Although the Monetary Authority of Singapore’s (MAS) progressive tightening of monetary policy has helped to arrest the momentum of price increases as well as facilitated a gradual decline in inflation, the central bank is not switching from inflation-fighting mode to growth-supporting mode yet, says managing director Ravi Menon.
Speaking at the central bank’s launch of its FY2022/FY2023 annual report, Menon reiterates how the monetary policy was tightened five times between October 2021 and October 2022. In the face of the slowdown in external growth, the trade-weighted exchange rate of the SGD has appreciated by 8.3% since the beginning of the period.
That said, MAS’s monetary policy stance remains tight relative to the business cycle. “We are closely monitoring the evolving growth-inflation dynamics and remain vigilant to risks on either side. We stand ready to adjust monetary policy as needed, especially if inflation momentum were to re-accelerate. For now, we affirm the monetary policy stance announced in the April monetary policy statement,” he adds.
In the later part of the year, a material slowdown in global economic activity looks increasingly likely, dimming the prospects of the highly exposed Singapore, warns Menon. With sequential growth in Q42022 at 0.1% and in Q12023 at −0.4%, the economy was “within a hair’s breadth” of a technical recession, says Menon.
That said, inflation in Singapore has clearly peaked and has discernibly moderated and should do so further by the end of the year. Thanks to MAS’s efforts to prop up the SGD, imported inflation should remain negative over the rest of the year, amid the decline in global energy and food prices.
Additionally, the domestic labour market is showing early signs of cooling off — a recovery in the non-resident workforce is helping to alleviate labour shortages, while labour demand is also easing in sectors most exposed to slower global demand such as manufacturing and ICT services. The pace of cost pass-through into prices should moderate as the strength of the domestic demand wanes.
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Net loss not cause for concern
For FY2022/FY2023 ended March, MAS recorded a net loss of $30.8 billion, the largest loss the central bank has ever recorded. This is mainly due to two factors — the negative currency translation effects of a stronger SGD, as well as high interest expenses from mopping up excess liquidity in the banking system, Menon explains.
The former was the reason for 70% or $21.4 billion of the net loss. Menon clarifies that the negative currency translation effects do not affect the external purchasing power of its official foreign reserves (OFR), which are held in foreign currencies. As such, it does not affect the central bank’s ability to conduct monetary policy or support financial stability.
See also: MAS set to hold monetary policy as inflation persists
The second factor accounts for 30% or $9 billion of the net loss. For FY2022/FY2023, the interest expense incurred on MAS’s money market operations was “unusually large” due to large volume of operations as well as high interest rates.
Specifically, MAS purchased a net US$73 billion ($98 billion) through foreign exchange intervention in calendar year 2022, more than 2.5 times the US$29 billion purchased in 2021. Consequently, the amount of money market operations MAS had to undertake to remove excess liquidity from the system also grew by a very large amount, elaborates Menon.
Over FY2022/FY2023, the average stock of interest-bearing money market instruments was $437 billion, 24% larger than in FY2021/FY2022.
The sharp spike in interest rates was an even bigger contributor to the increase in MAS’s interest expense during the period. The central bank could not have avoided this interest expense as doing so would have undermined exchange rate policy and domestic market functioning, Menon adds.
He says the relevant measure of MAS’s financial performance is how well its investments have done. The central bank made a small gain of $600 million on its investment portfolio amidst a depressed market environment for both equities and bonds.
He adds that MAS’s investment performance also has to be viewed from a longer-term perspective, given the year-to-year volatility in financial markets. Over the past 15 years, MAS’s investment portfolio has recorded an annual average investment gain of $11.7 billion.
Given the loss in FY2022/FY2023, MAS will not accrue a contribution to the government’s consolidated fund this coming few years. Despite this, it will still contribute $400 million for the financial year based on the contribution accrued for FY2020/FY2021 when the central bank recorded net profits. “We will need to generate future profits exceeding the cumulative losses in the latest two financial years of $38.2 billion, before we can resume contributions to the consolidated fund,” says Menon.
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Allocation to climate transition programme
In 2021, MAS set out the portfolio actions it will take to reduce the carbon intensity of its equities portfolio by up to 50% by FY2030. These included launching a climate transition programme to mitigate the impact of climate transition risk as well as excluding investments in companies that derive more than 10% of their revenues from thermal coal mining and oil sands activities.
Following this, MAS has allocated over $8 billion to a climate transition programme. This is done by tilting part of the equities portfolio towards less carbon-intensive companies that are more aligned with the low-carbon transition, rather than by excluding any entire carbon-intensive sector.
This approach strikes a balance between reducing the portfolio’s carbon intensity while continuing to support companies which are transitioning to lower carbon intensity, says Menon. “We will scale up our climate transition programme as we gain confidence in the effectiveness of the climate indices we have used to tilt our equities portfolio,” he adds.
Menon highlights that MAS has integrated environmental, social and governance considerations into its evaluation process for choosing its external fund managers.
“Bolstering the climate resilience of MAS’s investment portfolio is a work-in-progress. The initiatives we have taken to date have put us in a reasonably good position, but there is much more work ahead,” Menon concludes.
