Malaysia has been included into the US Treasury’s “Monitoring List” as a potential currency manipulator. Other countries included were China, Japan, Korea, Germany, Italy, Singapore and Vietnam. Malaysia’s inclusion was due to meeting 2/3 thresholds; namely trade surplus with US >USD20bn (i.e. USD27bn) and CA surplus/ GDP >2% (i.e. 2.1%). The report highlights that BNM intervenes on both sides of the currency market, which is comforting as the US Treasury seems to be more concerned on one sided currency intervention. As such, we reckon it is unlikely that Malaysia will be directly labelled as a currency manipulator. Maintain KLCI target at 1,710.

NEWSBREAK

Inclusion to US’ monitoring list. In the May 2019 report on “Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the US” by the US Dept of the Treasury Office of International Affairs, Malaysia has been included in its “Monitoring List” as a potential currency manipulator. BNM has refuted this claim in its official response statement (Figure #3).

HLIB’s VIEW

Background. As its name suggests, the said US Treasury report is published biannually to assess macroeconomic and foreign exchange policies of US’ major trading partners. This is the first time that Malaysia has been included into the list. Other countries that were included in this latest list are China, Japan, Korea, Germany, Italy, Singapore and Vietnam.

Criteria for inclusion. The US Treasury will assess all its trading partners whose bilateral goods trade with the US exceeds USD40bn p.a. (as of 2018, 21 of US’ trading partners exceeded this mark). From our understanding, a country will enter the list if 2 out of 3 recently revised threshold measures are met (Figure #1). They are (i) trade surplus with the US >USD20bn, (ii) current account (CA) surplus >2% of GDP and (iii) net forex purchases >2% of GDP persistently in 6 (or more) out of 12 months.

Where does Malaysia stand? From the thresholds, Malaysia met 2 of the 3 criteria. Firstly, from the US Treasury report, Malaysia’s goods trade surplus with US stood at USD27bn in 2018 (>USD20bn threshold). However, we note that this figure according to DOSM is much lower at RM25.8bn (USD6.4bn), which is below the USD20bn threshold. Secondly, Malaysia’s CA surplus stood at 2.1% of GDP, hitting the 2% threshold mainly due to the recent change in yardstick from 3% previously.

Currency manipulator label unlikely. The US Treasury report highlights that BNM has demonstrated a pattern over time of intervening on both sides of the market (Figure #2). We find this acknowledgment somewhat comforting as the US Treasury is more concerned about persistent one sided currency intervention (i.e. currency devaluation to boost trade surplus against the US). In 2018, US Treasury estimates that BNM net sold USD11bn in foreign exchange to resist ringgit depreciation, which clearly doesn’t fit the bill of devaluing currency to boost exports.

Maintain KLCI target of 1,710. We maintain our KLCI target of 1,710 for now (15.7x PE on mid-2020 EPS). A modest cut in our KLCI target post 1Q19 results season is likely, largely stemming from earnings reduction for banks (NIM compression from OPR cut) and plantations (results shortfall following lower CPO price).

Source: Hong Leong Investment Bank Research - 30 May 2019