Reserves Rose to US$98bn as at End-May

Reserves Coverage to Retained Imports Increased to 8.1 Months

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.7bn to US$98bn in the two weeks ended 31st May 2017 (from US$97.3bn as at mid-May 2017). In ringgit terms, reserves also increased by RM2.8bn from RM430.5bn in mid-May to RM433.3bn in the two weeks ended 31st May. The current level of reserves is sufficient to cover 8.1 months of retained imports, whereas reserves coverage of short-term external debt stayed unchanged at 1.1 times.

On a month-on-month basis, the country’s reserves position was higher by US$1.9bn in May 2017, the strongest monthly increase since September 2012, due to improvement in net portfolio fund flows. This was partly reflected in the foreign inflow of funds into the Malaysian equity market, which amounted to RM1.98bn in May, the fifth consecutive month of net buying, albeit relatively modest compared to the previous month. However, on a cumulative basis, foreign buying of Malaysian equity amounted to RM10.3bn in the January-May 2017 period, on expectations of improved domestic sentiment following better-than-expected economic growth and positive corporate earnings.

The higher foreign reserves were also attributed to foreign net buying of Malaysian bills and bonds during the month, which increased from RM6.8bn in April to RM10.1bn. This was mainly due to the improvement in foreign holdings of Malaysian Government Securities (MGS), which increased from RM5.72bn in April to RM8.91bn in May, after the bond sell-off of RM23.04bn in foreign holdings of MGS in March 2017.

Apart from the forex measures by the Financial Markets Committee of BNM, in requiring the 75% conversion of export proceeds into Ringgit, we believe the positive net export earnings have also supported the country’s reserves position. Malaysia recorded a strong trade surplus of about RM8.8bn in April, bringing the cumulative trade surplus for the first four months to RM27.6bn (RM33bn in Jan-April 2016).

With the healthy current account and trade surplus, as well as continuation of foreign net buying in bonds and equity market activities, we believe the country’s reserves will likely be well supported in the months ahead. From the end of April until 6 June 2017, the Ringgit has strengthened by 1.7% to RM4.267/US$. This was despite the anticipation of the upcoming FOMC meeting, which will be held on 13-14 June, where market expectation is for the US Federal Reserve (US Fed) to raise its fed funds rate further by 25 basis points.

Source: Affin Hwang Research - 8 Jun 2017