Impact of Monetary Authority of Singapore's $7.4 Billion Loss on Government Budget

Mr Vikram Nair asked the Deputy Prime Minister and Minister for Finance (a) whether MAS’ $7.4 billion loss will have any impact on the Government budget; (b) if so, what is the impact; and (c) whether any reconsideration is needed on how MAS contributions in the Government budget is to be used given the volatility in its returns.

Mr Liang Eng Hwa asked the Prime Minister (a) whether he can clarify the context for the loss of $7.4 billion reported by MAS in their financial statement for FY2021/2022; and (b) whether the recorded loss will have implications on the Government’s strong Singapore dollar policy and overall budget position for the current financial year.

Sir, first, in my capacity as Deputy Chairman of MAS, let me explain the context of the net loss. The net loss of $7.4 billion reflected a currency translation effect, in other words the effect of translating the foreign currency value of the Official Foreign Reserves (OFR) into Singapore dollars. The negative currency translation effect is not relevant to MAS’ investment performance, which is measured in foreign currencies. It also has no bearing on the international purchasing power of the OFR, or on MAS’ conduct of monetary policy.

For FY2021/2022, MAS made investment gains of $4 billion on the OFR. These investment gains were, however, outweighed by the negative currency translation effects of $8.7 billion arising from a stronger Singapore dollar. As MAS tightened monetary policy in October 2021 and January 2022, the Singapore dollar had strengthened against several of the foreign currencies in which the OFR are held. This meant a currency translation loss when the OFR were reported in Singapore dollar.

The negative currency translation effect has no implication for the international purchasing power of the OFR. In fact, given the purpose of the OFR in safeguarding the international purchasing power of the Singapore dollar, it is the foreign currency value rather than the Singapore dollar value of the OFR that matters.

MAS’ net loss in Singapore dollar terms also has no implications for its conduct of monetary policy. The aim of MAS' monetary policy is to secure low and stable inflation as the basis for sustained growth over the medium term. MAS, as Members know, conducts an exchange rate-centred monetary policy, managing the Singapore dollar against a basket of currencies of Singapore’s major trading partners. When inflationary pressures build up, as they have over the past year, MAS allows the trade-weighted exchange rate to appreciate faster. Negative currency translation effects do not have any bearing on MAS’ ability to manage the exchange rate; rather they are a consequence of MAS’ conduct of exchange rate policy.

Next, let me, in my capacity as the Minister for Finance, answer the questions relating to the impact of MAS’ net loss on the Government’s Budget position. At the outset, let me clarify that MAS’ overarching mandate is to ensure macroeconomic stability. The Government does not expect MAS to deviate from this mandate in order to maximise its contributions to the Government.

MAS contributes to the Government’s Budget in two ways.

First, under the Net Investment Returns (NIR) framework, the Government can spend up to 50% of the expected long-term real return on the net assets invested by MAS, GIC, and Temasek. The NIR framework is designed to provide a steady, sustainable stream of income to help meet the Government’s expenditure needs. The NIR is based on the long-term expected returns of the three investment entities and therefore, is not affected by their short-term performance. MAS’ reported net loss in the last FY has no impact on the NIR that is available to the Government.

Second, similar to other Statutory Boards, MAS makes contributions to the Government in lieu of corporate income tax. This is based on 17% of the net profit for the year after offsetting cumulative losses from previous financial years.

In the case of MAS, the Government recognises that its contributions will vary considerably from year to year due to the combined effect of currency translation and investment returns on MAS’ balance sheet. This is why, since FY2019, the Government has smoothened the revenue volatility by requiring the annual contributions made by MAS to be paid in equal proportions over a period of three years. This means that even though MAS recorded a net loss for FY2021/2022, the Government will receive $1.1 billion from MAS, based on the contributions accrued for the previous two financial years, when MAS recorded net profits. The smoothening formula has helped to mitigate the impact of MAS' net loss on the Government’s Budget.

