About 70 per cent of the Monetary Authority of Singapore's (MAS) record net loss of S$30.8 billion for the financial year of 2022-2023 is due to the "negative currency translation effects" of a stronger Singapore dollar, not currency intervention, Trade and Industry Minister of State Alvin Tan said in Parliament on Aug. 2, 2023.
Tan, also a MAS board member, explained that the "negative currency translation effects" are due to the Official Foreign Reserves (OFR) being held in foreign currencies but reported in Singapore dollars.
Tan added that this currency translation effect does not have any bearing on the external purchasing power of the OFR or MAS’ ability to conduct monetary policy.
Remaining 30 per cent is from net interest expenses incurred by MAS in mopping up excess liquidity
Tan was responding to multiple questions filed by Members of Parliament (MPs) about the benefits of having a strong Singapore dollar with such losses being reported, maintaining the local currency while minimising losses and the breakdown of the losses.
Tan explained that the remaining 30 per cent of the net loss was due to net interest expenses from MAS’s money market operations to mop up excess liquidity in the banking system.
The net interest expenses incurred by these operations were "unusually large" for the last financial year due to the large volume of operations and high interest rates, he added.
Singapore dollar appreciated against every major currency
The high volume of money market operations was necessitated by MAS’s interventions in the foreign exchange market to moderate the appreciation of the Singapore dollar.
Tan elaborated that had MAS not done this, the Singapore dollar would have been too strong and hurt the economy.
While this currency intervention added substantially to Singapore's OFR, it created excess Singapore dollar liquidity in the domestic banking system, which MAS had to remove and incur an interest expense in the process.
Tan also highlighted that the OFR is already held in a diverse range of currencies.
He said that as long as the Singapore dollar appreciates against these currencies, there will be "negative currency translation effects".
In the last financial year, the Singapore dollar appreciated against every major currency, Tan highlighted.
The effects of the appreciation cannot be hedged or diversified away, he added.
Stronger SGD is outcome of MAS's policy to curb inflation
On the benefits of having a strong Singapore dollar in view of the financial loss, Tan said the appreciation of the Singapore dollar in 2022 reflected the outcome of MAS’s tighter monetary policy to dampen inflation.
Such a policy has successfully curbed imported inflationary pressures, he elaborated, with Singapore’s import price index falling by some 14 per cent between May 2022 and June 2023.
This decline in import prices has, in turn, contributed to lower domestic inflation, Tan noted.
He said that on a month-on-month seasonally adjusted annualised basis, MAS Core Inflation fell from 9.1 per cent in June 2022 to 2.2 per cent in June 2023.
When the Progress Singapore Party's (PSP) Non-Constituency MP (NCMP) Hazel Poa asked a follow-up question on how much inflation has been dampened and the efficacy of the policy vis-à-vis the net loss, Tan replied that had MAS not tightened its monetary policy, quarterly core inflation would have reached 7.2 per cent, year-on-year, at its peak.
This is about 1.9 per cent higher than the actual peak of 5.4 per cent year-on-year in the first quarter of 2023.
He said that inflation would have stayed higher for much longer and brought about much more significant increases in the cost of living for households.
MAS's policy is focused on keeping inflation low and ensuring medium-term price stability
When asked by PAP MP Yip Hon Weng about how MAS strikes a balance between managing inflation and incurring losses, and whether these losses are anticipated, Tan replied that MAS's policy is focused "purely" on keeping inflation low and ensuring medium-term price stability.
MAS does not consider any potential impact on its profits as doing so will undermine its mission, he said.
Tan added:
"This is similar to how other major central banks conduct monetary policy. Many of them have also reported losses arising from their monetary policy operations. MAS’s financial performance is a necessary consequence of its conduct of monetary policy."
Tan also cited the OFR as key in enabling MAS to conduct effective monetary policy.
He explained:
"As a central bank, MAS adopts a conservative approach in its investments, with a significant proportion of its portfolio invested in liquid financial market instruments. Through a well-diversified portfolio and careful risk management, MAS expects to earn good long-term returns that are commensurate with its risk profile."
How does the net loss affect the government's budget?
On this matter, Tan explained that under the Net Investment Returns (NIR) framework, the government could spend up to 50 per cent of the expected long-term real return on the net assets invested by MAS, GIC, and Temasek.
As the NIR is based on the long-term expected returns of these entities, it is not affected by their short-term performance.
Hence, he said that MAS's reported net loss in the last FY has no impact on the NIR that is available to the government.
In addition, MAS contributes to the government’s Consolidated Fund in lieu of corporate income tax, similar to other statutory boards.
This is based on 17 per cent of the net profit for the year after offsetting cumulative losses from previous financial years, Tan noted.
The government also recognises that MAS contributions will vary yearly and has therefore smoothened the revenue volatility by requiring the annual contributions made by MAS to be paid in equal proportions over three years, he pointed out.
In light of the net loss, MAS will not accrue a contribution to the Consolidated Fund for the financial year of 2022 to 2023.
Nonetheless, MAS will still contribute S$0.4 billion to the Consolidated Fund in the current financial year, based on past profits.
"The smoothening formula has thus helped to mitigate the impact of MAS’ net loss on the government’s budget," Tan said.
Top left photo via MAS, right photo by Mothership