$45b to be transferred to GIC from foreign reserves: MAS

MAS said Singapore has more reserves than it needs for now, and the $45 billion transferred to GIC can be invested on a "longer-term basis with expected higher returns".
MAS said Singapore has more reserves than it needs for now, and the $45 billion transferred to GIC can be invested on a "longer-term basis with expected higher returns".PHOTO: ST FILE

Funds to support longer-term investments with higher returns

A total of $45 billion will be pumped into Singapore sovereign wealth fund GIC from the country's official foreign reserves this month to support longer-term investments, as the country has more reserves than it needs for now.

The Monetary Authority of Singapore (MAS) reported this yesterday, in one of its first disclosures on such transfers, and said that from next year it will also disclose information about its foreign exchange intervention operations from July 2020, without affecting their effectiveness.

The country held more than $404 billion in its official foreign reserves as of last month. These reserves, managed by the central bank, act as a buffer against financial crises and global economic stresses, as well as to defend the Singdollar when it faces speculative pressures.

The $45 billion transfer is "the excess over what MAS deems necessary to maintain confidence in Singapore's exchange-rate-centred monetary policy", it said.

Foreign reserves amounted to 82 per cent of Singapore's economy as of the first quarter of this year. But in its latest review, MAS had assessed that a 65 per cent level was sufficient. By parking the monies with GIC, they can be invested on a "longer-term basis with expected higher returns", said MAS.

Economists say that the transfer will help grow further the Net Investment Returns Contribution (NIRC) component of the annual Budget - already the largest component of government revenue.

The transfer amount is nearly three times the $16.44 billion revenue from NIRC in the 2018 financial year.

LOW INTEREST RATE ENVIRONMENT

In such an environment, it is sensible to maximise investment returns through multi-asset class funds, and among the three arms of Singapore's reserves, GIC is in the best position to do so. MAS' decision shows that this environment will probably persist.

MR SONG SENG WUN, CIMB Private Banking economist, on the $45 billion transfer.

But it still pales in comparison to the staggering amount of reserves left in MAS' war chest to be used in times of crises, said Maybank Kim Eng economist Chua Hak Bin.

"MAS was not obliged to disclose these transfers previously, but the initiative is timely given the growing significance of NIRC to the government coffers," said Dr Chua.

The full size of Singapore's reserves - which comprise MAS, GIC and state investor Temasek - is kept confidential for strategic reasons, but is estimated to be over $1 trillion.

CIMB Private Banking economist Song Seng Wun said the transfer implies that the low inflation, low interest rate environment of the past decade is likely to continue.

Mr Song said: "In such an environment, it is sensible to maximise investment returns through multi-asset class funds, and among the three arms of Singapore's reserves, GIC is in the best position to do so.

"MAS' decision shows that this environment will probably persist."

Economists also lauded the "confident" move to disclose Singapore's forex intervention operations. "Who would dare to bet against MAS when they can see the strength of its foreign reserves and its operations," quipped Mr Song.

 

Such operations include MAS' purchases of foreign exchange, aggregated over a six-month period, and are used to manage its nominal effective exchange rate policy band. The Singdollar is allowed to float within this band.

The initiative to disclose such information will provide better indication of its actions to implement its monetary policy stance, said the MAS.

Ms Selena Ling, head of treasury research and strategy at OCBC Bank, said that greater transparency on the net forex intervention operation data will also be welcomed by market watchers and non-agent banks, albeit with a six-month lag.

A version of this article appeared in the print edition of The Straits Times on May 09, 2019, with the headline '$45b to be transferred to GIC from foreign reserves: MAS'. Print Edition | Subscribe