News

Foreign reserves declined further to US$96.7bn (RM364.7bn), sufficient to finance 7.6 months of retained imports and is 1.1x of the short-term external debt.

Comments

The further decline in BNM reserves was broadly within our expectations given the persistent foreign selldown in equity holdings and widespread hoarding of foreign currencies particularly by the exporters.

We had in our Trade Report dated 6 August 2015 mentioned that the decent trade surplus piled up by the country may not lead to a buildup in BNM reserves as hoarding of export proceeds are rampant due to heightened MYR volatility.

On the external front, macro developments still do not support a near-term reversal for MYR. US jobs report for July continued to show modest improvements (nonfarm payrolls: +215,000; unemployment rate: 5.3%; average hourly earnings: +0.2% mom) and was broadly in line with market expectations. This has reinforced the case of a hike in fed fund rate in FOMC September meeting, and therefore, continued to support the strength of US$.

Meanwhile, commodity prices also continued to weaken, renewing the macro concerns on Malaysia (i.e. fiscal deficit target and current account balance). Recent commodity price weakness was driven mainly by lackluster Chinese economy and, to some extent, strong US$. China’s exports tumbled 8.3% yoy in July (Jun: +2.8% yoy), biggest drop in four months. The 8.1% yoy decline in China’s imports is expected to intensify concern about the trade linkages with Asian counterparts, including Malaysia (2014: 12% of total exports).

Closer to home, confidence on MYR also eroded further due to ongoing domestic issues. We understand that there is now rampant hoarding of foreign currencies especially by exporters. Meanwhile, foreign currency deposits have gained further popularity. All these have further weakened MYR and drain reserves from BNM.

As both external and domestic factors continue to remain unfavourable for MYR, we see BNM reserves declining further, albeit at a slower pace. The next critical level to watch is US$92bn. Any level below this will denote reserves to ST external debt ratio of less than 1.0x.

Given the sharp ringgit depreciation, we see BNM in policy dilemma. On one hand, its ability to cut interest rates to support growth is now constrained as this may introduce further ringgit depreciation and volatility. On the other hand, any measure to maneuver capital flows to boost reserves (i.e. repatriation of export proceeds) may be construed as a form of capital control, adversely affecting the already weakened market sentiment.

We maintain our MYR forecast at RM3.55-4.00/US$, with a mid-point average forecast of RM3.70/US$.

We reiterate our view that BNM will continue to leave its OPR unchanged at 3.25% in 2H 2015. 

Source: Hong Leong Investment Bank Research - 10 Aug 2015