July 6, 2023
SINGAPORE – A stronger Singapore dollar is helping ease inflation but has also landed the central bank with its biggest annual loss, mostly due to negative currency translation effects on its official foreign reserves (OFR).
Meanwhile, core inflation – that strips away accommodation and private transport costs and better reflects the expenses of Singapore households – may prove to be surprisingly stubborn. The Monetary Authority of Singapore (MAS) on Wednesday raised its end-2023 forecast for core inflation to 2.5 to 3 per cent, up from an estimate of around 2.5 per cent made in April.
Presenting its 2022/2023 annual report, MAS said that as the local dollar appreciated against currencies in the OFR – such as the US dollar, euro, Japanese yen and British pound – negative translation effects amounted to $21.4 billion. In other words, the value of the foreign reserves dipped when converted to Singapore dollars, as the local currency strengthened.
High interest expenses from mopping up excess liquidity in the banking system resulted in a further loss of $9 billion.
In all, MAS recorded a net loss of $30.8 billion for the financial year. This is the largest loss MAS has ever recorded, said its managing director Ravi Menon.
The central bank, otherwise, made an investment gain of $0.6 billion, even as interest income, dividends and realised gains from the management of OFR were offset by aggressive rate hikes by central banks globally that resulted in negative valuation effects across all asset classes.
Currency translation effects are basically paper losses, good only for reporting purposes.
“These currency translation effects have no impact on the international purchasing power of the OFR, or on MAS’ ability to conduct monetary policy and support financial stability,” the central bank said.
The translation effects are a consequence of MAS’ exchange rate-based monetary policy, which centres around the strength of the Singapore dollar.
In effect, the central bank targets the Singapore dollar’s trade-weighted value against a basket of currencies.
As the Singapore dollar strengthens, it offsets the impact of imported inflation.
Mr Menon said that negative currency translation effects are not a cause for concern and it does not make sense to try and avoid them.
“The negative currency translation effects and interest expenses reflect the consequential cost of carrying out MAS’ function as a central bank – which is to conduct monetary policy conducive to sustained non-inflationary economic growth,” he said.
MAS has tightened its policy stance – strengthening the Singapore dollar in the process – five times since October 2021.
Subsequently, both the all-items headline inflation and core inflation have peaked from their highest levels in a decade.
In May, headline inflation came in at 5.1 per cent, down from a peak of 7.5 per cent in September 2022. Core inflation in May was at 4.7 per cent, down from 5.5 per cent in February 2023.
In its annual report, MAS said inflation in the last six months of 2023 should slow further as imported costs are reduced and the current tightness in the domestic labour market eases.
Mr Menon said the easing of global supply chain frictions as well as the decline in global energy and food commodity prices have already turned Singapore’s import price inflation negative and that should remain so over the rest of the year.
Domestic wage growth is also expected to ease as the labour market becomes less tight, particularly in the external-facing sectors, MAS noted.
“Being proactive in tightening monetary policy has allowed us to keep pace with an accelerating inflation momentum and the policy has helped to arrest the momentum of price increases and facilitated a gradual decline in inflation,” Mr Menon said.
However, he noted that the fight against inflation is not over and the monetary policy stance needs to remain tight.
Core inflation has been high as businesses have raised prices at a firm pace to rebuild margins that were eroded by sharp increases in costs earlier.
The central bank said core inflation should average between 3.5 and 4.5 per cent for the year as a whole. Meanwhile, headline inflation is forecast to come in at 4.5 to 5.5 per cent, lower than an earlier forecast of 5.5 to 6.5 per cent.
Senior Minister Tharman Shanmugaratnam, who is also the chairman of MAS, in his last annual report message, said: “While inflation is still elevated, our five successive monetary policy tightening moves since October 2021 have broken the momentum of price increases and led to a gradual decline in core and headline inflation rates.”
Mr Tharman announced in June that he had decided to run for the post of the nation’s president. He said he had informed Prime Minister Lee Hsien Loong on June 8 that he would retire from politics and all his positions in government.
Deputy Prime Minister Lawrence Wong will replace Mr Tharman as MAS chair.
MAS kept its forecast for the Singapore economy to grow by 0.5 to 2.5 per cent this year, down from 3.6 per cent in 2022.
“The Singapore economy has slowed discernibly since the last quarter of 2022, weighed down by weakness in the trade-related sectors amid the global manufacturing downturn,” it said in the annual report.
It said: “The deep retraction in the global electronics industry and banking stresses abroad have dampened Singapore’s growth prospects, especially for the external-facing sectors.
“At the same time, the pace of expansion in the domestic-oriented sectors should also moderate as higher consumer prices and interest rates constrain spending.”
However, Mr Menon said, MAS is not switching from “inflation-fighting mode to growth-supporting mode” and hence will maintain its tightening stance.
MAS said rising interest rates worldwide and slowing global growth had also raised the risk to financial stability outlook.
However, the domestic financial system remains sound and resilient, with strong buffers to cushion adverse shocks and spillovers from the external environment, it noted.
“Specifically, banks in Singapore are well-capitalised with sound liquidity positions, underpinned by a stable and diversified funding base.”
MAS said households in Singapore have also stayed resilient despite tightening financing conditions and increases in debt servicing burden for borrowers.
Meanwhile, the credit quality of the corporate sector is also healthy, with the overall corporate sector non-performing loans low at 2.3 per cent in the first quarter of 2023, falling from 2.6 per cent in the same quarter of 2022.