New Bill allows MAS to subscribe for new type of government debt to facilitate transfers of official foreign reserves

SINGAPORE'S central bank is introducing amendments to the Monetary Authority of Singapore (MAS) Act to allow the authority to subscribe for a new type of non-marketable security that will facilitate the transfer of official foreign reserves.

MAS accumulates official foreign reserves when managing the Singapore dollar for price stability. The authority transfers official foreign reserves above what is needed for conducting monetary policy to the government for longer-term investment by GIC.

Currently, to facilitate such transfers, the government will in turn reduce its deposits placed with MAS.

However, this transfer mechanism is increasingly facing constraints as MAS' accumulation of official foreign reserves has persistently outpaced the growth of government deposits in recent years. The government's deposits are not growing as quickly because of smaller fiscal balances.

The amendment Bill, introduced on Nov 1 by Minister-in-charge of the MAS Tharman Shanmugaratnam, will allow the MAS to subscribe for reserves management government securities (RMGS) issued by the government. This new, non-marketable security is government debt issued to the MAS, as a new way of facilitating such transfers.

The Bill will give the MAS sole discretion on the amount of official foreign reserves to be transferred, and to redeem RMGS for foreign assets before maturity and without penalty, the MAS said in an explanatory note on Nov 1.

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The Bill will also allow the principal amount of a maturing tranche of RMGS to be reinvested into a new tranche, if the MAS does not require this principal amount to support its monetary policy and if the government agrees to do so.

RMGS can only be used for transfers and not for the government's spending. To prevent misperceptions of monetary financing - which refers to a central bank lending money to finance the government's spending and fiscal deficits - the Bill will state that MAS can only subscribe to RMGS for facilitating transfers of official foreign reserves, and it can only do so if the subscription does not compromise medium-term price stability.

Also, MAS will only be able to use foreign currency reserves to subscribe to RMGS.

The Bill also introduces related amendments to the Government Securities Act (GSA). These include a separate net issuance limit for RMGS within the GSA, to ensure that the issuances do not affect planned issuances of other government securities and Treasury Bills, and to avoid creating additional unintended borrowing space for these other securities.

The Bill will also amend the GSA to allow foreign currency assets received in exchange for the issuance of RMGS to be accounted for in the Government Securities Fund (GSF). Currently, only cash proceeds can be accounted for in the GSF.

"Allowing foreign currency assets to be received from the issuance of RMGS draws a clear and direct link between the issuance of RMGS and the transfers of official foreign reserves, and further ensures that the proceeds from RMGS issuances cannot be used for monetary financing," the MAS said.

The official foreign reserves allow the MAS to defend the nominal effective exchange rate of the Singapore dollar, or S$NEER, during times of speculative pressures or financial crises. In 2019, MAS assessed that it should maintain official foreign reserves amounting to at least 65 per cent of gross domestic product on an ongoing basis to provide a buffer against stresses in the global economy and markets.