Reserves to Retained Imports Stayed at 7.5 Months

The international reserves of Bank Negara Malaysia (BNM) fell by US$3.2bn to US$104.7bn in the two weeks ending 29th June 2018, as compared to US$107.9bn as at mid-June 2018 (US$108.5bn as at end May 2018). This was the sharpest two-week drop since end-July 2015, partly taken into account the quarterly adjustment for foreign exchange revaluation changes following the strengthening of the US dollar against various foreign currency reserve assets held by BNM. However, in ringgit terms, reserves rose by RM6.8bn to RM423.4bn as at end-June, due to the quarterly adjustment for foreign exchange revaluation changes. The current reserves level is sufficient to finance 7.5 months of retained imports, whereas reserve coverage of short-term external debt improved slightly to 1.1 times.

On a month-on-month basis, the country’s reserves position declined by US$3.8bn as at end June (US$108.5bn as at end May). Ringgit depreciated against US$ by -1.5% from end-May till end-June period. The US Federal Reserve (US Fed) decided to raise its federal funds rate (FFR) by 25bps to be in the range of 1.75-2.00% in the June FOMC meeting, the second rate hike for the year after the March meeting. The US$ will likely remain strong in 3Q18, where if the US labour market continues to improve and tighten, this could also lead to higher inflationary pressure, while stronger economic growth will also support the case for at least two more rate hike in 2H18. We believe the US Fed may likely raise its FFR two more times (likely in September and December’s FOMC meetings) to 2.25-2.5% by end 2018.

We believe the drop in Malaysia’s reserves in June was attributed to some net outflows in foreign holdings of Malaysian MGS. There are some concerns that the improvement in yields of the US$ denominated assets may risk some capital outflow from Asia region back to the US, as investors expect a sharper appreciation of the US$ against regional currencies in the months ahead. Malaysia’s 10-year MGS yield increased slightly from 4.19% as at end-May to 4.20% as at end-June, indicating some continuation of net foreign selling of bonds during that period. The foreign outflow in the equity market declined for second straight months by RM4.9bn in June (-RM5.6bn in May).

However, Malaysia’s reserve level has been trending above US$100bn for eleventh consecutive months, supported by substantial amount from trade surplus. In the first five months of this year, the cumulative trade surplus already amounted to RM54.5bn, a 64.9% increase as compared to the corresponding period last year. We expect Malaysia’s reserves level will likely hover around US$100-US$105bn by end 2018.

Source: Affin Hwang Research - 9 Jul 2018