MAS uses new mechanism to transfer S$75b of excess foreign reserves to Govt for GIC to invest long-term
SINGAPORE — The Monetary Authority of Singapore (MAS) has used a newly-created mechanism to transfer S$75 billion of excess official foreign reserves (OFR) to the Government to be invested by GIC, Singapore's sovereign wealth fund, which would tend to achieve better returns on the money.
In a statement on Thursday (April 7), the central bank said its OFR had grown steadily over the years to about 106 per cent of the country's annual gross domestic product (GDP), or economic output, amounting to S$563 billion, as at Dec 31, 2021.
“This reflects the persistently strong appreciation pressures on the S$NEER (nominal effective exchange rate) arising from Singapore’s positive net savings and large capital inflows from abroad,” said MAS.
MAS estimates it needs only about 65 per cent to 75 per cent of GDP to fulfil its role in managing the Singapore dollar and keeping inflation in check.
The central bank uses foreign currency to buy Singapore dollars to prop up the local currency when necessary, and uses Singdollars to buy foreign currency when it needs to rein in the value of the local currency as measured against the currencies of key trading partners.
In February, Parliament amended the MAS Act to allow the central bank to subscribe to newly-created Reserves Management Government Securities (RMGS).
This transfer of assets from MAS to the Government does not change Singapore’s total foreign reserves, nor make available funds which the Government can spend.
On Jan 11 this year, Finance Minister Lawrence Wong delivered a speech in Parliament, explaining that the Government needed “a new instrument to effect the transfer of assets from MAS to the Government for long term investment management”.
“Previously, 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, the reduction of assets on MAS’ balance sheet 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,” said Mr Wong.
He also said that it would be “inefficient” for MAS to hold on to OFR beyond its needs, because returns would be limited by MAS’ “relatively safer and more liquid investment posture as a central bank”, compared to GIC, which allows investment into “longer-term, high-yielding assets”.
After the transfer of S$75 billion of OFR to the Government, the stock of OFR remaining on MAS’ balance sheet is estimated at around 95 per cent of GDP.
“MAS expects further transfers of excess OFR to the Government over the course of the year to bring the OFR to the optimal amount,” said MAS.
The outstanding holdings of RMGS will be published on MAS’ website from April 14 and updated each month thereafter.
TODAY understands that the publication is new and is being done for transparency purposes.
