- International reserves at BNM declined further in 1H August. During 1H August, reserves dipped by 2.3% from end-July (or -USD2.2bil) to USD94.5bil. On a YTD basis, reserves fell by USD21.4bil (or -18.5%) despite the accumulated trade surplus of RM41.7bil and current account surplus of RM17.6bil in 1H15. Without the positive net trades, reserves could have deteriorated even further as at YTD. Based on the current reserves level, it is able to finance 7.5 months of retained imports and 1.0 time short-term external debt.

- Gross external debt amounts to RM794.3bil as at end-1H15. Malaysia’s gross external debt level has increased further by 3.4% QoQ to RM794.3bil in 2Q15 vs. +2.8% QoQ in 1Q15. The increase is attributable to the short-term external debt level, which accelerated by 4.6% QoQ to RM321.5bil in 2Q15, compared to +1.6% in 1Q15. In terms of segments, short-term external debt for both the government and banks increased during 2Q15.

- Reserves fell to RM356.4bil in 1H of August. In terms of Ringgit-denominated reserves, it dipped by 2.3% from end-July (or -RM8.3bil) to RM356.4bil during 1H of August. Cumulatively, reserves level has deteriorated by about RM89.9bil from its peak of RM446.2bil as at end-October 2013.

- Reserves remain above the short-term external debt level. Based on the latest available data for short-term external debt, which amounted to RM321.5bil in 2Q15, international reserves continued to trend above the short-term external debt level (≥ 1.0 time the short-term external debt). As a recap, total reserves stood at RM398.1bil (or USD105.5bil) as at end-June, which is RM76.6bil higher than the short-term external debt level in 2Q15.

- Lower reserves in Ringgit terms despite forex translation gains. Reserves fell in Ringgit terms during 1H August despite forex translation gains amid steep depreciation of the Ringgit currency. Thus, continued outflows of funds and weak Ringgit currency will continue to put a strain on the reserves level in the months ahead. In terms of international standard, the minimum threshold for reserves as per retained imports is 3.0 months and 1.0 time the short-term external debt.

- Reserves accounted for 10.0 months of retained imports in October 2011. The overall reserves position was sufficient to finance 10.0 months of retained imports in October 2011 as reserves amounted to USD134.8bil then. Ringgit closed at 3.14 per USD as at end-October 2011 (vs. 3.08 per USD in September 2011). As a recap, reserves rose to the highest level of USD141.4bil in May 2013 as Ringgit was strong during the month. Ringgit closed at 3.085 per USD as at end-May 2013 but stood at a high of RM2.96 on the close of 8 May 2013 (end-April 2013: 3.04 per USD).

- Deterioration in reserves due to weaker-than-expected Ringgit. Going forward, BNM is likely to mediate in the forex market on the back of the weaker-than-expected Ringgit, which will continue to exert further downward pressure on international reserves. Aside from that, the shift in forex regime by China ahead of the potential rate increase in the US has already triggered vast currency movements recently. As such, we expect continued weaknesses for the Ringgit owing to ongoing uncertainties in the domestic and global arena.

- Ringgit is relatively weaker compared to regional counterparts. Weak Ringgit tends to coincide with weak global currencies (see Chart 2 - Regional Currencies vs. USD). That said, Ringgit deteriorated sharply against its regional counterparts as at YTD. Also, compared to regional currencies, Ringgit led the pact as the steepest deterioration against the greenback. Based on last Friday’s close of RM4.1815 per USD, Ringgit had deteriorated by 19.6% YTD (end-2014: RM3.50 per USD).

Source: AmeSecurities Research - 24 Aug 2015