How MAS accumulates official foreign reserves

In this section we provide an explanation of the flow of funds that leads to the accumulation of Official Foreign Reserves (OFR), as well as the periodic transfer of excess OFR from MAS to Government.

On 11 January 2022, Parliament passed the MAS (Amendment) Bill which enables MAS to subscribe for Reserves Management Government Securities (RMGS) issued by the Government. In exchange, MAS will transfer to the Government OFR that are in excess of what MAS needs to conduct monetary policy and ensure financial stability (henceforth referred to as “excess OFR” for short).

The amendment to the MAS Act does not change in any way how MAS accumulates OFR. Neither does it change the principles on which excess OFR is transferred from MAS to the Government, nor create new domestic money supply in the process. This section explains these matters and clarifies certain misconceptions.

What are the sources of OFR accumulation?

OFR is accumulated when MAS purchases US dollars in exchange for Singapore dollars, in order to moderate the appreciation of the Singapore dollar exchange rate. It is hence a consequence of MAS’ monetary policy, which since the early 1980s has been focused on keeping the exchange rate within its target policy band.

The appreciation pressure on the Singapore dollar has reflected both supply and demand factors within the flow of funds. Chief among these have been the following two factors:

• Public sector operations which withdraw supply of Singapore dollars from the system. These occur when the government records overall surpluses, and because of government borrowings through issuance of Singapore Government Securities (SGS) in the bond market, and issuance of Special Singapore Government Securities (SSGS) to the CPF Board.

• The proceeds of SGS and SSGS issuance cannot be spent in the Government budget, and hence contribute to overall public sector surplus monies that are placed with MAS in the form of government deposits.

• Together, these public sector operations result in a withdrawal of Singapore dollar liquidity from the domestic banking system, which leads to appreciation pressures on the Singapore dollar.
  

• Capital inflows into Singapore which increase the demand for Singapore dollars. These capital inflows reflect Singapore’s strong economic and financial fundamentals, as reflected in its triple-A credit rating over many years. These too lead to appreciation pressures on the Singapore dollar.

MAS’ monetary policy operations ensure that the appreciation pressures on the Singapore dollar, whichever their source, do not compromise the objective of its exchange rate-centred monetary policy or domestic money market conditions. When MAS hence intervenes in the foreign exchange market by purchasing US dollars for Singapore dollars, it accumulates OFR.

Over the 1980s to the 2000s, both the supply and demand factors highlighted above contributed significantly to appreciation pressures on the Singapore dollar, and OFR accumulation. Until about 25 years ago, the Government ran large surpluses which together with SGS and SSGS issuance, led to a significant contraction of Singapore dollar liquidity.

However, in the last decade, it is large capital inflows that have chiefly contributed to the increase in OFR accumulation.

• With rising expenditures for healthcare, other social spending and infrastructure, the Government’s surpluses and thus its deposits with MAS have declined significantly.
  

• However, there has been a significant increase in capital inflows into Singapore, reflecting exuberant liquidity conditions in global financial markets and confidence in Singapore. As a result, the Singapore dollar exchange rate has faced strong appreciation pressures, necessitating MAS to step up its intervention operations to prevent an undue strengthening in the domestic currency.
  

• This has led to an accumulation of OFR despite declining government surpluses.

How are reserves transferred from MAS to Government?

Since 1981 when GIC was set up, MAS has been making periodic transfers to the Government of OFR that has been in excess of what it needed to conduct monetary policy and ensure financial stability. This has enabled the Government to invest foreign reserves through GIC on a longer-term basis while still ensuring that MAS has sufficient OFR to carry out its mandate.

Previously, these transfers of OFR were accompanied by a drawdown of Government deposits with MAS.

• As reflected on MAS’ balance sheet, this involves a reduction in both its assets and liabilities, with no change in MAS’ net assets: in exchange for the OFR that MAS transfers to Government (i.e. a reduction of MAS assets), the Government draws down its deposits with MAS (i.e. a reduction in MAS liabilities).

This transfer mechanism worked as long as the Government ran sizeable surpluses, contributing to significant deposits with MAS. With the decline in government surpluses and deposits with MAS, a new mechanism is needed to enable the transfer of excess OFR from MAS to the Government.

Hence the issuance of RMGS by the Government to MAS in exchange for OFR.

• As reflected on MAS’ balance sheet, this leads to a replacement of one form of assets for another. MAS’ transfer of foreign currency assets (OFR) will be replaced by a domestic asset that is a claim on the Government (RMGS).

Whether the transfer of OFR from MAS to the Government is achieved through a drawdown of Government deposits with MAS or the issuance of RMGS to MAS, there is no change in MAS’ net assets.

Does RMGS lead to new domestic money creation or central bank financing of the Government budget?

There is no new money creation arising from the purchase of RMGS by MAS.

“Monetary financing” of governments typically happens when central banks purchase government securities on the primary market and credit the proceeds to the government, i.e. the central bank “prints money” to help fund the government budget.

The purchase by MAS of RMGS is fundamentally different. It does not involve MAS creating Singapore dollars to give to the Government to spend. Instead, MAS is transferring excess OFR – its foreign currency assets – to the Government. In fact, the legislation allows MAS to transfer only foreign currency assets to the Government in exchange for RMGS. This eliminates the possibility of MAS creating Singapore dollars to finance government spending.

MAS’ subscription to RMGS is also not a form of “quantitative easing”. In some of the advanced economies, quantitative easing (“QE”) consists of the purchase of securities – including government securities – in the secondary market by the central bank, leading to an expansion of commercial banks’ deposit balances with the central bank. This represents an increase in the monetary base which supports the creation of new money. But MAS’ subscription to RMGS is not a transaction with commercial banks. It does not expand the banks’ balances with MAS. In fact, the size of MAS’ balance sheet does not change when it subscribes to RMGS. There is only a shift in the composition of its assets as explained above. (Please refer also to FAQs on RMGS here.)

In short, the introduction of RMGS does not change the flow of funds leading to OFR being accumulated by MAS. Neither does it alter the rationale or principles upon which excess OFR is transferred from MAS to the Government. It only changes the mechanism by which this transfer of excess OFR is effected.

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