Are We Accumulating Too Much in Reserves? — Speech by Jamus Lim

Delivered in Parliament on 11 January 2022

Mr Speaker, the Monetary Authority of Singapore (MAS) (Amendment) Bill is complementary to the earlier Government Securities (Debt Market and Investment) Act, which was debated in this House late last year, and on which I had previously spoken.

The present Bill introduces important institutional safeguards—consistent with this government’s overall approach of designating different accounts for distinct financial functions—that are designed to inhibit the purchase of Reserves Management Government Securities (RMGS) for the purposes of either monetizing government expenditures or financing fiscal deficits. It also embeds several related amendments to the Government Securities Act

As with earlier legislation, the stipulations in this Bill are largely technical in nature. The Bill will allow the transfer of official foreign reserves (OFR) in excess of what is required by the MAS for the conduct of monetary policy to the Government Investment Corporation (GIC) for management. As long as we accept the premise that such excess reserve accumulation is reasonable, then their transfer for management by GIC is likely to be sound and potentially more efficient.

I am not opposed to the Bill, but I will offer some brief comments and questions about several aspects of the Bill proper, before moving on to question the premise that our present status quo for reserve accumulation is reasonable.

Is the OFR threshold too much or too little?

MAS protocol currently adopts a threshold where OFRs in excess of 65 percent of GDP are regarded as excessive. I understand that this threshold is not established in law and is operationally determined. Yet Clause 15A indicates a capped aggregate amount of $580 billion, which—by Article 144(a) of the Constitution—requires a Parliamentary resolution to overturn. I am still left wondering why such a limit would need to be hard-coded into the letter of the law, since the functional use of RMGS purchases are, in any case, limited to reserve management purposes rather than fiscal expenditure.

One is also left to wonder how the 65 percent (or, for that matter, the $580 billion) threshold was determined. Would these two amounts be consistent? After all, a 65 percent of GDP will continue to increase, in absolute terms, as the economy continues to grow, whereas the dollar amount would not. Would this mean a need for periodic revisions to the $580 billion?

I would also add that, since 2010, Singapore has been party to the Chiang Mai Initiative, while the Federal Reserve has extended temporary dollar swap facilities to Singapore since the Global Financial Crisis in 2008. Does the threshold already account for the extra liquidity available as a result of these swap arrangements?

Conversely, the abundant liquidity conditions currently in place—resulting from large-scale asset purchases due to unconventional monetary policy operations (such as quantitative easing)—appear to be steadily reversing. The Fed has already announced tapering operations, many central banks have already begun the process of low interest rate normalization, and markets already anticipate tighter liquidity conditions to set in around the middle of this year. Would the threshold be sufficient if we are no longer living in a world of abundant liquidity?

Should we be accumulating as much in reserves as we are?

The meta-question that this Bill poses, however, should also be asked: Why are our foreign exchange reserves accumulating as rapidly as they are?

The official reason, furnished by the MAS in its explanatory brief accompanying this Bill, is that appreciation pressure on the Singapore dollar is the result of “positive net savings [sic] and persistent capital inflows arising from abundant liquidity in global financial markets”. But this only begs the question of why we appear to be resisting such appreciation pressure, of which excess reserve accumulation is the consequence.

The standard explanation is that the MAS is mandated to pursue an exchange rate policy aimed at mitigating the effects excessive short-term volatility on the real economy. But minimizing short-term volatility does not, by any means, preclude a steady appreciation (or depreciation) over time.

Mr Speaker, emerging economies, in the process of development, exhibit exchange rates which, after correcting for inflation, tend to appreciate over time. This is especially the case for countries that have experienced rapid economic growth, as Singapore has since independence. Yet remarkably, our real effective exchange rate (REER)—the average rate relative to our major trading partners—while waxing and waning over the decades, has remained remarkably close to the level that prevailed in 1970.

While we were still a middle-income country, this may have been a viable development strategy. However, inasmuch as we remain an open economy reliant on competitive exports, we must not forget that there is in fact a flip side to such exchange rate undervaluation: not only does this drive up the cost of the intermediate goods our manufacturers use as inputs to production, it also indirectly impoverishes our consumers, who must now face higher prices for the Nike shoes, Samsung TVs, and Apple iPhones that we import from elsewhere.

This is all the more so in the current macroeconomic environment. Singapore’s headline inflation rate touched 3.8 percent in November, the highest in more than 8 years. This should be unsurprising, given how much of our goods and services are, in fact imported. Global inflation trends likely to remain elevated, due to a mix of supply constraints, tight labor markets in certain segments, and heightened fuel prices. indeed, both the MAS and MTI have themselves acknowledged that this state of affairs is “likely to continue in the near term.”

I am not, of course, the first to suggest that our real exchange rate may in fact be undervalued. In 2019, the U.S. Treasury first placed Singapore on a watchlist for currency manipulators, a position that it has maintained in its latest iteration released in April last year. Other observers, using more rigorous assessment criteria, have posited the same possibility. I would, at the very least, urge additional introspection and research by the MAS on whether there is, in fact, a potential undervaluation of the Singapore dollar. If so, perhaps the government will consider whether a gradual appreciation of the Singapore dollar—which would in turn indirectly mitigate much of the excess OFR problem that is a major motivation behind this Bill—might be warranted, especially for an economy at our current stage of development.