In December, Singapore's official foreign reserves experienced a modest decline from November but showed a year-on-year increase, according to the latest report from the Monetary Authority of Singapore (MAS). The city-state's foreign reserves totaled $371.4 billion in November, reflecting a 1.5% decrease from the previous month.
However, compared to the same period last year, there was an impressive growth of 5.8%. The significant size of Singapore's foreign exchange reserves is critical for ensuring the nation's financial stability. This reserve pool empowers MAS to effectively manage the exchange rate of the Singapore dollar, which is essential in preventing extreme fluctuations and maintaining overall macroeconomic steadiness. The MAS utilizes the reserves to engage in interventions in the foreign exchange markets, striving to keep the Singapore dollar within a specific policy band.
When the Singapore dollar appreciates excessively, the central bank opts to purchase US dollars. Conversely, if the domestic currency is perceived to be overly weak, MAS will sell US dollars, aiding in stabilizing the currency's value. Globally, as well as within Singapore, it is standard for foreign reserves to be predominantly held in US dollars or euros.
While other currencies and gold may also be part of the reserves, they are typically maintained in smaller quantities. What sets MAS apart from other central banks is its approach to interest rates. Rather than adjusting interest rates to combat inflation or spur economic growth, MAS focuses on intervening in the foreign exchange markets.
Typically, this is done to bolster the strength of the domestic currency while simultaneously decreasing the costs of imports—a crucial factor given that Singapore's status as a city-state means that import prices directly influence its overall inflation rate. Moreover, a robust reserve pool equips Singapore with necessary resilience against economic downturns and external shocks.
It allows the government to gain access to funds as required in times of need. Additionally, MAS actively invests the official foreign reserves on a global scale, aiming to achieve significant returns that can be utilized to support government expenditures. Singapore has built its considerable foreign reserves primarily by generating current account trade surpluses, meaning it exports more goods and services than it imports.
These surpluses are subsequently invested by monetary authorities and government officials, ultimately contributing to the accumulation of foreign reserves. In relation to its gross domestic product (GDP) and population size, Singapore boasts one of the largest pools of foreign reserves compared to many nations worldwide.
For context, mainland China, which has a population of 1.4 billion and is known for its export prowess, holds a staggering $3.27 trillion in foreign exchange reserves. This figure is nearly nine times that of Singapore's reserves, which serve a population of just over 6 million residents, including non-citizens—a fraction of China's population..