State for his answer. I have a supplementary question. The Minister of State has said that the benefit of the strong dollar policy is to dampen inflation. Given that domestic consumption is $192 billion and this recorded loss of $30.8 billion is a big sum of money, equivalent to about 16% of domestic consumption, how much has it dampened inflation and compared to the $30.8 billion, what is the official cost-benefit analysis and the assessment on the efficacy of this policy?

Mr Alvin Tan: Sir, I thank the Member for her supplementary question. As I mentioned earlier in my reply, the loss is attributed to 70% in net currency translation losses and a 30% in interventions and money market operations. These are the normal functionings of how central banks conduct monetary policy and with its goal to dampen inflation and to have medium-term price stability – so that is to put that into context.

On its impact on price stability and its impact on inflation, I had mentioned that in my Parliamentary Question reply. But let me also explain that if MAS had not tightened monetary policy, quarterly core inflation would have reached 7.2% year-on-year at its peak – 1.9 percentage points higher than the actual peak of 5.4% year-on-year in the first quarter of 2023. So, inflation would have stayed higher for much longer and brought about much more significant increases in the cost of living for households.

Therefore, MAS' conduct of monetary policy has made an impact. We are still seeing the impact over the course of the different quarters, having tightened monetary policy five times since October 2021.

Mr Speaker: Assoc Prof Jamus Lim.

Assoc Prof Jamus Jerome Lim (Sengkang): Thank you, Speaker. One motivation behind my request for a breakdown in the numbers was because MAS had previously explained that it would strategically strengthen the Singapore dollar for the purposes of addressing imported inflation. This was a move that I supported, and, in fact, Minister of State Tan has reiterated this MAS position that the Singapore dollar has, indeed, appreciated against every major currency.

That said, based on my understanding of the data, between January and July 2023, the movements of the Singapore dollar were essentially the converse of the US dollar. In particular, when there is a strengthening of the US dollar, the Singapore dollar would weaken and when the US dollar weakened, the Singapore dollar would strengthen.

In particular, for the US dollar's two most recent peaks at the beginning of June and July, this broadly corresponded to troughs in the Singapore dollar-US dollar rates. This actually suggests to me that MAS was not really leaning that much against the wind; or if it did, it was not doing so with sufficient interventions that would have altered the overall US dollar trends. And, therefore, attributing losses, the 30% that the Minister of State Tan mentioned, to sufficient interventions does not strike me as credible.

So, my follow-up question then is whether the MAS actually views this earlier strong dollar policy as successful and, if so, why in March it announced a decision to ease the Singapore dollar policy?

Mr Alvin Tan: Sir, I thank Assoc Prof for his supplementary question. I think it is really important to note that the Singapore dollar is trade-weighted against a basket of currencies, not just the US dollar. Therefore, you need to look at it as a whole basket of currencies. We look at it from very much over the long term.

First, on currency translation effects, I have explained that technically. The second is on currency intervention and as well as money market operations. Because the Singapore dollar was already on an appreciating trend and in addition to high savings rates as well as large volume of capital inflows, MAS also intervened by selling Singapore dollars and, therefore, moderating the appreciation rate. Had it not done so, then you could worsen inflation.

But when you sell Singapore dollars into the domestic banking system, you will then have to undertake money market operations. This is the normal conduct of central banking policy.

What the MAS then does is to sell repurchase agreements (repos) or MAS bills, of which it then has to pay interest payments on. And these interests, in line with global interest rates, have risen. And, therefore, when we issue an MAS bill, for example, we would have to pay a higher interest rate. That adds to that 30% account of the loss that we are talking about today.

So, just explaining the technicalities of how this works; trade-weighted as well as why we need to conduct money market operations to moderate the appreciation of the Singapore dollar.

Mr Speaker: Mr Don Wee.

Mr Don Wee (Chua Chu Kang): Thank you, Speaker. Can I confirm with the Minister of State the loss is a result of currency translation as well as money market operations, so as to help Singaporeans, especially the SMEs to cope with the rising business costs as well as the rising cost of living?

Mr Alvin Tan: I thank Mr Don Wee for his question. In fact, that is the whole purpose of MAS' monetary policy – it is to manage price stability as well as to manage inflation, and we have done so. I explained in my reply to Parliamentary Questions and the supplementary question by Ms Hazel Poa.

Let me just reiterate a few points on how the policy has been successful in curbing imported inflationary pressures. Again, I said that between May 2022 and June 2023, our import price index had fallen by some 14%. So, in concert, this has dampened. Had we not done so, I think the cost of living would be higher, imported inflation would be also higher.

Mr Speaker: Mr Yip Hon Weng.

Mr Yip Hon Weng (Yio Chu Kang): Thank you, Mr Speaker. I thank the Minister of State for his response. I have one supplementary question. I wish to ask how have MAS' investments been thus far and its impact on our official foreign reserves.

Mr Alvin Tan: Sir, just to take a step back and just to also state to the House that the relevant measure of MAS' financial performance is not currency translation effects or interest expense, but how well its investments have done.

MAS made a small gain of $0.6 billion on its investment portfolio amidst a depressed market environment. And last year, as Members would know, was an unusual year for financial markets, where bond markets and equity markets performed very badly. In this case, MAS' investment performance had to be viewed from a longer-term perspective.

Since the 2008 Global Financial Crisis, MAS' investment portfolio had benefited from an unusual period of low inflation as well as low interest rates. Including this latest year, MAS recorded an annual average investment gain of S$11.7 billion in the last 15 years.

MAS seeks to preserve the external purchasing power of the OFR over the long term to support monetary policy implementation. So, over a 20-year period, MAS' average annual investment gain was 3.7%.

Notwithstanding the financial loss that we had been discussing, MAS' OFR position remains strong and it re-transferred S$191 billion of excess OFR to the Government.

Mr Speaker: Assoc Prof Jamus Lim.

Assoc Prof Jamus Jerome Lim: If I may just quickly clarify my earlier supplementary question? I appreciate what Minister of State Tan shared about how the Singapore dollar is measured against a basket of currencies. But, in particular, could I confirm with him that MAS did, indeed, reverse its strong dollar policy in March of this year? And, if so, what were the factors that led to its decision to subsequently make that reversal after making a case for strengthening the Singapore dollar?

Mr Alvin Tan: As I mentioned to the Member earlier on, it is measured against a trade-weighted basket of currencies. We have tightened monetary policy five times since 2021, and there was no such announcement.