News

• Foreign reserves slid further by US$2.2bn to US$94.5bn (RM356.4bn) as of 14 August. The reserve level was sufficient to finance 7.5 months of retained imports and is 1.0x the short-term external debt.

Comments

• The persistent reduction in BNM’s foreign reserves was not unexpected given that: (i) foreign investors continued to shy away from Malaysian assets given both external and domestic uncertainties; (ii) rampant hoarding of foreign currencies fanned by steep MYR depreciation; (iii) foreign redemption of debt securities matured in the month; and (iii) narrowing current account surplus.
• Apart from those known factors (i.e. faltering commodity prices and softer external demand), the latest two major external events - yuan devaluation and FOMC minutes - in the past two weeks are expected to further pressure BNM reserves level and MYR in the immediate term.
• The unexpected yuan devaluation by a cumulative 3.5% on 11-12 Aug, which was believed to safeguard China’s GDP growth and gain admission to IMF SDR, will squeeze the fight in the already lackluster global demand. We had in our economic report dated 12 Aug 2015 mentioned that yuan devaluation is negative for Malaysia given: (i) increased competition for Malaysian exporters who are enjoying the benefits of ringgit depreciation; and (ii) fear of China slowdown further pressuring global commodity prices.
• Despite a dovish FOMC minutes of 28-29 July meeting, the discussion of options to wind down Fed balance sheet created another fear of potential drain of market liquidity. The committee was also concerned about a material China slowdown that may derail US recovery. We opine that US$ would remain its strength due to divergence in global monetary policy and potential balance sheet unwinding.
• Turning to Malaysia, Malaysia’s Prime Minister had last week taken action to address market concerns by pledging that: (i) the government will neither re-impose capital control nor re-peg MYR, while continue to improve fiscal situation; (ii) BNM will enjoy its independence in its monetary policy and other mandated responsibilities; and (iii) GLCs will sell their foreign assets and repatriate the monies back to home country. At this juncture, we think these measures will take a few months to reverse the decline in BNM reserves and tame MYR volatilities.
• With the confluence of China slowdown, sustained strength of US$ and concerns about impact of low commodity prices, we opine that confidence on MYR would remain jittery. We maintain our MYR forecast range of RM3.55- 4.20/US$ for the remainder of the year.
• We expect BNM reserves to dip further and the next psychological level could be US$92.0bn as any level below this will denote reserves to ST external debt ratio of <1.0x.
• We expect BNM to stand pat for the remainder of the year given resilient economic outlook and absence of inflation threat.

Source: Hong Leong Investment Bank Research - 24 Aug 2015