Reserves Sufficient to Cover 7.4 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.1bn to US$102.4bn in the two weeks ending 28th February 2019, from US$102.3bn as at 15 February 2019. This was, however, the slowest twoweek increase since end-31 December 2018. Similarly, on a month-on-month basis, the country’s reserves position rose but at a slower pace of US$0.3bn to US$102.4bn from US$102.1bn as at end-January 2019. In Ringgit terms, reserves rose by RM0.2bn to RM423.3bn in the second half of February, compared to RM423.1bn as at 15 February 2019. The current level of reserves is sufficient to cover 7.4 months of retained imports compared to 7.3 months as at mid-February and the reserve coverage of short-term external debt was unchanged at 1.0 times.

The slight improvement in reserves during the month was partly attributed to higher net inflow from foreigners in the domestic bond market. In the month of January, the net foreign buying in bond market amounted to RM4.5bn, the first monthly net inflow since October 2018, from a net outflow of RM2.3bn in January 2019. We believe the foreign net inflow was partly due to net foreign buying of Malaysian Government Securities (MGS) and private debt securities (PDS), which rose by RM4.9bn and RM0.8bn respectively during the month. We observed that demand for the 10-year MGS in February was relatively healthy, where the yield dropped by 17.8bps to 3.89 as of end-February (4.07 as of end-January), which we believe may be driven by better-than-expected economic data releases during the month, such as industrial production (3.4% yoy in December) as well as 4Q18 GDP growth (4.7% yoy). However, in the equity market, there was a foreign net outflow of RM0.8bn in February, following the net inflow of RM1bn in January 2019.

The country’s reserves level has remained above US$100bn since August 2017, sustained by Malaysia’s healthy trade balance and its current account surplus. In January, the country’s trade surplus widened to a 3-month high of RM11.5bn compared to RM10.7bn in December. In 4Q18, Malaysia’s current account surplus rose to RM10.8bn (3% of GNI) from RM3.8bn in 3Q18 (1.1% of GNI). With healthy exports growth, we expect Malaysia’s trade surplus of around RM100bn for 2019 (RM120.3bn in 2018) supported by sustained demand for E&E products. We also expect current account surplus to remain healthy at around RM30bn in 2019 (RM33.5bn in 2018). However, there are some downside risks with potential escalation of trade tensions, if not resolved, where it may have negative impact on global trade and investment. Nevertheless, we expect the country’s reserves to be about US$100-105bn by end-2019 (US$101.4bn as at end 2018). We believe that in the upcoming US Fed FOMC meeting on 19-20 March 2019, the US Fed will likely continue to paint a dovish tone on the monetary policy, possible signalling that they will be ‘patient’ in determining the future interest rate path.

Source: Affin Hwang Research - 8 Mar 2019