Reserves to Retained Imports Remained Unchanged at 7.6 Months

The international reserves of Bank Negara Malaysia (BNM) increased by US$0.4bn to US$103.5bn in the two weeks ending 30th August 2019 (US$103.1bn as at 15 August 2019). However, on a monthly basis, the reserves position fell by US$0.4bn to US$103.5bn (US$103.9bn in end-July), due partly to portfolio capital outflows as a result of foreign investors selling in the domestic equity market in the first two weeks ending 15 August 2019. In Ringgit terms, reserves rose by RM1.7bn to RM428.7bn in the second half of August, compared to RM427bn as at 15 August 2019. The current level of reserves is sufficient to cover 7.6 months of retained imports, similar to the previous month. Meanwhile, the reserve coverage of short-term external debt was slightly lower at 1.1 times compared to 1.2 times as at end-July.

Although the August data for foreign holdings of Malaysian bills and bonds has not been released yet, we believe higher reserves level was supported by foreign inflows into the domestic bond market. In August, the 10-year Malaysian Government Securities (MGS) bond yield dropped by 25.6bps to 3.32%, while the 3-year yield fell by 14.2bps to 3.12%. This may be attributed partly to the betterthan-expected 2Q19 GDP growth of 4.9% yoy, higher than market expectations of 4.7%. In addition, we believe lower inflation expectations may have also caused bond yields to dip lower after June inflation rate moderated slightly to 1.4% yoy from 1.5% in May. Besides that, higher net export earnings may have also contributed the rise in reserves during the month, where the country’s trade surplus in July surged to RM14.3bn (RM10.5bn in June). Between January to July, the trade surplus has widened to RM81.6bn compared to RM68.8bn in the corresponding period in 2018. However, in contrast, in the domestic equity market, foreign investors remained net sellers with a larger net outflow of RM2.6bn in August from RM0.08bn in July. Year-to-date, net foreign outflows amounted to RM7.3bn compared to a net outflow of RM8.6bn in the same period in 2018.

Nevertheless, the country’s reserves level has remained above US$100bn since August 2017 and we expect this to be sustained as Malaysia’s trade surplus remains healthy despite ongoing trade tensions between US and China. Going forward, while still uncertain of the outcome, both US and China have recently discussed on a potential trade compromise and likely to resume trade talks in October. Overall, we expect international reserves of BNM to hover around US$100-US$105bn by end 2019 (US$101.4 as at end-2018), where reserves to be supported by the steady current account surplus, which has stayed above RM10bn since 4Q18 (RM14.3bn in 2Q19 vs. RM16.4bn in 1Q19).

Source: Affin Hwang Research - 10 Sept 2019