Monetary Authority of Singapore (Amendment) Bill

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 Lawrence Wong (The Minister for Finance): 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 the 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.

Next set of questions pertain 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 arises. 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 Sing 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 Sing 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. 

Source: Hansard