Reserves to Retained Imports Dropped Slightly to 7.5 Months

The international reserves of Bank Negara Malaysia (BNM) fell slightly by US$0.5bn to US$109.5bn in the two weeks ending 30th April 2018. In ringgit terms, reserves also declined from RM425bn as at 13th April to RM423.1bn as at 30th April. Nevertheless, the current level of reserves remain adequate to facilitate international transactions, sufficient to cover 7.5 months of retained imports, with reserve coverage of short-term external debt remained unchanged at 1.1 times.

The country’s adequate international reserves will continue to provide as a buffer against potential external shocks and volatility. However, we believe the slight drop in reserves during the month was attributed partly from some net outflow of foreigners in the bond market. Malaysia’s 10-year MGS yield rose from 3.9% as at end-March to 4.1% as at end-April, indicating some net foreign selling of bonds during that period. Similarly, although the official number has yet to be published, the short forward position by BNM may also decline slightly in April, after recording US$8.7bn in February to US$6.9bn in March. However, non-resident portfolio investment flows were positive, reflecting purchases of domestic equity securities, where net inflow from foreigners in the domestic equity market increased by RM1.5bn in April, after two consecutive months of net outflow in both February and March at RM1.1bn and RM0.07bn respectively. Despite some mix trends in equity and bond markets, Ringgit depreciated slightly against the US$, weakening from RM3.86/US$ in March 2018 to RM3.92/US$ in April 2018. This was despite higher global crude oil price recorded in the same month, where price of crude Brent rose from US$72.58 in mid-March to US$75.17 by end-April. We believe the weaker ringgit was attributed from stronger dollar in April, with market expectations of monetary policy normalisation by the US Federal Reserve, after the latest US unemployment data, showing US unemployment rate continued to improve further by 3.9% in April, its lowest level since 2000.

Going forward, we expect reserves to likely continue be supported by higher current account surplus as well as conversion of exports proceeds into Ringgit by exporters. In March, Malaysia’s trade surplus widened to RM14.7bn, the highest trade surplus recorded since 1Q10, bringing the total trade surplus of RM33.4bn in the first three months of 2018. We believe that the forward indicators for the global economic growth is still indicating continue healthy growth momentum in the country’s exports. We are maintaining our expectation that the Malaysia reserves level will likely hover around US$105-US$110bn by end 2018.

Source: Affin Hwang Research - 8 May 2018