Singapore's GIC set to manage extra S$185b in reserves

[SINGAPORE] Singapore's sovereign wealth fund GIC is poised to get a massive influx of new funds to manage after the city-state changed the way the central bank transfers excess foreign currency reserves to the firm.

Parliament on Tuesday (Jan 11) passed a bill allowing the Monetary Authority of Singapore (MAS) to buy a new type of non-marketable security issued by the government, known as Reserves Management Government Securities. The new mechanism will be used to bring down the level of foreign reserves held by the central bank - currently about S$566 billion - to a rate equal to 65-75 per cent of gross domestic product. The rest would be run by GIC.

The result could be a huge injection of funds for GIC, already one of the world's biggest asset managers. Finance Minister Lawrence Wong said about S$185 billion would need to be transferred in phases to reach the optimal reserves amount, without specifying how long that would take. The reserves were equal to about 111 per cent of GDP as of the third quarter, he said.

Wong added it would be "inefficient" for MAS to hold on to official foreign reserves beyond its needs, "because returns on the OFR will be limited by MAS's relatively safer and more liquid investment posture."

He said the move, part of the MAS's long-standing practice of transferring what it considers excess foreign reserves to GIC, would boost contributions to the government since GIC has a higher-return seeking portfolio than the central bank. The investor has posted an annualised 20-year rate of return of 4.3 per cent after inflation.

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The move is likely to further amplify GIC's already wide reach and investing power because unlike most peers, its mandate is to invest almost entirely overseas.

In 2021, the firm struck more deals than ever, in its 40th year of operations. GIC doesn't disclose how much it manages, though research firm Global SWF estimates it ran about US$744 billion as of March.

These transfers are likely to put downward pressure on Singapore-dollar rates and ease the trapped excess US dollar liquidity in Singapore's banking system, according to a research note from Citigroup.

While the MAS was able to transfer funds before the amendment - S$45 billion was given to GIC in 2019 - Wong said the moves had required a corresponding reduction in the government's local currency deposits at the central bank. Deposits aren't growing as quickly as reserves after Singapore ran budget deficits for 2 straight years to provide stimulus during the pandemic.

The legislative change is the latest in a string of measures taken by Singapore to boost revenue as it faces rising costs and macro-economic shifts that threaten to reduce its relevance in global travel and trade. The 7 per cent goods and services tax could be raised as early as this year, and regulators are studying ways to implement a wealth tax.

The central bank uses foreign reserves for monetary policy purposes and to support financial stability.

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