Reserves Sufficient to Cover 7.5 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) increased by US$0.2bn in the second half of the month to US$104.4bn as at 30 August 2018, compared with US$104.2bn as at 15 August 2018, rising for the first time after the fortnightly declines since second half of May this year. Likewise, in Ringgit term, reserves also improved by RM0.8bn to RM422.5bn in two weeks ending end-August (RM421.7bn as at 15 August 2018). The Malaysia's current level of reserves is estimated to cover 7.5 months of retained imports and 0.9x the short-term external debt.

We believe the improvement in reserves was partly attributed to a small positive inflow from the total foreign holding of debt securities, albeit the number for August has yet to be released. In the month of July, the total foreign holding started to increase after three straight months of decline, rising to RM4bn, due partly to the net buying activity of Malaysian Government Securities (MGS). We believe the net buying activity will likely be higher in August, as reflected in the 10-year Government bond yield, which fell from 4.07 at the end of July to 4.04 at the end of August. Foreign investors, which was net sellers of Malaysia’s equity market since May 2018, also recorded the smallest outflow for the month of August at RM0.1bn, as compared to an outflow in July of RM1.7bn. Year-to-date, the cumulative net selling by foreign investors in the Malaysian equity market amounted to around RM8.6bn.

In the latest quarterly report published by Bank Negara Malaysia (BNM), the total export proceed from net foreign exchange conversion rose to about US$13.7bn as at July 2018. We expect the BNM’s forex measure requiring exporters to convert 75% of their US$ export proceeds to Ringgit will continue to support reserves, as well as Ringgit in the months ahead. On a cumulative basis, the country’s trade surplus has widened to RM68.8bn in Jan-July 2018, as compared to RM51bn in the corresponding period of 2017. Similarly, we believe the country’s reserves level will remain at a healthy level, and likely to hover around US$97-100bn by end 2018.

Going forward, we expect volatility in the global financial markets that may lead to some downside risks of further capital outflows from emerging economies, especially those economies with twin deficits. However, emerging economies with better economic fundamentals, such as Malaysia, with steady economic growth and current account surplus, will weather the risk and greater volatility better. Nevertheless, we believe that if global trade tensions between US and China escalates, as well as US Fed raising policy rates more than current expectations, there are downside risks to nonresident portfolio outflows.

Source: Affin Hwang Research - 7 Sept 2018