Explanatory Brief for Monetary Authority of Singapore (Amendment) Bill 2021
1 Mr Tharman Shanmugaratnam, Senior Minister and Minister-in-charge of the Monetary Authority of Singapore (MAS), today moved the Monetary Authority of Singapore (Amendment) Bill 2021 (Bill) for First Reading in Parliament.
2 MAS is introducing amendments to the Monetary Authority of Singapore Act (MAS Act) that will empower it to subscribe to Reserves Management Government Securities (RMGS) issued by the Government. RMGS will facilitate the transfer of MAS’ Official Foreign Reserves (OFR) that are above what is required for conducting monetary policy and ensuring financial stability
3 Singapore’s monetary policy is aimed at ensuring medium-term price stability. MAS implements monetary policy by managing the nominal effective exchange rate of the Singapore Dollar (S$NEER
4 The OFR play an important role in MAS’ conduct of monetary policy by enabling MAS to defend the S$NEER during times of speculative pressures or financial crises. In 2019, MAS assessed that it should maintain OFR amounting to at least 65% of GDP on an ongoing basis. This level of OFR will provide a sufficiently strong buffer against stresses in the global economy and markets, to underpin confidence in Singapore’s exchange-rate centred monetary policy and the domestic financial system.
5 Singapore’s positive net savings and persistent capital inflows arising from abundant liquidity in global financial markets has led to persistently strong appreciation pressures on the S$NEER. MAS’ intervention in the foreign exchange markets to dampen these pressures and keep the S$NEER within the policy band has led to a steady accumulation of OFR over the years. As at 3Q2021, MAS’ OFR amounted to nearly 115% of GDP
6 Currently, transfers of MAS’ OFR are facilitated by a corresponding reduction in the Government’s SGD cash deposits with MAS as consideration. However, this transfer mechanism is increasingly facing constraints, as MAS’ accumulation of OFR has persistently outpaced the growth of Government’s deposits in recent years. Government’s deposits are not growing as quickly due to smaller fiscal balances.
KEY PROVISIONS IN THE BILL
7 In view of the limitations of the current transfer mechanism, the Bill will introduce amendments to the MAS Act to empower MAS to subscribe for RMGS, a new type of non-marketable security, that will be issued by the Government under the Government Securities Act (GSA)
8 The Bill will allow the principal amount of a maturing tranche of RMGS to be reinvested into a new tranche of RMGS, if the principal amount is not required by MAS to support monetary policy implementation or financial stability, and the Government agrees to do so.
9 The Bill will put in place strong safeguards against potential misperceptions of monetary financing
(a) First, MAS can only subscribe to RMGS for the sole purpose of facilitating the transfer of OFR, and MAS can only do so if the subscription does not compromise its objective of ensuring medium-term price stability.
(b) Second, MAS will only be able to use foreign currency assets (cash and non-cash assets) to subscribe to RMGS. This will reinforce the fact that RMGS will not be used to raise money (Singapore Dollars) to finance Government spending.
10 These new safeguards will complement the existing safeguard in the GSA. Under the GSA, the Government’s proceeds from borrowing are accounted for in the Government Securities Fund (GSF) and can only be used for investments. Thus, borrowings under the GSA do not increase the amount available for spending by the Government.
RELATED AMENDMENTS TO THE GOVERNMENT SECURITIES ACT
11 Issuing RMGS under the GSA is therefore consistent with the existing policy to clearly delineate between borrowings for investment and market development purposes (under the GSA), and borrowings to finance infrastructure (under the Significant Infrastructure Government Loan Act (SINGA)).
12 The Bill will also introduce related amendments to the GSA to facilitate the transfer of OFR to the Government via RMGS.
13 First, the Bill will introduce a separate net issuance limit for RMGS within the GSA. A separate net issuance limit will ensure that the issuances of RMGS do not affect the planned issuances of other Government securities and Treasury Bills (should issuances of RMGS be higher than planned), and avoid creating additional unintended borrowing space for other Government securities and Treasury Bills (should the outstanding amount of RMGS be lower than expected).
14 Second, the Bill will amend the GSA to allow foreign currency assets (both cash and non-cash) received in exchange for the issuance of RMGS to be accounted for in the GSF. This is currently not possible as the Government can only account for cash proceeds in the GSF. Allowing foreign currency assets (i.e. the OFR transfer proceeds) to be received from the issuance of RMGS draws a clear and direct link between the issuance of RMGS and the transfers of OFR, and further ensures that the proceeds from RMGS issuances cannot be used for monetary financing.