"Monetary Authority of Singapore (Amendment) Bill" - Second Reading Speech by Mr Lawrence Wong, Minister for Finance and Deputy Chairman of the Monetary Authority of Singapore, on behalf of Mr Tharman Shanmugaratnam, Senior Minister and Minister-in-charge of the Monetary Authority of Singapore, on 11 January 2022
1. Mr Speaker, I beg to move, “That the Bill be now read a second time.”
2. As Singapore’s central bank, the Monetary Authority of Singapore (MAS) conducts monetary policy to maintain medium-term price stability which is necessary for sustained growth of the economy. MAS conducts monetary policy by managing the nominal effective exchange rate of the Singapore Dollar, the S$NEER, within a policy band. When global financial or economic conditions cause the S$NEER to be subject to significant strengthening or weakening pressures that are inconsistent with domestic price stability, MAS may intervene in the foreign exchange market to sell or buy Singapore Dollars, or SGD, to keep the S$NEER within the policy band.
3. The Official Foreign Reserves (OFR) plays an important role in MAS’ conduct of monetary policy and support of financial stability. It gives confidence in Singapore’s exchange rate-centred monetary policy framework, particularly during periods of speculative pressure or financial crises, when MAS will need to use its OFR to purchase SGD to defend the exchange rate. Conversely, in periods of appreciation pressures on the SGD, MAS can also sell SGD in exchange for foreign currency to keep the S$NEER within the policy band. When this happens, MAS accumulates foreign assets and its OFR grows. MAS invests the OFR mainly in safe and liquid assets, so as to ensure that the OFR is available at short notice when needed – for example, to fend off a speculative attack on the SGD which could potentially undermine confidence in the Singapore economy.
4. Singapore’s excess of domestic savings over investments and persistent capital inflows – in part reflecting Singapore’s triple-A credit rating and the abundant liquidity in global financial markets – have meant strong appreciating pressures on the SGD. If left unchecked the S$NEER will strengthen much more than necessary to keep inflation low and stable. As MAS intervened in the foreign exchange market to dampen appreciation pressures on the S$NEER, it has been steadily accumulating OFR beyond that which it estimates is required to fulfil its monetary policy and financial stability mandate.
Optimal amount of OFR
5. The optimal amount of OFR that MAS estimates it needs is currently around 65% to 75% of GDP. There is no strict formula to determine this range, but it takes reference from a range of internationally-used measures of reserve adequacy that recognise the foreign currency needs of our small open economy that is heavily dependent on trade and financial transactions with the rest of the world. MAS has assessed that this amount of OFR should be able to provide a sufficient buffer against severe crisis in the global economy and financial markets.
6. Today, the stock of OFR has grown to S$566 billion, or about 111% of GDP as at 3Q 2021 – significantly above this range.
7. It would be inefficient for MAS to hold on to OFR beyond its needs, because returns on the OFR will be limited by MAS’ relatively safer and more liquid investment posture as a central bank. Indeed, it is for this reason that GIC was set up in 1981 to invest OFR that was not needed by MAS in longer-term, high-yielding assets rather than in liquid but low-yielding assets.
8. The transfer of OFR from MAS to the Government for management by GIC has hence been a long-standing practice. For example, in 2019, MAS announced a transfer to the Government of S$45 billion of OFR after reviewing the optimal amount of OFR needed.
9. To date, transfers of MAS’ OFR to the Government have been facilitated through a corresponding reduction in the Government’s SGD cash deposits with MAS. In other words, the reduction of assets on MAS’ balance sheet is matched by a reduction of liabilities.
10. 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. For example, if we want to bring the current level of OFR to the upper end of the optimal range, or 75% of GDP, about S$185 billion of OFR will have to be eventually transferred to the Government. This is far in excess of the Government’s current deposits with MAS.
11. We hence need a new instrument to effect the transfer of assets from MAS to the Government for long term investment management. To be clear, this transfer of assets does not increase the total size of the Government’s reserves.
New type of Government security to facilitate continued transfers of OFR
12. The Bill sets out legislative amendments that will introduce powers in the MAS Act for MAS to subscribe for a new type of non-marketable security issued by the Government solely to facilitate transfers of OFR that is not needed for MAS’ mandate. This new security is called Reserves Management Government Securities, or RMGS. The amendments will allow MAS to subscribe for RMGS issued by the Government under the Government Securities Act, or GSA, as consideration for OFR that is transferred to the Government for longer-term management by GIC.
13. In introducing the Bill, MAS and the Government have sought to ensure that MAS’ ability to fulfil its mandate is not affected. Two sets of safeguards have thus been proposed in both the MAS Act and the GSA, to tightly circumscribe the conditions for MAS’ subscription of RMGS and the Government’s issuance of RMGS. I will provide further details about each set of safeguards.
Safeguards against the use of RMGS to finance the Government’s spending
14. The first set of safeguards seeks to robustly address potential misperceptions of monetary financing, in other words, MAS financing the Government’s spending.
