Reserves Sufficient to Cover 7.8 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) increased further by US$0.1bn to US$100.5bn as at 31st August 2017, compared with US$100.4bn as at 15th August 2017. On a month-on-month basis, the country’s reserves position was higher by US$1.1bn in July (US$99.4bn in July), which marks the eighth consecutive month of increase.

The country’s reserves also improved in Ringgit terms, rising from RM427bn as at end-July to RM431.7bn as at end-August 2017. The reserves position is sufficient to finance 7.8 months of retained imports and is 1.1 times the short-term external debt. The reserve level has been on an upward trend since April 2017.

Foreign investors, which was net buyers of Malaysia’s equity market in July, recorded a small outflow for the month of August at RM0.2m, as compared to an inflow in July of RM0.4bn (cumulative fund inflows into equity market amounted to RM10.8bn year-to-date). This was also the first time in 2017 that there was a total net outflow from the equity for the month. At the same time, while the total foreign holding of debt securities declined in July by RM2.3bn (the number for August has yet to be released), but we believe a small positive inflow, possibly reflected in the 10-year Government bond yield, which fell by 10 basis points from 3.99% at the beginning of August to 3.89% at the end of August.

We believe that BNM’s measure on exports proceeds (requiring the 75% conversion into Ringgit), will continue to provide support Ringgit and Malaysia’s reserves position. On a cumulative basis, the country’s trade surplus widened to RM50.9bn in Jan-July 2017, as compared to RM43.8bn in the corresponding period of 2016. Ringgit has been stable for the past few months, with a gradual appreciation over time. In August, Ringgit has appreciated by approximately 0.24% against the US$, closing the month at RM4.27/US$ and continue to improve further until RM4.23/US$ currently.

Despite some volatility on the foreign bond holdings of Malaysian Government Securities (MGS), especially in the months of September and October, we continue to expect Malaysia’s reserves to hover around US$98-100bn by end 2017 (US$94.5bn as at end-2016), supported by monthly trade surpluses. This should also provide some buffers to the reserve level from volatility of portfolio flows.

Source: Affin Hwang Research - 7 Sept 2017