Reserves to Retained Imports Improved to 7.5 Months

The international reserves of Bank Negara Malaysia (BNM) in the two weeks ending 29th March 2019 rose by US$0.4bn to reach US$103bn, its highest level since end September 2018 (US$102.6bn as at 15 March 2019). Similarly, on a monthly basis, the reserves position was also higher by US$0.6bn to US$103bn from US$102.4bn as at end-February 2019. However, in Ringgit terms, reserves fell by RM4.2bn to RM420.2n in the second half of March, compared to RM424.4bn as at 15 March 2019. The current level of reserves is sufficient to cover 7.5 months of retained imports compared to 7.4 months as at mid-March and the reserve coverage of shortterm external debt was unchanged at 1.0 times.

The increase in reserves in March was partly due to some foreign net inflow into Malaysia’s domestic bond market for the second consecutive month, as reflected by the rise in net foreign buying, which amounted to RM2.9bn (net inflow of RM4.5bn in February). This was partly due to net foreign buying of Malaysian Government Securities (MGS) and Government Investment Issue (GII), which rose by RM1.4bn and RM1.3bn, respectively during the month. In March, there was also continued demand for the 10-year MGS yield, where we noticed that the yield had dropped by 12.5bps to 3.77 as of end-March (3.89 as of end-February), possibly due to the dovishness of the US Fed in the March FOMC meeting, where it now expects no rate hikes in 2019 after leaving its Fed Funds Rate (FFR) at 2.25-2.5% compared to its previous projection of one or two rate hikes. Besides that, the US Fed also guided that that its balance sheet reduction will conclude in September 2019. From October, it will not reduce its holdings of Treasury securities, while continuing to runoff Mortgage Backed Securities at US$20bn a month. However, in Malaysia’s equity market, there continued to be foreign net outflows for the second consecutive month of RM1.6bn in March, higher than the net outflow of RM0.8bn in February.

We expect Malaysia’s reserves level, which has remained above US$100bn since August 2017, to be supported by the country’s healthy trade balance. On a cumulative basis, country’s trade surplus widened to RM22.6bn compared to RM18.7bn in the corresponding period in 2018. Despite the decline in exports in February of 5.3%, we believe demand for Malaysia’s manufactured goods especially E&E exports will continue to support export performance, as reflected by the stable growth of E&E exports. Therefore, we believe this will contribute to a healthy trade balance of around RM100bn (RM120.3bn in 2018). We also expect non-resident portfolio inflows to be supported by the US Fed’s pause in its rate hike cycle as well as potentially stable performance of the Ringgit against the US Dollar, which has appreciated by 1.3% year-to-date. However, downside risks remain amid uncertainties surrounding trade talks between the US and China as well as Brexit developments. 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 - 8 Apr 2019