Amendments passed to allow MAS to subscribe for govt debt to facilitate transfers of official foreign reserves

MAS will be allowed to subscribe for a new type of non-marketable security, Reserves Management Government Securities. PHOTO: ST FILE

SINGAPORE - A new mechanism will soon be in place to facilitate transfers of official foreign reserves to the Government for longer-term investment by sovereign wealth fund GIC.

This comes after Parliament passed changes to the Monetary Authority of Singapore (MAS) Act on Tuesday (Jan 11) to allow the central bank to subscribe for a new type of non-marketable security - Reserves Management Government Securities (RMGS), which will facilitate the transfer of official foreign reserves.

At present, transfers of MAS' official foreign reserves are facilitated by a reduction in the Government's Singapore dollar cash deposits with MAS as consideration.

However, this transfer mechanism is increasingly facing constraints, and mainly because MAS' accumulation of official foreign reserves has persistently outpaced the growth of government deposits in recent years.

"We hence need a new instrument to effect the transfer of assets from MAS to the Government for long-term investment management," said Finance Minister Lawrence Wong on Tuesday.

He outlined that safeguards will be added to avoid any misperception that RMGS will constitute monetary financing of government spending.

This is because MAS will be empowered to subscribe for RMGS for the sole purpose of facilitating the transfer of official foreign reserves to the Government, and can do so only if the subscription does not compromise its objective of ensuring medium-term price stability.

At the same time, the amendments 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 eliminates the possibility of MAS as a central bank creating Singdollars to finance government spending, said Mr Wong, who is also deputy chairman of MAS.

During the debate on the Bill, several MPs, including Mr Liang Eng Hwa (Bukit Panjang), asked about MAS' management of official foreign reserves and how the optimal amount of official foreign reserves is determined.

In 2019, MAS assessed that it should maintain official foreign reserves at around 65 per cent to 75 per cent of gross domestic product on an ongoing basis.

This would provide a buffer against stresses in the global economy and markets, and underpin confidence in Singapore's exchange-rate-centred monetary policy and the domestic financial system.

Mr Wong noted that MAS takes reference from historical episodes of significant domestic and international disruptions to compute the official foreign reserves necessary to safeguard stability and confidence.

He highlighted that transferring excess official foreign reserves to GIC for long-term management is not a new idea but rather a "longstanding practice", refuting Non-Constituency MP Leong Mun Wai's suggestion that the new mechanism would be a departure from Singapore’s reserves management principles.

Transferring excess official foreign reserves to GIC for long-term management was the very reason why GIC was set up in 1981, Mr Wong pointed out.

Addressing a question on whether the MAS deliberately keeps Singapore's exchange rate low for competitive reasons, the minister stressed that this is not the central bank's policy.

"MAS' aim is price stability over the medium term. We are quite clear that keeping the Singdollar artificially weak is unsustainable and not in Singapore's interest," he said.

MPs, such as Mr Louis Ng (Nee Soon GRC), also raised questions about the RMGS issuance limit, which is set at $580 billion.

This limit has been set so that the Government can administer and monitor RMGS issuance, and having such a limit will provide transparency to Parliament, which serves as an additional layer of checks, Mr Wong said.

Should the need arise, the Government will have to go back to Parliament and justify any further increase to the RMGS issuance limit.

He also noted that this transfer of official foreign reserves not needed by MAS should have a slight positive impact on the Net Investment Returns Contribution over the long term.

"This is to be expected, because GIC has a higher return-seeking portfolio than MAS," Mr Wong said, acknowledging that in the short term, this increase is not expected to be significant.

In reply to Mr Leong's question about disclosing the size of Singapore's national reserves, the minister reiterated that it is not in Singapore's interest to put out the full information on how much reserves it has.

"The reserves are ultimately a strategic asset against a whole range of emergency contingency scenarios," he added.

"We believe that it is still in our national interest to maintain this strategic asset... to have some discretion on our part and to be able to use these resources decisively and effectively when such an emergency arises."

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