Monetary Authority of Singapore faces challenges as investment gains diminish and interest expenses rise.
SINGAPORE: The Monetary Authority of Singapore (MAS) reported a loss of S$7.4 billion for the last financial year, attributed to lower investment gains from the country’s foreign reserves and the appreciation of the Singapore dollar. MAS managing director Ravi Menon announced on Tuesday (Jul 19) that investment gains on Singapore’s foreign reserves totaled S$4 billion, but this was overshadowed by the strengthening Singapore dollar and increased interest expenses.
The rise in the Singapore dollar resulted in a negative foreign exchange translation effect of S$8.7 billion. Total expenditures rose to S$2.8 billion, primarily due to higher interest expenses linked to domestic money market operations. This marks MAS’ first reported loss since the financial year ending in March 2013, leading to the decision not to contribute to the Government’s consolidated fund or return profits to the Government this year.
In response to rising inflation, MAS has tightened monetary policy four times in the past nine months, including two off-cycle moves in January and July. Unlike other central banks, MAS manages the exchange rate of the Singapore dollar instead of adjusting interest rates. When inflationary pressures increase, MAS allows the trade-weighted exchange rate to appreciate more rapidly to mitigate imported inflation and restrain export demand.
The Singapore dollar has strengthened by 4% against the British pound, 5% against the euro, and 9% against the Japanese yen.
INFLATION A KEY CHALLENGE
In May, import prices in Singapore surged by 27% compared to the same period last year, primarily driven by higher oil and food prices. Core inflation, which excludes private transport and accommodation costs, is projected to peak between 4% and 4.5% in the third quarter, before slightly easing towards the end of the year to around 3.5% to 4%, which is significantly higher than Singapore’s typical inflation rates. For the entirety of 2022, core inflation is forecasted at 3% to 4%.
Menon cautioned that fresh shocks to global energy and food supplies due to ongoing conflicts, such as the war in Ukraine, or significant overheating in the domestic labor market could lead to higher and more persistent inflation. He identified inflation as the “key macroeconomic challenge” facing the global economy, with the International Monetary Fund (IMF) projecting global inflation to reach 7.4%—the fastest rate in the last 25 years. This surge is attributed to a mix of factors, including a robust demand recovery post-COVID, supply-side disruptions, and the war in Ukraine.
FORCEFULNESS AND CALIBRATION
Menon highlighted that tight labor markets are currently the primary source of inflation pressures in most advanced economies. Supply chain disruptions began to surface last year, even prior to the Russia-Ukraine conflict. Both Russia and Ukraine are significant producers and exporters of oil, gas, and food commodities, and the war has affected the supply of essential materials such as palladium and neon, vital for semiconductor production.
Menon likened controlling inflation to the challenge of slowing a speeding car on a gentle slope, stating, “It takes a combination of forcefulness and calibration.” He emphasized the importance of taking decisive action to control inflation without causing economic recession.
THE ECONOMY IN 2023
Looking ahead, Menon indicated that economic growth in Singapore is expected to moderate further in 2023, aligning with a slowdown in its major trading partners. However, he noted that there are currently no expectations of recession or stagflation in Singapore next year, although “considerable downside risks” in the global economy warrant careful observation.
He also pointed out the challenges posed by the combination of rising prices and interest rates, which add to the burden of debt servicing. The increase in domestic interbank interest rates has resulted in higher lending and mortgage rates. Menon anticipates that domestic interest rates will continue to rise.
MAS is actively monitoring potential systemic risks to the financial system arising from debt-related stresses in the corporate and household sectors. Menon assured that MAS conducts rigorous stress testing on major banks to identify vulnerabilities in their portfolios. While the corporate sector has adequate liquidity, stress tests indicate that most Singapore-listed firms would remain resilient to interest rate and earnings shocks. The household debt situation in Singapore remains generally healthy, though some households may experience more constraints due to rising interest rates.
Menon also reported that the financial sector performed well in 2021, with value-added growth in the industry reaching 7.4%, and fintech investments soaring to US$3.9 billion. The sector created approximately 4,300 jobs in financial services and fintech during the same period.
