Reserves to Retained Imports Improved to 7.5 Months

The international reserves of Bank Negara Malaysia (BNM) fell by US$1.1bn in the two weeks ending 31 October 2018 to US$101.7bn, from US$102.8bn as at 15 October 2018. This was the sharpest two-week drop since the two weeks ending 29 June 2018. On a monthly basis, international reserves had declined at a slower pace of US$1.3bn at the end of October, compared to a drop of US$1.4bn at the end of September, led by the smaller decline of US$0.2bn in the first half of October. In Ringgit terms, reserves had fallen by RM4.6bn to RM422bn in the second half of October, compared to RM426.1bn as at 15 October 2018. The current level of reserves is sufficient to cover 7.5 months of retained imports and the reserve coverage of short-term external debt was unchanged at 0.9 times.

We believe lower reserves may be due to the net selling of foreign holding of debt securities (the October figures have yet to be released). This was reflected by the slight rise in 10-year MGS yield to 4.08 as of end-October from 4.07 as of end-September. In addition, on the Malaysia’s equity market, foreign investors, which turned around and became net buyers in September had returned to being net sellers in October (amounting to US$1.4bn). Yearto-date, the cumulative net selling by foreign investors in the Malaysian equity market is RM10bn.

In the near term, we believe another expected 25bps rate hike by the US Fed in the December FOMC meeting to 2.25-2.50% as well as the on-going reduction of the US Fed’s current US$4.5 trillion balance sheet has already been priced in by the market. As the US Fed is expected to maintain its gradual rate hike path of three 25bps hikes in 2019 and one 25bps rate hike possibly in 2020, any significant outflows from emerging markets likely to be gradual. Additionally, Democrats taking over US House of Representative may limit potential appreciation of US Dollar, as any attempt to change the fiscal policy could be difficult to pass, leading to a widening of US fiscal deficit.

Malaysia’s reserves levels have been maintained above US$100bn since August 2017 supported by the country’s healthy trade balance where on a cumulative basis, the country’s trade surplus has widened to RM85.7bn in January to September 2018, as compared to RM71.2bn in the corresponding period of 2017. According to the recently released Economic Report 2019, Malaysia’s trade balance is projected to widen to RM106.6bn in 2018 and RM109.4bn in 2019. Downside risks to non-resident portfolio outflows are still present, amid the continued US-China trade war uncertainty, where in the latest development the US is reportedly prepared to announce tariffs on all remaining Chinese imports if talks between the two leaders, President Trump and President Xi Jinping, fail at the G20 Summit later this month. Nevertheless, we are maintaining our expectation for Malaysia’s foreign reserves level to hover around US$97-100bn by end 2018.

Source: Affin Hwang Research - 8 Nov 2018