Reserves Sufficient to Cover 7.5 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.3bn to US$103.6bn in the two weeks ending 31st December 2019 (US$103.3bn as at 13 December 2019). On a monthly basis, the reserves position also increased by US$0.4bn to US$103.6bn (US$103.2bn in end-November). In Ringgit terms, reserves fell by RM8.4bn to RM424.1bn in the second half of December, compared to RM432.5bn as at 13 December 2019. The current level of reserves is sufficient to cover 7.5 months of retained imports. Meanwhile, the reserve coverage of short-term external debt was unchanged at 1.1 times.

Higher level of reserves may have been attributed partly to the sustained inflow into the domestic bond market. Although December’s data on Malaysia’s foreign holdings of bills and bonds has not been released yet, we believe some inflow as reflected in lower Malaysian Government Securities (MGS) yields. In December, the 10-year MGS yield fell by 10bps to 3.3%, while the 3-year yield fell by 5bps to 3.0% potentially due to Malaysia’s November headline inflation, which registered a six month low of 0.9% yoy (1.1% in October). In addition, higher inflows may have also been partly attributed to higher commodity prices seen during the month. However, in the domestic equity market, net outflows continued for the sixth consecutive month with a net outflow of RM1.2bn in December (an outflow of RM1.5bn in November). Therefore, in 2019, net foreign outflows amounted to RM11.1bn compared to an outflow of RM11.7bn in 2018, making this its second consecutive year of equity outflows.

Going into 2020, we expect the level of Malaysia’s reserves to remain steady, supported by sustained trade surplus and current account surplus (i.e. supported by Malaysia’s diversified exports). Furthermore, the US Fed guided in its latest dot plot in December 2019 that it will likely hold rates at 1.5-1.75% in 2020, which we believe would maintain a favourable interest rate differential between US and Malaysia and possibly support some inflows into the domestic bond market.

Besides that, we also anticipate inflows to be bolstered by positive developments surrounding US-China trade talks as the “phase one” deal is anticipated to be signed on January 15th 2020. However, we continue to expect some uncertainties around Malaysia’s position in FTSE Russell’s World Government Bond Index until the next interim review in March 2020 to possibly weigh on inflows into the domestic bond market. In 2020, we project international reserves of BNM to hover around US$100-US$105bn by end 2020 (US$103.6 as at end-2019).

Source: Affin Hwang Research - 9 Jan 2020