Reserves to Retained Imports Lower at 7.3 Months

The international reserves of Bank Negara Malaysia (BNM) fell by US$0.5bn to US$102.3bn in the two weeks ending 31st May 2019 (US$102.8bn as at 15 May 2019). On a monthly basis, the reserves position declined by US$1.1bn from US$103.4bn as at end-April 2019. In Ringgit terms, reserves also fell by RM2bn to RM417.4bn in the second half of May, compared to RM419.4bn as at 15 May 2019. As a result, the current level of reserves is sufficient to cover 7.3 months of retained imports, slightly lower compared to 7.4 months as at end-April. The reserve coverage of short-term external debt was unchanged at 1.1 times.

Although the May data for foreign holdings of Malaysian bills and bonds has not been released, we believe that the country’s lower reserves level may be partly attributed to continued outflow of foreign fund (net outflow of RM9.8bn in April), particularly for Malaysian Government Securities (MGS) and Government Investment Issue (GII). In May, Malaysia’s 10-year MGS yield was lower by 1.3bps at 3.78%, while the 3-year MGS fell by 1.1bps to 3.40% partly attributed to the 25bps cut in the Overnight Policy Rate (OPR) by BNM from 3.25% to 3%.

Meanwhile, on the domestic equity market, net foreign outflows were registered for the fourth consecutive month, with outflows of RM2bn in May (RM1.4bn in April), making this its largest monthly net outflow since June 2018. Year-to-date, net foreign outflows amounted to RM4.8bn.

Nevertheless, the country’s reserves level has remained above US$100bn since August 2017, supported by healthy trade surplus, which widened to RM47.8bn year-to-date compared to RM46.4bn in the same period in 2018. Although the ongoing trade tensions between US and China will continue to be a downside risk for Malaysia’s trade performance, we believe demand for Malaysia’s manufactured goods will be steady. This is in line with the positive sentiment of Malaysian manufacturers backed by their expectations of higher foreign demand over the next 12 months according to the IHS survey.

As such, we believe the country’s trade surplus will likely be around RM110bn in 2019 (RM120.3bn in 2018). Besides that, if the US Fed decides to cut interest rates, we believe this may also support some non-resident portfolio inflows. Furthermore, we believe the six measures recently introduced by BNM to support market liquidity and accessibility will also likely attract some inflows into the Malaysian market. Therefore, we expect reserves to hover around US$100- US$105bn by end 2019 (US$101.4 as at end-2018).

Source: Affin Hwang Research - 12 Jun 2019