On 16 Sep 1992 George Soros made billions shorting the pound sterling and brought the mighty Bank of England to its knees. Soros has become the bogeyman the Singapore government parades out when explaining the need to keep the size of reserves a secret. The secrecy narrative posits currency speculators are not inclined to attack the Sing Dollar when they have no idea how big a war chest Monetary Authority of Singapore has to fight them.
Currency speculators attack in two ways.
They short the currency in the FX market or the shares in the equity market, or both. In 1992 they attacked GBP in the FX market and in 1998 they attacked Hongkong’s Hang Seng Stock Exchange.
To attack SGD, speculators first need lots and lots of SGD. And where do they go to get SGD? The debt market. And this is where they meet the first road block, a credit restriction.
Singapore is an important international financial centre.
It is known to be an open market, but is actually not quite as open as most folks think. As the size of the economy is small, Singapore needs to guard against the internationalization of the SGD. MAS Notice 757 sets out the restrictions on lending of SGD to non-resident financial institutions.
1. SGD lending to non-resident financial institutions is capped at SGD5m per borrower.
2. Where aggregate lending has exceeded SGD5m, the lender bank must ensure that if the funds are to be used outside Singapore, it has to be swapped or converted into a foreign currency at drawdown.
3. Banks must ensure temporary overdrafts on Vostro accounts are covered within 2 days.
4. Banks must not extend S$ credit facilities to non-resident financial institutions if there is reason to believe that the S$ proceeds may be used for S$ currency speculation.
So there you are. No money, no honey. No finance, no attack.
Now why didn’t anybody tell you this before?
Should the would-be speculator turn to the SGX, he will face roadblock number 2. He will need to contend with the Exchange’s regulations for delivery in 2 days. He may have facilities for borrowing scripts but he needs SGD financing.
The truth of the matter is the narrative that keeping the size of our reserves serves to protect the value of SGD is a lie. Singaporeans have been hoodwinked for decades because nobody has the temerity to ask nor think for himself.
[This is an abridged version of the blogpost ‘Keep reserves secret to protect SGD is a fallacy –SGD cannot be attacked’. To check out the full version, click here.]