Reserves Still Sufficient to Cover 7.4 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) fell by US$0.9bn in the second half of the month to US$103bn as at 28 September 2018, compared with US$103.9bn as at 14 September 2018. This was attributed from the quarterly adjustment for foreign exchange revaluation changes following the strengthening of the US$ against various foreign currency reserve assets held by BNM. However, reserves in Ringgit term improved by RM6.6bn to RM427 in two weeks ending end-September (RM420.4bn as at 14 September 2018). The country’s current level of reserves is sufficient to cover 7.4 months of retained imports and 0.9x the short-term external debt.

The drop in reserves for the month of September was partly attributed to the net selling activity in foreign holding of bills and bonds, which declined by RM3bn to RM184.5bn. This was led by higher net selling by foreigners in Malaysian Government Securities (MGS), which fell further from -RM0.6bn in August to –RM5.6bn in September. However, on the Malaysia’s equity market, foreign investors, which was net sellers of Malaysia’s equity market since May 2018, were net buyer in September. Year-to-date, the cumulative net selling by foreign investors in the Malaysian equity market amounted to around RM8.5bn.

Going forward, the strong US$ against other foreign currencies may put some pressure on Malaysia’s reserves position, especially if US dollar strengthen further against major currencies on the back of rising Fed Funds rate (FFR). However, In the latest assessment and guidance on the US Fed’s dot plots analysis, the US Fed maintained its expectation that the Fed Funds Rate will be at 2.25-2.50% by end 2018, and increased to 3.0-3.25% by end 2019 (another three 25bps rate hikes in 2019) and 3.25-3.50% by end 2020. We believe the tightening of FFR will likely be gradual from here on, therefore, the risks of further portfolio rebalancing by international investors, leading to a strong US$ and sharp downward pressure on emerging market currencies may be manageable. We believe the current high global oil prices may also provide some support for the Ringgit.

We also believe the increase in BNM’s short position, which increased to US$17.7bn as at end of August 2018, approximately US$1.4bn from the amount in July, was conducted in order to manage the liquidity in the FX market due partly to some foreign sell-off of bills and bonds since May. On a cumulative basis, the country’s trade surplus has widened to RM70.5bn in January to August 2018, as compared to RM63bn in the corresponding period of 2017. Given that US Fed rates hike is likely to be at measured pace and Malaysia’s economic fundamental remains sound, we believe the country’s reserves level will remain at a healthy level, and hover around US$97-100bn by end 2018.

Source: Affin Hwang Research - 8 Oct 2018