Reserves to Retained Imports Maintained at 7.4 Months

The international reserves of Bank Negara Malaysia (BNM) was unchanged at US$101.4bn in the two weeks ending 31st December 2018, similar to the reserves level recorded as at 14 December. However, on a monthly basis, the reserves position was lower by US$0.6bn to US$101.4bn from US$102bn as at end-November. In Ringgit terms, reserves fell by RM0.6bn to RM419.5bn in the second half of December, compared to RM420.1bn as at 14 December 2018. The current level of reserves is sufficient to cover 7.4 months of retained imports and the reserve coverage of short-term external debt was unchanged at 1.0 times.

We believe the relatively stable level of reserves could be due to possible net inflow of foreign holding of debt securities (the official figures have yet to be published). In the Malaysian bond market, there was some demand for the 10-year MGS in December where the yield had declined to 4.07 as of endDecember compared to 4.13 as of end-November, possibly due to the optimism on the trade outlook following the announcement of the 90-days pause on tariff hikes by the US on imports from China. Besides that, appetite for the Malaysia bond market could have also stemmed from the stronger Malaysian trade figures reported in November for the month of October, which rose by 17.7% yoy. However, on the Malaysia’s equity market, foreign investors, remained as net sellers for the third consecutive month in December, with a net outflow of RM1bn. In 2018, the cumulative net selling by foreign investors in the Malaysian equity market was RM11.1bn, higher than the total net outflow of RM10.7bn in 2017. Malaysia’s reserves levels continues to remain above US$100bn since August 2017, supported by the country’s healthy trade balance. On a cumulative basis, the country’s trade surplus has widened to RM109.6bn in January to November 2018, as compared to RM91.1bn in Jan-Nov 2017.

We are maintaining our full-year trade surplus forecast of around RM120bn in 2018 followed by a surplus of about RM100bn projected for 2019. In 1H19, we believe the country’s foreign reserve may come under some pressure from potential risk of portfolio capital outflows, especially with uncertainties surrounding trade talks between US and China as well as the development of further tariff hikes once the 90-day pause ends on 1 March 2019.

However, if there is a trade compromise between US and China, and with the possibility for US Fed to pause its interest rate hikes, we expect demand for the Ringgit to be likely supported by capital inflows into the region, supported also by the improvement in compliance rate arising from BNM’s require conversion of foreign currency export proceeds to Ringgit as well as healthy current account surpluses. We project reserves to be about US$100- 105bn by end-2019 (US$101.4bn as at end 2018).

Source: Affin Hwang Research - 8 Jan 2019