How Singapore Manages its Massive Wealth

Singapore’s foreign reserves is one of the world’s  largest as a percentage of their GDP. In fact,   they are the third highest according to  Singapore’s official sovereign wealth fund   website, GIC. However, recently, we have  seen Singapore’s foreign reserves go down.  

Since the Covid-19 pandemic, the government  had no choice but to pull money out of this   reserve. Why? Well, that’s because the  pandemic exerted a tremendous economic   strain globally and Singapore was no exception. 

The government needed to stabilize the economy   and support both businesses and individuals  during this period of unprecedented challenge.   The outbreak of Covid-19 led to significant  disruptions in economic activities, causing a   sharp contraction in Singapore's GDP. To combat  this, the government implemented various fiscal   stimulus measures aimed at providing immediate  relief to those affected by the pandemic.

One of the key strategies was to draw on the  nation's substantial foreign reserves. These   reserves, accumulated over years of prudent fiscal  management, offered a crucial financial buffer.   By tapping into these reserves, the Singaporean  government could fund extensive support programs   without incurring excessive debt or compromising  the country's long-term financial stability.

But then again, just how much foreign  reserves does Singapore really have? And   of Singapore or MAS, GIC Private Limited, and  Temasek Holdings. MAS Is the central bank of   Singapore and primarily focuses on ensuring  monetary stability.

It holds reserves as part   of its monetary policy and to uphold confidence  in Singapore's exchange rate-centered monetary   system. On the other hand, GIC Private  Limited, which was established in 1981,   manages a significant portion of the government's  foreign reserves, with its primary objective being   long-term investment returns to preserve and  enhance the international purchasing power of   the reserves. Temasek Holdings, founded in  1974, operates more as a holding company,   owning and managing a portfolio of  assets, and its activities contribute   to the overall reserves but are somewhat  different from typical reserve management.

Before we answer how much they have, let’s first  discuss what a foreign reserve is. Where does   Singapore get it? Foreign reserves are assets held  by a country's central bank or monetary authority,   usually in various currencies, and are used  to back liabilities and influence monetary   policy.

These assets can include different  types of money, bonds, treasury bills,   gold, and other financial instruments.  They're essential for a country to meet   its international financial obligations,  including the import of goods, services,   and repaying external debt. Foreign reserves  also serve as a tool for central banks to ensure   stability in their own currency by intervening  in foreign exchange markets if necessary.

Singapore's foreign reserves are accumulated  through various means such as trade surpluses and   the acquisition of the US Dollars. The first is  trade surpluses. Singapore is known for its robust   export industry.

Singapore exports more than it  imports, meaning they have a net inflow of foreign   currencies. The trade surplus has continuously  been positive from 2019 to 2023. For instance,   in 2023, Singapore exported a total of 638 billion  dollars, and only imported 567 billion dollars.

Another source of foreign reserves is through  the acquisition of US Dollars in exchange for   Singaporean dollars. This action is aimed  at controlling the strengthening of the   Singapore dollar's exchange rate. Since the  early 1980s, MAS' monetary policy has been   focused on maintaining the exchange  rate within a specific target band.

The pressure to appreciate the Singapore  dollar stems from both supply and demand   dynamics in fund flows. The two  primary factors influencing this are: Public sector operations, which reduce the  supply of Singapore dollars. This happens   when the government has overall surpluses, and  through government borrowings via the issuance   of Singapore Government Securities (SGS)  in the bond market, and Special Singapore   Government Securities (SSGS) to the CPF Board. 

The funds raised through SGS and SSGS cannot   be used in the Government's budget, leading  to a build-up of public sector surplus funds,   which are then deposited with MAS. These  operations collectively withdraw Singapore   dollar liquidity from the domestic banking system,  creating upward pressure on the currency's value. Capital inflows into Singapore, which heightens  the demand for Singapore dollars.

These   inflows are a reflection of Singapore’s  robust economic and financial health,   as indicated by its long-standing triple-A credit   rating. These inflows also contribute to  the appreciation of the Singapore dollar. MAS' monetary policy activities ensure that  these sources of appreciation pressure do not   interfere with the goals of its exchange  rate-focused monetary policy or with the   domestic money market conditions.

When MAS  intervenes in the foreign exchange market by   purchasing US dollars and selling Singapore  dollars, it results in an increase in OFR. From the 1980s to the 2000s, both the discussed  supply and demand factors played significant roles   in the appreciation of the Singapore dollar  and the growth of OFR. Around 25 years ago,   the government consistently ran large  surpluses, and alongside SGS and SSGS   issuances, this led to a considerable  reduction in Singapore dollar liquidity.

Now, let’s dive into the data and see. MAS  holds about 480 billion Singaporean dollars   in total reserves as of February 2024.  Before Covid-19, Singapore had about 376   billion dollars in foreign reserves for December  of 2019.

However, unlike what most people think,   the reserves held by MAS actually shot up.  It went to as high as 579 billion dollars in   February 2022. After that, however, it went down  to about 383 billion dollars in January 2023 then   hovered around to where it is today.

The reason  for its fall is varied. There are news reports,   for instance, on April 7, 2022 where Reuters  reported that Singapore’s central bank,   which is MAS, had transferred 75 billion dollars  of excess foreign reserves to the government   through a subscription of reserves management  government securities or RMGS for short. RMGS   serves as a system that enables the movement of  official foreign reserves, which is surplus to the   requirements for maintaining monetary policy and  financial stability, from the central bank to the   government.

This allows for its extended-term  investment by GIC, the sovereign wealth fund. The second source is GIC. However, GIC does  not publicly list their reserves.

According   to its official website, and annual report  they have about 100 billion US Dollars or 134   billion Singaporean dollars invested overseas.  That, however, may not mean that is their total   assets in their account. A separate data by  Global SWF said that they have 769 billion   Finally, before we end the video,  it is important for Singaporeans to   understand what these reserves  mean for Singapore’s economy.

Let’s take an example, the recent Covid-19  pandemic. When the pandemic struck,   economies around the world experienced severe  contractions, and governments had to deploy   significant financial resources to mitigate the  impacts. For Singapore, the reserves acted as   a vital economic safety net.

The government  was able to draw on these reserves to fund a   variety of relief measures, including subsidies  for businesses to prevent layoffs, support for   individuals who lost their jobs, and investments  in public health to manage the crisis. A key   example occurred in early 2020 when Singapore had  drawn over $31 billion dollars from its reserve to   fund a package of measures to cushion the people  and economy from the effects of the pandemic. The ability to utilize these reserves without  incurring additional debt allowed Singapore   to maintain economic stability and provide a  buffer against the unprecedented shock.

This   allowed Singapore to stabilize the economy and  support the population when necessary. The same   scenario will be seen in the future at times of  trouble, and is also seen throughout the world. But anyway, do let us know what  you think.

Thanks for watching!