Reserves to Retained Imports Improved to 7.2 Months

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.7bn to US$103.7bn in the second half of the month ending 30th January 2018, compared with US$103bn as at 15th January, the highest monthly increase since mid-August last year. In Ringgit terms, the country’s reserves also improved by RM2.9bn from RM416.8bn as at mid-January to RM419.7 as at end-January. The current level of reserves is sufficient to cover 7.2 months of retained imports, whereas reserve coverage of shortterm external debt remain unchanged at 1.1 times.

The improvement in reserves during the month was partly attributed to higher net inflow from foreigners in the domestic equity market. In the month of January, the net foreign buying in equity market amounted to RM3.4bn, the highest net inflow since March 2017 (RM907.2m in December). Meanwhile, the country’s trade surplus widened to RM9.9bn in November, bringing the cumulative trade surplus for the first eleven months to increase by 13.6% yoy to RM90bn (RM79.2bn in 11M17). We believe the cumulative trade surplus, with the requirement by BNM on the 75% conversion of export proceeds into ringgit since early 2017, will continue to support international reserves in the upcoming months. According to BNM Financial Market Committee update, back in May 2017, the conversion of forex from export proceeds to Ringgit was at US$1.1bn from December 2016-May 2017. However, the cumulative net conversion surged to US$8.8bn as at end November (reflecting an increase of US$7.7bn from May to November 2017). Domestically, in December, the foreign holdings of Malaysian bills and bonds continue to increase by RM2.65bn, after RM6.69bn increase in November, supported by foreign interests in Malaysian Government Securities (MGS) and Government Investment Issue (GII). We believe there will be some improvement in January.

Nonetheless, with strong Malaysia’s economic fundamental and BNM’s forex measures, we expect reserves to hover around US$105-US$110bn by end-2018 (US$102.4 as at end-2017). However, the recent concern will be the US monetary policy and US Fed interest rate hikes. The latest US wage number, with an average hourly earnings increasing by 2.9% yoy in January, highest since June 2009, sparked a shift in inflation expectation in the US. The market may be pricing in the possibility of a higher inflation pressure than initially estimated which could lead to the US Fed tightening its benchmark interest rate by more than three times in 2018 (against our earlier expectation of just three rate hikes).

Source: Affin Hwang Research - 7 Feb 2018