SINGAPORE (July 19): Singapore, for now, expects neither a recession nor a stagflation next year, as global economy outlook dims considerably with central banks worldwide forced to fight inflation at the risk of over-cooling economies.

“The extent of the growth moderation will depend in part on how the scenarios for the global economy will pan out,” says MAS managing director Ravi Menon.

“But there are considerable downside risks in the global economy which bear close watching,” adds Menon at a July 19 briefing to release MAS’ FY2021/22 annual report.

Global inflation was already picking up with the recovery of the pandemic. It was made worse when Russia invaded Ukraine and triggered spikes in commodities and energy prices.

MAS has over the past year or so moved to strengthen the Singdollar, so that imports will be relatively cheaper. The Singdollar strengthened 4% against the Pound Sterling, 5% against the Euro, and 9% against the Japanese Yen.

However, the moves had come at a cost in the form of forex losses, which contributed to the $7.4 billion loss reported by MAS for its financial year ended March 2022. In the preceding year, MAS had made $5.2 billion. This is the first net loss since FY2012/13.

For the FY2021/22, MAS made no contribution to the Consolidated Fund nor return of profits to the government. MAS had contributed $1.1 billion to the Consolidated Fund the year prior.

“Investment gains arising mainly from interest income, dividends and realised capital gains were recorded despite challenging market conditions and concerns over monetary tightening by global central banks to address higher inflation, as well as slower global growth and geopolitical tensions,” says MAS.

These gains were, however, outweighed by “negative currency translation effects” as the Singapore dollar strengthened “significantly” against the Euro, Japanese yen and pound sterling, adds MAS.

Total expenditure of $2.8 billion was due largely to interest expenses on MAS bills and other borrowings for domestic money market operations.

During the financial year, MAS subscribed to $75.0 billion of Reserves Management Government Securities (RMGS). RMGS facilitates the transfer of Official Foreign Reserves that is above what is required for the conduct of monetary policy and financial stability, from MAS to the Singapore government for longer-term management by GIC.

As at March 31, 2022, total capital and reserves of MAS was $40.1 billion, down from $47.5 billion the year prior.

‘Taming inflation means slower growth’

Inflation was the key theme for Menon at the media conference on July 19, where he spoke at length on the impact of this economic phenomenon on global and domestic economic outlook, financial stability, financial sector performance and MAS’ financial operations.

Singapore’s monetary policy is centred on managing the exchange rate of the Singapore dollar. “When inflationary pressures build up, MAS allows the trade-weighted exchange rate to appreciate faster. A stronger exchange rate helps to directly reduce imported inflation as well as restrain export demand, providing relief to labour market pressures,” explains Menon.

MAS has tightened monetary policy four times since October 2021. Then, MAS slightly increased the rate of appreciation of the trade-weighted exchange rate policy band as a pre-emptive move when core inflation picked up from 0.7% in 2Q2021 to 1.1% in July-August 2021.

In January 2022, a month before Russia’s invasion of Ukraine, MAS added slightly to the rate of appreciation of the policy band in an off-cycle move to lean against gathering inflation momentum.

In April 2022, MAS re-centred upwards the exchange rate policy band and further increased its rate of appreciation. This was in view of a fresh impulse to inflation arising from shocks to global commodity prices and supply chains in the wake of the Russia-Ukraine war.

Last week, MAS again re-centred upwards the exchange rate policy band in another off-cycle move to lean against price pressures becoming more persistent.

The effects of MAS’ four monetary policy tightening moves are still working their way through the economy, says Menon. He adds that they will continue to dampen inflation over the next 12 months. “The appreciation of the exchange rate is estimated to dampen core inflation by 0.9% points in 2H2022. Over 2022 to 2023, the four tightening moves to-date is estimated to restrain core inflation by an average of 1.2% points each year.”

Taming inflation means slower economic growth, says Menon. “The outlook for a gentle easing of inflationary pressures globally is also premised on strong monetary policy actions by central banks… A slowdown in economic growth is necessary to restore macroeconomic balance.”