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Labour chief Chan Chun Sing speaks at the Temasek Polytechnic graduation ceremony (Source: The Straits Times).

Chan Chun Sing says severe implications if Singapore does not have sufficient reserves. But just how much is enough?

Minister in the Prime Minister’s Office Chan Chun Sing has said that there will be “severe implications” if the country does not have sufficient reserves as buffer.

Speaking at a Chinese New Year dinner on Saturday (Feb 24), Mr Chan also said Singapore’s fiscal policy impacts the strength of its currency as well.

“How much we spend and how much we save will also signal to the currency markets what they can expect the strength of the Sing dollar to be,”

Mr Chan's comments come after the announcement of the Budget 2018 by Finance Minister Heng Swee Keat, who introduced the increase of GST from 7% to 9% which will be implemented between 2021 and 2015. Mr Heng also revealed that the surplus for FY2017 was $9.6 billion instead of the $1.9 billion as forecasted earlier.

“There are severe implications on what it means to not have a strong Sing dollar or not have sufficient reserves as our buffer.” said Mr Chan.

Commenting on Mr Chan's remark about having sufficient reserves for the country, finance commentator, Chris Kuan wrote on his Facebook page, "Again, Mr Chan, please tell how much is enough? No need to be exact, just a ballpark number below which you think S$ may expect to come under attack? Monetary Authority of Singapore (MAS)'s foreign exchange reserves as of Jan 2018 are already S$369b or 88% of Gross Domestic Product."

Kuan then highlighted, "But according to the International Monetary Fund (IMF), in its surveillance of member states' foreign exchange reserves adequacy*, for a country with a mature economy, a large banking sector and a very open capital account, like Singapore, the upper limit for prudent level of reserves is 20% of broad money or M2. Singapore's broad money stands at 135% of GDP - in other words, going by the IMF's opinion, the prudent limit stand at 27% of GDP or S$113b. That means, the MAS alone, not counting the foreign assets managed by GIC (entirely foreign) and Temasek (70% foreign) has foreign reserves more than 3 times the prudent limit."

He goes on to ask, "Perhaps Singapore is unique but even so twice is not enough that we must be 3 times? Then where do we go from here 4 times, 5 times, double the present level of MAS foreign reserves?"

""How much is enough" is no idle question - the good of a strong currency also has the bad of socio-economic consequences and it affects the rate of return achievable on the reserves. So vapid, box standard reasoning like severe implications for our currency if Singapore does not have sufficient reserves as buffer, will not help. We want to know more because it affects our lives through the increasing taxes that we are asked to pay, the inadequacy of our pensions and healthcare provisions, the low level of social spending and therefore the high level of inequality, and much more." wrote Kuan.

* Guidance Note on the Assessment of Reserve Adequacy and Related Considerations - https://www.imf.org/external/np/pp/eng/2016/060316.pdf