o The buying of USD increases OFR, which are MAS’ assets. o The selling of SGD increases banks’ SGD deposits with MAS, which are MAS’ liabilities. These additional balances correspondingly increase the aggregate amount of SGD liquidity in the banking system.
Foreign Assets ↑
Deposits of Banks with MAS ↑
o MAS does so by withdrawing SGD liquidity using four instruments: direct borrowing, foreign exchange swaps, repurchase agreements on Singapore Government Securities, and issuance of MAS Bills. o For example, by issuing more MAS Bills than maturing (net issuance of MAS Bills), MAS can withdraw the additional SGD liquidity and restore banks’ SGD deposits with MAS to their original level. o Sterilisation is not a pre-requisite for FX intervention (or accumulation of OFR), but is subsequent to such intervention to support the smooth functioning of interest rate markets rather than the monetary policy target (which is the S$NEER).
MAS Bills ↑
o MAS will subscribe for RMGS only after it has accumulated more OFR than what is needed to conduct monetary policy and support financial stability. o MAS decides the amount and timing of its OFR transfers to the Government, and hence its RMGS subscriptions.
o The proceeds from RMGS are accounted for in the Government Securities Fund (GSF).o The GSF can only be used for investments or to pay for expenses related to the investment and management of the GSF or the issuance and redemption of Government securities and T-Bills. o The GSF cannot be used to fund Government fiscal needs.
o MAS is the party that initiates the subscription of RMGS to facilitate the transfer of OFR that is above what MAS requires for conducting monetary policy and ensuring financial stability. MAS can also redeem RMGS if the need arises.
o Such transfers of OFR to the Government have been a longstanding practice. It was why GIC was set up in 1981 – to manage part of the reserves for higher returns without the central bank constraints of liquidity.
o Such transfers have been a longstanding practice. This was why GIC was set up in 1981.
o For example, global financial markets remain volatile and uncertain – investment returns are expected to face significant headwinds.o There is no guarantee that the Net Investment Returns will always be increasing every year.
o The Government’s budget is about 19% of Singapore’s GDP. Of which, 15 percentage-points are from taxes and fees, and the remaining 4 percentage-points are from NIRC. o NIRC is currently already the largest single contributor to our revenues.o Going forward, even with RMGS, we expect the contribution by NIRC to the budget to remain stable as a percentage of GDP.