ANCHOR OF ECONOMIC
AND FINANCIAL STABILITY
MANAGEMENT OF OFFICIAL FOREIGN RESERVES
As at 31 March 2014, MAS held S$343 billion (US$273 billion) of official foreign reserves (OFR) on its balance sheet. MAS invests the OFR conservatively, ensuring sufficient liquidity to support the conduct of monetary policy while preserving the international purchasing power of the reserves.
The OFR constitute more than 90% of the assets on MAS’ balance sheet. They are accounted for on a lower of cost and market valuation basis in MAS’ financial statements. The key components of the investment gain from the OFR are interest income from cash and bonds, dividends from equity holdings and realised capital gains/losses arising from sale of the OFR assets. The investment gain also comprises write-back of, or provision for, diminution in the value of the OFR assets. When the market value of OFR assets falls below cost, a provision is made against investment gain. Should the market value subsequently recover, the provision is written back as investment gain, by up to the amount of value recovered.
Asset and Currency Allocation
The OFR are invested in a well-diversified portfolio including cash, bonds and equities. Investment- grade bonds comprise the largest allocation in the portfolio. With regard to currency composition, about three-quarters of the OFR are denominated in the major G4 currencies i.e. US Dollar, Euro, British Pound and Japanese Yen, with no single currency allocation making up more than one-third of the composition.
MAS monitors investment risks in the OFR closely. Besides establishing risk controls and limits to manage financial and liquidity risks, MAS conducts regular stress tests to ensure its portfolio can weather the impact of potential tail risk events and would consider appropriate actions to mitigate risk where necessary.
Currency Translation Effects
MAS’ financial results are reported in Singapore Dollars. The reported value of the OFR hence depends on the movements of the Singapore Dollar vis-à-vis the foreign currencies in which the reserves are held. Such currency movements will result in translation effects in MAS’ financial statements.
The translation effects in MAS’ financial statements have no impact on the international purchasing power of the OFR, and hence do not have bearing on MAS’ ability to conduct exchange rate policy and provide a buffer in the event of a sharp deterioration in Singapore’s balance of payments. Accordingly, it would not be meaningful to hedge against the Singapore Dollar to mitigate translation effects.
Chart 4 shows the investment performance of the OFR in MAS’ income statement over the period comprising the global financial crisis and the recovery since the crisis. The gains/losses of OFR, as represented by the dark yellow bars in Chart 4, comprise two separate components – investment gains/losses (blue bars) and currency translation effects (grey bars). Holding the Singapore Dollar exchange rate constant to strip out translation effects, the OFR recorded an investment loss of S$13.8 billion in FY2008/09 as a result of the global financial crisis. As market prices fell across all asset classes, significant valuation provisions were made. In FY2009/10, as markets gradually recovered, the OFR posted an investment gain of S$29.0 billion due primarily to the write-back of valuation provisions. The yearly investment gain from FY2010/11 to FY2013/14 was relatively stable at between S$9.4 billion and S$12.8 billion, mainly from interest income and realised capital gains/ losses from sale of OFR assets.
As MAS’ financial results are reported in Singapore Dollars, MAS recorded a negative translation effect as the Singapore Dollar strengthened between 15% and 26% against the G4 currencies from FY2009/10 to FY2012/13. However, there were positive translation effects1 in FY2008/9 and FY2013/14, as the Singapore Dollar generally weakened against the G4 currencies. Translation effects are volatile as they reflect the movements of the Singapore Dollar against the currencies in which the OFR assets are invested in.
Taking the investment gains/losses together with the currency translation effects, MAS’ annual gains/losses2 from OFR over the last six years ranged from –S$10.4 billion to S$16.5 billion.
1 The translation effect in MAS’ financial statements is dependent on the exchange movements of the Singapore Dollar vis-à-vis the currencies in which the OFR assets are invested in, which are primarily denominated in the G4 currencies. However, MAS’ monetary policy is centred on the management of the Singapore Dollar against a basket of currencies of our major trading partners.
2 Gross of investment, interest and other expenses.