What we learnt from the MAS Annual Report

TL;DR

• Amidst the headlines of a S$7.4 billion reported by the MAS, there are several other worthy points from the MAS annual report we believe are worth highlighting. 
• The MAS expects inflation in Singapore to get worse before improving, which is why it’s important to budget for such price increases.
• While most Singapore households can withstand higher interest rates, we should exercise caution in taking on new financial commitments.
• MAS plans to broaden the scope of crypto regulation that may tighten retail investors’ access, as investing in cryptocurrencies is seen to be highly risky.  

What happened?

Each time the Monetary Authority of Singapore (MAS) publishes its annual report, there is always something that we can take away from it. 

This year, a lot of the focus seems to be on the S$7.4 billion loss reported for the financial year ended March 31, 2022. 

After all, that’s a huge sum of money we’re looking at.  For comparison, the recent support package announced by Finance Minister Lawrence Wong to cushion Singaporeans from inflation was worth about S$1.5 billion. 

However, we would not be too worried about the losses incurred. It was explained that the loss came from a large negative foreign exchange translation effect with the strengthening of the Singapore dollar. 

Some of Singapore’s foreign reserves would have been in foreign currencies, such as the British pound, Euro and the Japanese yen. 

When these currencies weaken against the Singapore dollar, a negative foreign exchange translation effect would lead to losses. 

In this case, the Singapore dollar strengthened 4% against the British pound, 5% against the euro, and 9% against the Japanese yen. 

Putting the headlines aside, there were several interesting points we learnt from the annual report and comments by Ravi Menon, MAS’ Managing Director, at the media conference. 

3 things we learnt from the MAS Annual Report

#1 – Inflation will get worse before it gets better

Ravi Menon spent most of his speech talking about inflation, so it’s pretty clear it is the focus of his remarks. 

After all, inflation affects everyone and is at the top of the concerns amongst many Singaporeans. 

Here, his key message revolves around the following themes:

• Inflation is brought about by both supply and demand factors
• Controlling inflation will mean a slowdown in economic growth
• A multi-pronged approach is needed to deal with inflation

What is important to note is that inflation is likely to become worse before getting better.

Core inflation is expected to rise to 4.0-4.5% in 3Q 2022, from what is already a 13-year high of 3.6% in May. 

It is then expected to ease slightly to 3.5-4.0% towards the end of the year. At this level, inflation will still be higher than what most of us are used to. 

That said, inflation could still turn out to be higher than expected, especially if the Ukraine conflict leads to further energy and food supply shocks, or if the job market in Singapore becomes overheated. 

How does this impact us? We should budget for further price hikes as inflation is likely to remain elevated. 

#2 – Most Singapore households can withstand interest rate increases

With the sharp spike in interest rates we have seen in recent months, there are naturally concerns on whether Singapore households would be able to service their debt requirements. 

The MAS believes that Singapore has one of the strictest limits on household borrowing with various measures put in place over the years to ensure prudent borrowing.

For example, the total debt servicing ratio (TDSR) limits a mortgage borrower’s overall debt obligations to 55% of his income. 

There is also a buffer for higher interest rates, as the TDSR is computed using an interest rate of 3.5% or the prevailing market rate to calculate mortgage obligations. 

Encouragingly, stress tests done by the MAS suggest that most households should be able to service their debts even under scenarios of significant interest rate hikes and sharp loss in income. 

As a sign that there have not been major repayment issues currently, the proportion of non-performing mortgages has remained low at less than 1%. 

How does this impact us? As interest rates continue to go up, we should exercise caution in taking on new financial commitments. 

Interest rates in Singapore have gone up - Interbank rate now close to 2%

#3 – Tighter regulations on cryptocurrencies

With all the turmoil in the crypto industry currently, it was inevitable that Ravi Menon had to address these developments. 

After all, the media have often reported that many of the crypto players that are facing financial difficulties are “Singapore-based”.

He clarified that these so-called “Singapore-based” crypto firms have little to do with crypto regulations in Singapore.

Most of these entities are not licensed or regulated by the MAS.

It is important to note that crypto regulation in Singapore is largely focused on containing money laundering and terrorist financing risks.

What most retail investors are most concerned about – consumer protection, does not come under the current regulatory regime. 

This is why the MAS plans to broaden the scope of crypto regulations to cover more activities and possibly tighten retail investors’ access in new measures that could be proposed in the next few months. 

How does this impact us? Investing in cryptocurrencies is highly risky!

Why should we care?

Coming at the back of the 2022 Temasek Review which was published last week, the MAS annual report provides a few key messages for us to ponder over.

How does this impact us?

• We should budget for further price hikes as inflation is likely to remain elevated. 
• As interest rates continue to go up, we should exercise caution in taking on new financial commitments. 
• Investing in cryptocurrencies is highly risky!