Reserves to Retained Imports Eased to 7.5 Months

The international reserves of Bank Negara Malaysia (BNM) fell marginally by US$0.1bn in the two weeks ending 30 November 2018 to US$102bn, from US$102.1bn as at 15 November 2018. However, on a month-on-month basis, the country’s reserves position was slightly higher by US$0.3bn in November (US$101.7bn as at end October). In Ringgit terms, reserves declined by RM0.6bn to RM422.8bn in the second half of November, compared to RM423.4bn as at 15 November 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 1.0 times.

The lower reserves during the month was partly due to the decline in foreign holding of bills and bonds, where net foreign selling fell by RM5.2bn, the sharpest drop in 5-month. This was attributable to net foreign selling of Malaysian Government Securities (MGS) and private debt securities (PDS), which fell by RM5.4bn and RM0.3bn respectively during the month. Similarly, on the equity market, there has been an outflow by foreign investors for the month of November at RM0.7bn, its eight consecutive month of foreign selling this year. Nonetheless, the foreign selling has narrowed in November as compared to the month of October (RM1.4bn), bringing the cumulative fund outflow for the year to RM10.7bn year-to-date. The BNM’s short position increased from US$19.8 in September to US$22.8bn in October to manage the liquidity in the FX market due to some foreign sell-off in both bonds and the equity market.

Nevertheless, Malaysia’s reserves level remained above US$100bn since August 2017, and continue to be supported by the country’s healthy trade balance. On a cumulative basis, the country’s trade surplus has widened significantly to RM102bn in January to October 2018 period, as compared to RM81.2bn in the corresponding period of 2017. With the 2018 YTD and full year trade surplus remaining large, we believe that the sustainability of trade surplus, and hence the current account surplus position, will continue to support reserve level in the country. We believe Malaysia’s foreign reserves level will hover around US$100bn by end 2018.

According to BNM, the adequate level of international reserves, together with the availability of substantial foreign currency and external assets by banks and corporations, and a flexible exchange rate, will continue to serve as important policy buffers against potential external shocks. Ringgit has depreciated further against US$ by 2.8% (RM4.05/US$ in 1 Jan 2018 vs RM4.17/US$ as at 6 Dec 2018). The requirement of foreign exchange administration rules, with conversion of foreign currency export proceeds to Ringgit will support demand for the Ringgit.

Source: Affin Hwang Research - 10 Dec 2018