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 focused 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 when the government records overall 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 hence intervenes in the foreign exchange market by purchasing US dollars for Singapore dollars, it accumulates OFR.
Over the 1980s to the 2000s, both the supply and demand factors highlighted above contributed significantly to appreciation pressures on the Singapore dollar, and OFR accumulation. Until about 25 years ago, the Government ran large 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 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 declining government surpluses.
(This message is quoted from Internet information and is not the opinion of this website.)