Official Foreign Reserves (OFR)
OFR is accumulated when MAS purchases US dollars in exchange for Singapore dollars, in order to moderate the appreciation of the Singapore dollar exchange rate. It is hence a consequence of MAS' monetary policy, which since the early 1980s has been centred on keeping the exchange rate within its target policy band.
The appreciation pressure on the Singapore dollar has reflected both supply and demand factors within the flow of funds. Chief among these have been the following two factors:
- Public sector operations which withdraw supply of Singapore dollars from the system. These occur if the government records overall fiscal surpluses, and because of government borrowings through issuance of Singapore Government Securities (SGS) in the bond market, and issuance of Special Singapore Government Securities (SSGS) to the CPF Board.
- The proceeds of SGS and SSGS issuance cannot be spent in the Government budget, and hence contribute to overall public sector surplus monies that are placed with MAS in the form of government deposits.
- Together, these public sector operations result in a withdrawal of Singapore dollar liquidity from the domestic banking system, which leads to appreciation pressures on the Singapore dollar.
- Capital inflows into Singapore which increase the demand for Singapore dollars. These capital inflows reflect Singapore's strong economic and financial fundamentals, as reflected in its triple-A credit rating over many years. These too lead to appreciation pressures on the Singapore dollar.
MAS’ monetary policy operations ensure that the appreciation pressures on the Singapore dollar, whichever their source, do not compromise the objective of its exchange rate-centred monetary policy or domestic money market conditions. When MAS intervenes in the foreign exchange market by purchasing US dollars for Singapore dollars, it accumulates OFR.
An increase in MAS’ OFR does not result in an equivalent increase in Singapore reserves. This is because the increase in OFR assets may be matched by increases in MAS’ liabilities. For instance, when MAS purchases foreign assets whilst implementing monetary policy, the increase in OFR may be accompanied by increases in MAS’ other liabilities, such as MAS Bills.
Trend of OFR accumulation
Over the 1980s to the 2000s, both factors highlighted above contributed significantly to appreciation pressures on the Singapore dollar, and therefore to OFR accumulation. The Government used to run large fiscal surpluses which, together with SGS and
SSGS issuance, led to a significant contraction of Singapore dollar liquidity.
However, in the last decade, it is large capital inflows that have chiefly contributed to the increase in OFR accumulation.
- With rising expenditures for healthcare, other social spending and infrastructure, the Government's fiscal surpluses and thus its deposits with MAS have declined significantly.
- However, there has been a significant increase in capital inflows into Singapore, reflecting exuberant liquidity conditions in global financial markets and confidence in Singapore. As a result, the Singapore dollar exchange rate has faced strong appreciation pressures, necessitating MAS to step up its intervention operations to prevent an undue strengthening in the domestic currency.
- This has led to an accumulation of OFR despite declines in the Government’s overall fiscal position.
Transfer of OFR to Government
Since 1981 when GIC was set up, MAS has been making periodic transfers to the Government of OFR that has been in excess of what it needed to conduct monetary policy and ensure financial stability. This has enabled the Government
to invest foreign reserves through GIC on a longer-term basis while still ensuring that MAS has sufficient OFR to carry out its mandate.
Reserves Management Government Securities (RMGS)
On 11 January 2022, Parliament passed the MAS (Amendment) Bill which enables MAS to subscribe for Reserves Management Government Securities (RMGS) issued by the Government. In exchange, MAS will transfer to the Government OFR that are in excess of what MAS needs to conduct monetary policy and ensure financial stability (henceforth referred to as “excess OFR” for short).
The amendment to the MAS Act does not change in any way how MAS accumulates OFR. Neither does it change the principles on which excess OFR is transferred from MAS to the Government, nor create new domestic money supply in the process.
Previously, these transfers of OFR were accompanied by a drawdown of Government deposits with MAS.
- As reflected on MAS' balance sheet, this involves a reduction in both its assets and liabilities, with no change in MAS' net assets: in exchange for the OFR that MAS transfers to Government (i.e. a reduction of MAS assets), the Government draws down its deposits with MAS (i.e. a reduction in MAS liabilities).
- This transfer mechanism worked as long as the Government ran sizeable fiscal surpluses, contributing to significant deposits with MAS. With the decline in government fiscal surpluses and deposits with MAS, a new mechanism is needed to enable the transfer
of excess OFR from MAS to the Government.
Hence the issuance of RMGS by the Government to MAS in exchange for OFR. - As reflected on MAS' balance sheet, this leads to a replacement of one form of assets for another. The transferred foreign currency assets (OFR) will be replaced by a domestic asset that is a claim on the Government (RMGS).
Whether the transfer of OFR from MAS to the Government is achieved through a drawdown of Government deposits with MAS or the issuance of RMGS to MAS, there is no change in MAS' net assets.
RMGS is not money creation or quantitative easing
There is no new money creation arising from the purchase of RMGS by MAS.
- “Monetary financing” of governments typically happens when central banks purchase government securities on the primary market and credit the proceeds to the government, i.e. the central bank “prints money” to help fund the government budget.
- The purchase by MAS of RMGS is fundamentally different. It does not involve MAS creating Singapore dollars to give to the Government to spend. Instead, MAS is transferring excess OFR – its foreign currency assets – to the Government. In fact, the legislation allows MAS to transfer only foreign currency assets to the Government in exchange for RMGS. This eliminates the possibility of MAS creating Singapore dollars to finance government spending.
