News

• Foreign reserves rose by US$0.2bn to US$94.7bn (RM357.7bn) as at end-August. The reserves level was sufficient to finance 7.4 months of retained imports and is 1.0x the short-term external debt.

Comments

• BNM reserves rose unexpectedly in the second-half of August, ending the series of decline since the start of July (cumulative decline of US$11bn). Despite the continued foreign capital outflows and narrowing of current account surplus, we opine that GLC fund repatriation was the main factor helping to reverse the declining trend in reserves.
• Recent negative news flows from top three biggest economies (i.e. US, China and EU) since August revealed that Malaysia’s foreign reserves and MYR are likely to remain under pressure ahead. Nevertheless, we expect stabilisation in reserves will be sustainable, going by (i) promise made by the Prime Minister on fund repatriation by GLCs and no capital control nor ringgit re-peg; and (ii) the set-up of Special Economic Committee to develop immediate and medium-term plans to deal with freefalling ringgit and capital flight.
• The latest instability created by China’s central bank in August -- yuan devaluation, policy rate and RRR cuts as well as massive sell-off of its US T-bill holdings – already had repercussions on Malaysia’s external account. However, we opine that these developments will eventually help to soften somewhat the pace of MYR depreciation against the US$. China’s latest measures are seemed as a pre-emptive move to safeguard its economy and yuan as well as sending a hint to US Fed that China prefers a slower gain in US$.
• The ECB on 3 September adjusted its QE programme to sustain the recovery in GDP growth and inflation. It also reiterated that its commitment to expand the stimulus further should China slowdown pose material downside risk to the EU economy. This, together with the likelihood of looser policy in China, indicates that global liquidity would remain abundant, alleviating the concerns about tightening of global liquidity.
• Besides, a US Fed rate hike in Sep is much less compelling now given the ripple effects of yuan devaluation and weaker data releases of late. In this regard, we finetune our call of rate liftoff to October, with a 25bps hike and no balance sheet wind down.
• We now opine that episode of sharp reserves depletion has already ended. We expect BNM reserves to stabilize and hover around this level in the next few months. The mandate of GLC fund repatriation will continue to gain pace while the US Fed is likely to go even slower on its rate hike plan. We also expect the Malaysian government to unveil some soft administrative measures to deal with weak MYR. That said, the psychological level to watch out for is US$92.0bn as any level below this will denote reserves to ST external debt ratio of <1.0x.
• We reiterate our MYR forecast range of RM3.55-4.20/US$ and OPR pause for the remainder of the year.

Source: Hong Leong Investment Bank Research - 7 Sep 2015