Reserves to Retained Imports Increased to 7.6 Months

The international reserves of Bank Negara Malaysia (BNM) increased by US$0.6bn to US$103.9bn in the two weeks ending 31st July 2019 (US$103.3bn as at 15 July 2019). This was its highest level since August 2018. On a monthly basis, the reserves position rose by US$1.2bn to US$103.9bn (US$102.7bn in end-June). In Ringgit terms, reserves was also higher by RM2.3bn to RM430.3bn in the second half of July, compared to RM428bn as at 15 July 2019. As a result, the current level of reserves is sufficient to cover 7.6 months of retained imports which is higher compared to 7.3 months as at end-June. Meanwhile, the reserve coverage of short-term external debt was unchanged at 1.2 times.

We believe that higher level of reserves level was partly attributed to the net foreign inflow into Malaysia’s domestic bond market for the second consecutive month in July, which totalled RM5.7bn (RM6.6bn in June 2019). Net foreign buying of Malaysian Government Securities (MGS) and Government Investment Issue (GII) rose by RM5.6bn and RM0.1bn, respectively. This was also reflected in the MGS bond yields, where in July, 10-year yield dropped by 6bps to 3.57%, while the 3-year yield fell by 2.7bps to 3.27%, partly attributed to lower inflation expectations. This was despite the pickup in inflation in June to 1.5% yoy from 0.2% with expectations that recent confirmation by the government that there will be no electricity tariffs hikes until the end-2019 as well as the ongoing cap on retail fuel prices. Besides that, lower yields were also due to BNM’s cautious tone concerning global growth in its latest MPC meeting. However, as for the domestic equity market, following a net inflow of RM0.13bn in June, foreign investors returned to be net sellers with an outflow of RM0.08bn in July. Year-to-date, net foreign outflows amounted to RM4.7bn (net outflow of RM8.5bn in the same period last year).

Malaysia’s reserves level has remained above US$100bn since August 2017, where this has been continually supported by the country’s healthy trade surplus, which widened to RM67.1bn in 1H19, compared to RM60.5bn in 1H18. Going forward, we believe Malaysia will likely be able to benefit from trade diversion, which will support exports. Therefore, we are maintaining our Malaysia’s trade surplus projection at RM115bn for 2019 (RM120.3bn in 2018). Furthermore, we believe the possibility of US Fed’s cutting its Federal Funds rate further in the coming FOMC meetings, where widening interest rate differential would also favour some inflows into Malaysia. Further rate cuts in the US going forward, especially if the US economy shows more signs of weakening, will also support non-resident portfolio inflows. Therefore, we project reserves to hover around US$100-US$105bn by end 2019 (US$101.4 as at end-2018).

Source: Affin Hwang Research - 8 Aug 2019