"But there are considerable downside risks in the global economy which bear close watching," adds Menon at a July 19 briefing to release MAS's FY2021/22 annual report.
Global inflation was already picking up with the recovery of the pandemic. It was made worse when Russia invaded Ukraine and triggered spikes in the prices of commodities and energy.
MAS has, over the past year or so, moved to strengthen the Singapore dollar (Singdollar), so that imports will be relatively cheaper. The Singdollar strengthened 4% against the pound sterling, 5% against the Euro, and 9% against the Japanese yen.
However, the moves came at the cost of forex losses, which contributed to the $7.4 billion loss reported by MAS for its financial year ended March 2022. In the preceding year, MAS made $5.2 billion. This is the first net loss since FY2012/13.
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For FY2021/22, MAS made no contribution to the consolidated fund nor return of profits to the government. MAS had contributed $1.1 billion to the consolidated fund the year prior.
“Investment gains arising mainly from interest income, dividends and realised capital gains were recorded despite challenging market conditions and concerns over monetary tightening by global central banks to address higher inflation, as well as slower global growth and geopolitical tensions,” says MAS.
These gains were, however, outweighed by “negative currency translation effects” as the Singdollar strengthened “significantly” against the Euro, Japanese yen and pound sterling, adds MAS.
Total expenditure of $2.8 billion was due largely to interest expenses on MAS bills and other borrowings for domestic money market operations.
During the financial year, MAS subscribed to $75.0 billion of reserves management government securities (RMGS). RMGS facilitates the transfer of official foreign reserves that is above what is required for the conduct of monetary policy and financial stability, from MAS to the Singapore government for longer-term management by GIC.
As at March 31, 2022, total capital and reserves of MAS was $40.1 billion, down from $47.5 billion the year prior.
‘Taming inflation means slower growth’
Inflation was the key theme for Menon at the media conference on July 19, where he spoke at length on the impact of this economic phenomenon on global and domestic economic outlook, financial stability, financial sector performance and MAS's financial operations.
Singapore’s monetary policy is centred on managing the exchange rate of the Singdollar. “When inflationary pressures build up, MAS allows the trade-weighted exchange rate to appreciate faster. A stronger exchange rate helps to directly reduce imported inflation as well as restrain export demand, providing relief to labour market pressures,” explains Menon.
MAS has tightened its monetary policy four times since late last year. On October 2021, MAS slightly increased the rate of appreciation of the trade-weighted exchange rate policy band as a pre-emptive move when core inflation picked up from 0.7% in 2Q2021 to 1.1% in July-August 2021.
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In January 2022, a month before Russia’s invasion of Ukraine, MAS added slightly to the rate of appreciation of the policy band in an off-cycle move to lean against gathering inflation momentum.
In April 2022, MAS re-centred upwards the exchange rate policy band and further increased its rate of appreciation. This was in view of a fresh impulse to inflation arising from shocks to global commodity prices and supply chains in the wake of the Russia-Ukraine war.
Last week, MAS again re-centred upwards the exchange rate policy band in another off-cycle move to lean against price pressures from becoming more persistent.
The effects of MAS’s four monetary policy tightening moves are still working their way through the economy, says Menon. He adds that they will continue to dampen inflation over the next 12 months. “The appreciation of the exchange rate is estimated to dampen core inflation by 0.9% points in 2H2022. Over 2022 to 2023, the four tightening moves to-date are estimated to restrain core inflation by an average of 1.2% points each year.”
Taming inflation means slower economic growth, says Menon. “The outlook for a gentle easing of inflationary pressures globally is also premised on strong monetary policy actions by central banks… A slowdown in economic growth is necessary to restore macroeconomic balance.”
GST hike
Could the GST hike expected next year add to the inflationary pressures seen today?
Menon says the hike will not raise inflation permanently. Rather, its impact will only last for about a year. “It has a one-off effect on prices [and] it comes back down once the base effect is gone.”
Singapore’s goods and services tax (GST) is slated to rise from 7% to 8% in 2023, and further increase to 9% in 2024. “In past episodes when the GST was raised, it has always had that one-off effect. After a year, inflation comes back to normal,” says Menon.
He adds: “Now, you could make the argument that at a time of high inflation, the risk of the effect could be longer. But that risk has to be weighed against the other risk: We need to have sufficient revenue to tide over these challenging times.”
The government’s judgement is that the timing is right, says Menon. “But we need to watch very closely that it does not lead to a longer-term impact on inflation.”
Singapore-based crypto firms
Following recent reports of beleaguered “Singapore-based” crypto companies, Menon distanced Singapore from the insolvent Three Arrows Capital and the scandal-hit TerraForm Labs and Luna Foundation Guard.
Says Menon: “In reality, these so-called ‘Singapore-based’ crypto firms have little to do with crypto-related regulation in Singapore. TerraForm Labs and Luna Foundation Guard are not licensed or regulated by MAS, nor have they applied for any licences or sought exemption from holding any licences.”
He adds: “Three Arrows Capital was not regulated under the Payment Services Act. It had operated under the registered fund management regime to carry out limited fund management business, but had ceased to manage funds in Singapore prior to the problems leading to its insolvency.”
Menon says the key lesson from the upheaval in the global crypto industry is clear. “Investing in cryptocurrencies is highly risky.”
That said, Menon points to the difference between digital assets or blockchain technology and cryptocurrency tokens. MAS will also launch a consultation on proposed measures for crypto regulation by October.
‘Far-reaching effects’
The global environment has become more complex and challenging this past year, says Tharman Shanmugaratnam, chairman of the MAS. “Even as countries are progressively emerging from the Covid-19 pandemic, Russia’s invasion of Ukraine has had, and will continue to have, far-reaching effects on supply chains, inflation, and the outlook for growth.”
MAS’s tightening of monetary policy should slow the inflation momentum, adds Tharman. However, it cannot fully mitigate the pass-through of higher global inflation, especially in food and energy prices. “The domestic labour market is tight and some pick-up in consumer services inflation is to be expected. However, MAS expects core inflation to stabilise by the latter part of the year.”
The financial sector should continue to grow handsomely, says Tharman in his prepared message. “It performed strongly through the pandemic, growing an annual average of 7.2% over 2020-21. Growth has been broad-based, across banking, insurance, asset management, and payment services. The past two years also saw a net creation of 5,800 jobs in financial services.”