15. Currently, MAS is already prohibited under the MAS Act from lending to the Government or subscribing for Government securities, apart from limited exceptions, such as to conduct monetary policy or to develop the bond market in Singapore. Similarly, there are existing safeguards under the GSA today, where the Government’s proceeds from borrowing are accounted for in the Government Securities Fund and can only be used for investments. Thus, borrowings by the Government in the form of RMGS, will not increase the amount available for spending by the Government.
16. The Bill will add safeguards in the MAS Act and the GSA to avoid any misperception that RMGS will constitute monetary financing of Government.
(a) First, the Bill will empower MAS to subscribe for RMGS for the sole purpose of facilitating the transfer of OFR to the Government, and MAS can do so only if the subscription does not compromise its objective of ensuring medium-term price stability.
(b) Second, the Bill will require MAS to use only foreign assets to subscribe for RMGS; and correspondingly, the Government to accept only foreign assets in exchange, to be accounted for in the Government Securities Fund. This draws a clear and direct link between MAS’ RMGS subscription and the transfer of MAS’ OFR to the Government, and eliminates the possibility that MAS as a central bank creates SGD to finance Government spending.
17. The Bill will introduce within the GSA a separate net issuance limit for RMGS, which will be S$580 billion. Of this amount, about S$185 billion represents the amount which MAS will have to transfer to the Government, in phases, to bring the level of OFR back to the optimal range. The bulk of the remainder is estimated based on the expected pace of OFR accumulation in future years.
18. The separate net issuance limit differentiates RMGS from other types of Government borrowings. Transfer amounts and hence RMGS issuance depends on the accumulation of OFR which is driven mainly by MAS’ conduct of monetary policy. This in turn, is affected by financial market factors that can be uncertain. Having a separate limit for RMGS will ensure that the planned issuances of other Government securities and Treasury Bills are not affected should the issuance of RMGS be higher than projected. Conversely, it will also avoid creating additional unintended borrowing space for other Government securities and Treasury Bills, should RMGS issuance be lower than expected.
19. For transparency, MAS will publish the outstanding RMGS amounts each month. The Government Financial Statements will also state the total gross issuance and total gross redemption of RMGS, in addition to the outstanding RMGS amount.
Safeguards to preserve MAS’ access to sufficient OFR to fulfil its mandate
20. A second set of safeguards will preserve MAS’ access to sufficient OFR to fulfil its mandate of conducting monetary policy and ensuring financial stability.
21. The Bill sets out in the MAS Act that any subscription for RMGS can only be made for the purposes of transfer of OFR in excess of the amount MAS considers necessary for the conduct of monetary policy. MAS alone determines the amount of OFR required to meet its mandate, and consequently, the amount of OFR which can be transferred to the Government. The Government plays no role in this decision. Consequently, MAS also determines the amount and timing of its RMGS subscriptions to effect transfers of OFR, and the Government cannot independently effect a transfer of OFR from MAS.
22. The Bill also sets out in the GSA that RMGS will be issued subject to such conditions as to repayment and redemption as may be agreed between MAS and the Government. These conditions will safeguard MAS’ access to sufficient OFR to implement monetary policy and support financial stability. For example,
(a) First, MAS will have the right to redeem RMGS before maturity at par, to meet its OFR needs in support of the conduct of monetary policy and financial stability. We expect that the optimal amount of OFR held by MAS will comfortably meet its needs under most circumstances. Hence, MAS’ redemption of RMGS before maturity will likely be needed to supplement OFR only in a tail risk event.
(b) Second, when MAS redeems RMGS at or before maturity, MAS will be repaid in foreign assets.
23. These conditions will ensure that the RMGS on MAS’ balance sheet can readily support MAS’ ability to fulfil its mandate if necessary.
24. In conclusion, this Bill will allow MAS to subscribe for RMGS issued by the Government, for the sole purpose of facilitating continued transfers of MAS’ OFR to the Government for longer-term investment by GIC. RMGS will enable such transfers to be sustained over the longer term.
25. While the Government will take on more debt as a result of RMGS, borrowing is not revenue, and the introduction of RMGS does not increase what the Government can spend. The Government’s approach towards borrowing remains unchanged – the Government’s borrowings is for non-spending purposes with the exception of the recently introduced SINGA to finance spending on nationally significant infrastructure.
26. This Bill will also put in place safeguards to ensure that RMGS will not and cannot be used for Government spending, and that MAS will continue to have ready access to the transferred OFR to support MAS’ ability to fulfil its mandate as necessary.
27. Further, the nominal increase in Government debt through RMGS will be matched by an increase in assets, with no change in the Government’s net asset position. The Government continues to have a strong balance sheet with no net debt – RMGS does not change this, as all RMGS issuances are only used to facilitate transfers of assets for longer-term investment.
28. Mr Speaker Sir, I beg to move.