MAS' subscription to RMGS is also not a form of “quantitative easing”.
- In some of the advanced economies, quantitative easing (“QE”) consists of the purchase of securities – including government securities – in the secondary market by the central bank, leading to an expansion of commercial banks' deposit balances with the central bank. This represents an increase in the monetary base which supports the creation of new money. But MAS' subscription to RMGS is not a transaction with commercial banks. It does not expand the banks' balances with MAS. In fact, the size of MAS' balance sheet does not change when it subscribes to RMGS. There is only a shift in the composition of its assets as explained above.
In short, the introduction of RMGS does not change the flow of funds leading to OFR being accumulated by MAS. Neither does it alter the rationale or principles upon which excess OFR is transferred from MAS to the Government. It only changes the mechanism by which this transfer of excess OFR is effected.
Please also refer to MAS’ FAQs on RMGS.
Government Debt
A country’s debt position is commonly measured by its gross debt-to-GDP ratio, which compares a country’s public debt to its economic output. While Singapore’s gross debt-to-GDP ratio may appear large on its own, it does not consider Singapore’s sizeable asset position. Looking only at the liabilities (i.e. debts) alone does not discriminate between two countries with the same level of debt but with very different levels of assets.
In fact, the Singapore Government has a strong balance sheet with no net debt. Our financial assets are well in excess of our debt. This net asset position is reflected in the net investment returns generated on our reserves, which is made available for Government spending via the Net Investment Returns Contribution. In addition, our strong balance sheet explains why Singapore receives the top credit rating of AAA from the three leading international credit-rating agencies (S&P, Moody’s, and Fitch).
Our top credit ratings reflect the following:
- Majority of the Singapore Government borrowings are for non-spending purposes. Under the Government Securities (Debt Market and Investment) Act 1992, the Singapore Government cannot spend the monies raised from Singapore Government Securities (SGS) (Market Development) and Treasury Bills (T-bills) , Special Singapore Government Securities (SSGS), Singapore Savings Bonds (SSB), and Reserves Management Government Securities (RMGS). SGS (Market Development) and Treasury Bills (T-bills) are issued to develop the domestic debt market and SSGS are bonds issued to the Central Provident Fund (CPF) Board with full Government guarantee. SSB are issued to provide individual investors with a long term saving option. RMGS are issued to the Monetary Authority of Singapore (MAS) for the sole purpose of facilitating the transfer of Official Foreign Reserves (OFR) not needed by MAS, to the Government for longer-term management by GIC.
- All SGS (Market Development), T-bills, SSGS, SSB, and RMGS borrowing proceeds are therefore invested. The investment returns are more than sufficient to cover the debt servicing costs.
- Only a small proportion of Government borrowings is for spending purposes, under the Significant Infrastructure Government Loan Act (SINGA). Under SINGA, the Government borrows to finance and capitalise nationally significant infrastructure, and there are strict safeguards under the SINGA to ensure prudence in borrowing. SGS (Infrastructure) and Green SGS (Instructure) would be issued under the SINGA.
- A key principle underlying Singapore's long-term budgetary objectives is to maintain a balanced budget over the course of a term of Government. This is a prudent approach to fiscal policy that some other countries are seeking to adopt.
The Singapore Government has a strong balance sheet that has assets well in excess of its liabilities. This is why it is able to earn significant investment income on its net assets.
Borrowing Types
The Singapore Government does not borrow for recurrent spending needs. Instead, the Government issues debt to meet specific long-term objectives:
| Objective of issuing debt | Description | Examples |
| To facilitate debt market development and other non-spending purposes | Borrowings issued under the Government Securities (Debt Market and Investment) Act 1992.
The proceeds from such borrowings are invested as part of our reserves and cannot be spent. | Publicly Held • Singapore Government Securities (“SGS”) (Market Development) and Treasury Bills (“T-Bills”) help to develop the domestic debt market by providing a robust yield curve for the pricing of private debt securities. • Singapore Savings Bonds (“SSB”) provide a long-term savings option to individual investors.
Non-Publicly Held • Special Singapore Government Securities (“SSGS”) primarily issued to meet the investment needs of the Central Provident Fund (“CPF”). Singaporeans’ CPF monies are invested in these securities which are fully guaranteed by the Government. The securities earn for the CPF Board a coupon rate that is pegged to CPF interest rates that members receive. • Reserves Management Government Securities (“RMGS”) facilitate transfers of Official Foreign Reserves (“OFR”) above what the Monetary Authority of Singapore (“MAS”) requires to the Government for longer-term investment. |
| To finance nationally significant infrastructure | Borrowings issued under the Significant Infrastructure Government Loan Act (“SINGA”).
Such borrowings are raised within the legislative safeguards that include a gross borrowing limit and the proceeds can only be spent on qualifying nationally significant infrastructure projects. | • SGS (Infrastructure) are issued to finance spending on nationally significant infrastructure, and to spread the costs of nationally significant infrastructure across multiple generation of users.
• Green SGS (Infrastructure) are a sub-category of SGS (Infrastructure). These are Singapore sovereign green bonds that finance qualifying green infrastructure under the Singapore Green Bond Framework. |
Read more information on Government borrowings.