|SINGAPORE: The Monetary Authority of Singapore (MAS) recorded its biggest loss in 40 years on the back of a strong Singapore dollar.
MAS recorded a net loss of S$10.9 billion for its fiscal year ended March 2011. This compared to a record net profit of S$10 billion posted last year.
The central bank said excluding exchange rate effects, it achieved income and net capital gains totalling S$12.3 billion during the financial year ended March 2011.
MAS disclosed these figures in its latest annual report released on Thursday.
The loss comes as the foreign exchange impact from the stronger Singapore dollar exceeded the interest, dividend and valuation gains on foreign assets held.
Most of MAS’ assets comprise official foreign reserves.
These are invested in a diversified range of foreign currency assets.
During the year, the Singapore dollar appreciated against most currencies including the US dollar, euro and sterling pound, but weakened against the yen.
The total assets of the central bank, including the Currency Fund, grew by S$13.85 billion to S$299.75 billion in the financial year ended 31 March 2011.
In 2010, MAS tightened its monetary policy as the economy strengthened. It shifted to a modest and gradual appreciation of the exchange rate policy band in April 2010.
Further tightening was undertaken in October 2010 and April 2011 as growth became more entrenched and resource constraints more binding.
However a strong local currency translated into the central bank’s largest ever overall loss.
Ravi Menon, managing director of MAS, said: "Translation losses are not new to MAS because in most years the Singapore dollar has been appreciating. So in most years, we would have translation losses.
"But in most years the investment returns more than offset the translation losses, so we show a profit. Only on two occasions in the last 40 years has this not happened. And I think this is largely because of the size of the translation losses, which in turn reflects the strength of the Singapore dollar.
"As I said the Singapore dollar has appreciated against most currencies. The rate of appreciation of the Singapore dollar in the last financial year was the fastest since the Asian financial crisis, so the translation losses were larger. Therefor it tipped the P&L (Profit and Loss) into a loss."
The MAS said despite the large loss it would not be changing its investment strategy.
Mr Menon explained: "The whole purpose of holding foreign reserves is to hold them in foreign currencies to boost your international purchasing power.
"So our investment strategy must remain focused on that to maximise returns in foreign currency on a sustained long-term basis as well as ensure sufficient liquidity.
"Because as a central bank, we also need to make sure that our assets are in fairly liquid form to meet our monetary policy operation needs. So those are the two guiding principles and that will remain so.
"The translation loss is not a factor. It is just a reporting phenomenon where you report in Singdollar, the strength of the Singdollar diminishes the value of the reserves. Like I said, if we had reported our results in foreign currency or US dollar, this is not an issue."
The MAS said that during the year the Singdollar appreciated against most currencies. The Singdollar appreciated 9.9 per cent against the US dollar, some 5.5 per cent against the euro and 4.9 per cent against the sterling pound.
Song Seng Wun, regional economist at CIMB Research, said: "This is the difficulty when we report foreign exchange reserve holding, which is really a holding with a mixture of foreign currencies and assets. You’ve got US dollars in there, you’ve got euros, you’ve got yen, and a number of other currencies as well.
"The problem, as we all know, is that the strong Singdollar has certainly helped for those who do online shopping but for the government who reports reserve currencies in the reporting currency Singdollar, we’ve got a problem.
"And that is what we have got this time round, in that the US dollar depreciated by over 10 per cent, that is that the Singdollar has strengthened. So when we report any balance sheet in the reporting currency which is stronger, you are going to get exchange losses.
"By our estimate, we probably hold something like 60 per cent of the reserves in US dollar and if that currency depreciates by more than 10 per cent, then you will have an impact. Some of it is in euros as well, and again, many Singaporeans realise that the euro has weakened."
The MAS said that the current monetary policy stance of appreciating the Singdollar nominal effective exchange rate (S$NEER) policy band set in April this year remains appropriate.
The next Monetary Policy Statement is scheduled for October.
Mr Menon added: "In nominal effective exchange rate terms against a basket of currencies, you can continue to see the Singdollar appreciating because that is the policy line, strongly supported by market fundamentals, that you can continue to see for some time more."
MAS said that together with the Ministry of Trade and Industry, it is reviewing Singapore’s GDP growth forecast for this year. For now, it said that the 5 to 7 per cent forecast range remains intact.
However, if the pick-up from the second quarter is weaker, than expected growth could come in at the lower half of the range.
In the chairman’s message of the annual report, Deputy Prime Minister Tharman Shanmugaratnam said that "the ongoing sovereign debt crisis in the European periphery poses significant risks – both to global economic growth and financial stability."
Mr Tharman added that Singapore faces a changed financial landscape globally following the crisis of 2008-2009, and that the regulatory approach in Singapore will "evolve, whilst retaining the close monitoring and supervision of financial institutions that ensures that our financial system remains resilient and stable."
In the capital markets, MAS implemented several safeguards for investors such as guidelines on the form and content of the Product Highlights Sheet.
The MAS said it will also implement changes to fund management regulation, aimed at raising the quality of players and enhancing regulatory oversight to enable sustained growth of the industry.
Going forward Mr Tharman said MAS will continue to support the development of Singapore as an international financial centre "trusted for its high standards of regulation, integrity and efficiency."