Reserves to Retained Imports Increased to 7.4 Months

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.4bn to US$102.1bn in the two weeks ending 31st January 2019, from US$101.7bn as at 15 January 2019. On a monthly basis, the reserves position also increased by US$0.7bn to US$102.1bn from US$101.4bn as at endDecember 2018. Similarly, in Ringgit terms, reserves rose by RM1.9bn to RM422.3bn in the second half of January, compared to RM420.4bn as at 15 January 2019. The current level of reserves is sufficient to cover 7.4 months of retained imports (7.3 months as at mid-January) and the reserve coverage of short-term external debt was unchanged at 1.0 times.

Although the January data for foreign holdings of Malaysian bills and bonds has yet to be released, we believe foreign holdings may have improved from the RM2.2bn decline registered in December 2018, due to steady foreign interest in Malaysian Government Securities (MGS) and Government Investment Issue (GII). On the Malaysia’s equity market, the foreign net outflow registered since October 2018 turned around to become a net inflow of RM1bn in January 2019 (net outflow of RM1bn in December 2018). Meanwhile, in the Malaysian bond market, demand for the 10-year MGS in January was steady with the yield unchanged at 4.07 as of end-January similar to end-December 2018, possibly supported by the release of US Fed’s less hawkish December FOMC minutes, where it guided that the timing of future policy rate hikes have become less clear due to volatility in financial markets and some global growth concerns. Furthermore, it was also highlighted in the FOMC minutes that certain members were against another rate hike.

The country’s reserves levels has remained above US$100bn since August 2017, supported by the country’s healthy trade balance and current account surplus position. In 2018, Malaysia’s trade balance widened to RM120.3bn compared to RM98.5bn in 2017, making this its widest trade surplus since 2012. We are maintaining our trade surplus forecast of around RM100bn for 2019. In the months ahead, downside risks to the non-resident portfolio (possibility some pressure on foreign net outflow) will remain due to external uncertainties, as the US-China trade war continues with the 90-day tariff deadline approaches. Despite this, the possibility of the US Fed taking a pause in its interest rate hike cycle may lead to some foreign net inflow. In the January FOMC meeting, the Fed guided that it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate” in order to maintain the country’s expansion of economic activity, robust labour market conditions and inflation close to the Fed’s 2% target. Year-to-date, the Ringgit has appreciated against the US$ by 1.5%. We expect the country’s reserves to be about US$100-105bn by end-2019 (US$101.4bn as at end 2018).

Source: Affin Hwang Research - 13 Feb 2019