Reserves Sufficient to Cover 7.6 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) increased further by US$0.1bn to US$101.5bn as at 31st October 2017, compared with US$101.4bn as at 13th October 2017. On a month-on-month basis, the country’s reserves position was higher by US$0.3bn in October (US$101.2bn in September). The country’s reserves also improved in Ringgit terms, rising from RM427.7bn as at end-September to RM428.9bn as at end-October 2017. The current level of reserves is sufficient to finance 7.8 months of retained imports, whereas reserve coverage of short-term external debt remained unchanged at 1.1 times.

The country’s reserve level has been above US$100bn for three straight months, may be attributed partly to net export earnings, where cumulative trade surplus for the first nine months rose by 15.6% yoy to RM69.6bn (RM60.2bn in 9M16). This was despite foreign holdings of Malaysian bills and bonds declined by RM2.8bn in October, attributable to Malaysian Government Securities (MGS) and private debt securities (PDS), which fell by RM6.7bn and RM0.6bn respectively during the month. We believe that the sustainability of trade surplus, and hence the current account surplus position, will continue to support reserve level in the country. We are projecting reserves to stay slightly above US$100bn by end-2017. Meanwhile, on the equity market, there has been an outflow by foreign investors for the month of October at RM0.23m, the third month of foreign selling this year. Nonetheless, the foreign selling has been narrowed in October as compared to the month of September (RM0.74m) and August (RM0.24m), bringing down the cumulative fund inflow for the year to RM9.9bn year-to-date.

Despite the net portfolio outflow from both the equity and bond market in recent months, reserves continued to trend slightly higher, while the short forward position by BNM also improved from US$15.7bn in August to US$12.2bn in September. We believe this reflected signs of the Ringgit possibly gaining some strength going forward, particularly when BNM forex measures is expected to cushion some portfolio outflows in the short term. We believe that BNM’s measure to make it compulsory for businesses to convert up to 75% of their exports proceeds into Ringgit is beginning to take full effect. At the moment, the portfolio outflow is also manageable. However, going into 2018, especially towards the second half of 2018, there is possibility of some risk of further capital outflow originated from both US fiscal and monetary policy, leading to US$ strength, which may put some downside risk for the Ringgit, but only gradually.

Source: Affin Hwang Research - 8 Nov 2017