Investment returns are inherently volatile reflecting market conditions. The Government has taken steps to ensure that this volatility does not unduly affect the Budget. It is neither responsible nor prudent for us to rely on windfall surpluses in any given year to fund our increased structural spending needs.

Mr Deputy Speaker, thank you. I also thank the Deputy Prime Minister for the comprehensive reply. Can I clarify a couple of points? How much has MAS contributed to Government's consolidated funds in the past five years, beyond FY2021/2022 that was reported in the press? How does MAS decide how much money MAS needs to contribute to the consolidated fund every year?

Sir, I do not have the specific figures with me right now. I have explained just now that MAS' contributions are in lieu of corporate income tax and there is formula for it. It is based on 17% of the net profit for the year, after offsetting cumulative losses from previous years. On top of that annual contribution, in FY2019, we also introduced a smoothening formula so that the contributions made by MAS are paid in equal proportions over a period of three years.

These are all based on a formula and MAS will publish every year in its annual report the contributions it makes to the consolidated fund based on these formulas.

Thank you, Sir. I would like to further ask the Deputy Prime Minister this. We know that for the investment returns, we do have the NIRC framework where it smoothens out over a long period of time. We call it the long-term expected real returns. So, I would like to ask the Deputy Prime Minister, why are these investment returns from OFR, and hence, the foreign exchange translation effects and fluctuations, not counted under the NIRC framework where the returns are smoothened out over the long period of time, through that methodology?

The second question, in MAS' annual report, it also mentioned the higher interest rate expenses. Can I ask if the rising interest rates will add to the overall interest expenses of the Government, given the size of securities the Government intends to issue going forward?

Mr Deputy Speaker, I should clarify first of all on the first question that, in fact, MAS' investment returns are part of the NIR framework. The NIR framework covers our investments by MAS, Temasek and GIC – three investment entities. The investments are largely in foreign currencies, they are in foreign assets. So, they will be converted, translated into Singapore dollars, into a net asset base, which is smoothened out. The smoothening formula for the net asset base computation, in a way, helps to moderate foreign currency effects. So, in fact, MAS' contributions through the NIR mechanism to NIRC is very much incorporated already into the present NIR framework.

On the second question of the impact of interest rates on interest expenses, that is something that will happen. With rising interest rates, there will be implications for MAS' interest expense. But it also has an implication for MAS' investment income. On the expense side, MAS will have to spend more, perhaps, when it needs to borrow as part of money market operations to manage banking system liquidity. But on the investment side, over the medium term, rising interest rates will also help to raise investment income from our foreign asset holdings.

So, taking both into consideration, over the longer-term, MAS should be able to manage the effects of rising interest rates on its financials.

Thank you, Deputy Speaker. I would like to ask the Deputy Prime Minister and Minister for Finance one supplementary question. While MAS had chalked up a $7.4 billion loss in 2022, both the investment companies Temasek Holdings and GIC have chalked up hundreds of billions of dollars of additional profits because of the good markets in 2021 and 2022. Can I ask the Minister, overall, are we expecting a further increase in our foreign reserves in 2023?

Mr Deputy Speaker, Temasek and GIC have reported their performances in their annual statements. I am not sure where Mr Leong Mun Wai got "hundreds of billions of dollars" in returns, but the performance by Temasek and GIC have been published, we can find out what they are.

In the end, regarding these performances, it is not so much whether they do well, or not so well on an annual basis, because what matters to us is the NIRC that comes into the Budget. And as we have explained time and again, that is not based on short-term investment performance, which can be up or down, depending on market volatility, but it is on the long-term expected real rate of return, which is determined and then applied, as I have mentioned just now, on the net asset base of MAS, GIC and Temasek respectively for us to work out the NIRC into the Budget.

So, that is what matters for budgetary matters. When we work out next year's Budget in 2023, Members will see what is the NIR contribution. This framework has been worked out, I think it is something that is sound and it is something that we will continue to manage prudently and responsibly.