Part 1 and 2 of this series of Singaporean public finances focused where the Share cash from the increased indebtedness has gone and the role of the Central Provident Fund in providing a low cost easy access source of funds for the government of Singapore. Since I answered most questions about the CPF in Part 2, people started asking about the Monetary Authority of Singapore (MAS) and its $300 billion SGD in foreign reserves.
The short answer is that the existence of $300 billion in foreign reserves held by the MAS does not change the analysis in anyway. Let me explain why.
Countries normally have three sources by which they can raise revenue or increase wealth. Taxes in all their forms, borrowing, and using foreign exchange. We have already discussed the fact that the government of Singapore has run a large long term public surplus and increased borrowing rapidly totaling $512 billion SGD since 1990.
However, another source of government wealth is foreign reserves which grow generally due to current account or trade surpluses. Foreign reserves are normally controlled by the central bank, in this case the Monetary Authority of Singapore (MAS).
Since 1980, Singapore due primarily to its currency management policies has run a structural trade surplus averaging 10.2% of GDP. To provide some perspective on this number, over the same time period the oil exporting countries Saudi Arabia and the United Arab Emirates averaged only 4% and 9.7% respectively. The current account surplus peaked in 2006 at an astounding 25.4% of GDP. To prevent the currency from appreciating rapidly due to the large and sustained current account surplus, the central bank (the Monetary Authority of Singapore or MAS) buys large amounts of foreign currency. These currency purchases designed to minimize appreciation pressures then become foreign reserves.
To provide some hard numbers, since 1980 Singapore has run an accumulated current account surplus of $353 billion USD. If this number was converted into SGD based on the year the surplus was incurred, this would translate into $556 billion SGD. Including the current account surplus has a number of implications for our analysis of Singaporean public finances and the foreign reserve assets held by MAS.
First, the source of the MAS foreign reserves are totally and completely separate from the other revenue sources under discussion. The existence of $300 billion SGD in reserves given the long term current account surplus is no surprise and is distinct from government surpluses or borrowing. In other words, the existence of $300 billion SGD in foreign exchange reserves cannot add to our knowledge when searching for missing funds.
Second, the MAS foreign reserves have been fully funded and paid for by the near constant current account surplus run by Singapore since 1980. Even in the year between 1980 and 1987 when Singapore was running trade deficits, the foreign exchange reserves grew from $6.5 billion USD to $15 billion USD or $13.9 billion SGD to $31.6 billion SGD based upon exchange rates at the time.
Third, given the level of foreign exchange reserves and historical current account surplus, the numbers appear quite plausible at their current levels with also the distinct possibility to have funded additional investments in GIC or Temasek. We do not expect all of a current account surplus to be translated into foreign exchange reserves as there are many things that influence this such as a moderately but steadily appreciating currency or liquidity operations. In other words, given the $353 billion USD cumulative current account surplus since 1980, the $237 billion USD in foreign reserves is quite plausible and also leaves significant room for significant investments in Temasek or GIC. It is important to emphasize that not all current account surpluses are translated into foreign reserves, however there is a close correlation between them.
The fundamental point that is being made here is this: the MAS foreign reserve assets have already been paid for from the current account surplus due to managed currency operations. Furthermore, given the numbers while we do not have access to the data, it is quite plausible that transfers were made from MAS to GIC for investment purposes. Finally, the MAS foreign reserve assets as sole and separate from government surpluses and borrowing, cannot add to the discrepancy in assets that should exist and the estimated assets believed to exist.
We still need to find significant amounts of unreported assets.