New securities for transfer of official foreign reserves will not increase risks: Wong

A NEW class of securities, introduced to facilitate the transfer of official foreign reserves to the government, will not increase risks for Singapore's monetary operations, Finance Minister Lawrence Wong said in Parliament on Tuesday (Jan 11).

In the second reading debate on the Monetary Authority of Singapore (Amendment) Bill, he also reiterated that various safeguards ensure that the new securities will not allow the Monetary Authority of Singapore (MAS) to fund government spending or fiscal deficits.

MAS accumulates official foreign reserves (OFR) in the process of managing the Singapore dollar. Official foreign reserves above the required amount are transferred to the government, for longer-term investment by the GIC. In return, the government reduces its deposits with the MAS.

But as the rate of OFR accumulation has outpaced the growth of the government's deposits in recent years, a new transfer mechanism is needed.

This will be provided by Reserves Management Government Securities (RMGS), introduced in the Bill which was passed on Tuesday. The government will issue RMGS to MAS in consideration for the official foreign reserves being transferred.

Under the existing Government Securities Act, the government's proceeds from borrowing can only be used for investment, and thus do not increase the amount available for spending.

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Responding to questions by Members of Parliament on how the optimal OFR level is determined and reviewed, Wong said that the MAS uses a range of international reserves adequacy measures within a cost-benefit framework.

This includes computations based on historical episodes of shocks to price stability, and the opportunity cost of holding reserves instead of investing them in higher-yielding assets.

Based on such considerations, the MAS has assessed that 65 per cent to 75 per cent of gross domestic product (GDP) is adequate for its needs, said Wong, noting that transferring excess official foreign reserves to GIC "is not new at all".

Asked what might happen if the official foreign reserves fall below the range and need to be topped up, Wong replied: "To date there has not been a crisis where MAS's OFR has fallen below this threshold."

But if such a situation arises, the MAS will have the right to redeem the RMGS before maturity at par to meet its needs, he added.

MP for Toa Payoh GRC Saktiandi Supaat had asked if the RMGS would mean a greater vulnerability to foreign exchange risks, or have an impact on the financial system's liquidity.

Wong replied that as RMGS transactions are between government entities, "there is no change in our total foreign reserves and no additional exposure to foreign exchange risk".

For the MAS itself, subscribing to RMGS would result in a shift from foreign-currency-denominated assets to Singdollar-denominated assets, reducing its foreign exchange exposure. The government would instead bear this exposure as part of its larger investment portfolio with GIC.

As for whether the accumulation of RMGS on MAS's balance sheet will affect liquidity in the banking system, Wong said that it will not have an effect.

This is because the MAS can only use foreign assets to subscribe for RMGS, "and does not create or use Singdollar in the process".