Reserves Sufficient to Cover 7.4 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) fell by US$0.9bn to US$103.4bn in the two weeks ending 28th February 2020 (US$104.3bn as at 14 February 2020). On a monthly basis, the reserves position fell by US$0.8bn to US$103.4bn (US$104.2bn in end-January), erasing the slight gain in the first two weeks of February. In Ringgit terms, reserves fell by RM3.5bn to RM423.3bn in the second half of February, compared to RM426.8bn as at 14 February 2020. The current level of reserves is sufficient to cover 7.4 months of retained imports. The reserve coverage of short-term external debt was unchanged at 1.1 times.

We believe that lower level of reserves level was partly attributed to the net foreign outflow from Malaysia’s domestic bond market in February, especially in second half of the month, which amounted to RM8.1bn compared to a net inflow of RM3.6bn in January (its first net outflow since October 2019). Bulk of the net outflow was seen in Malaysian Government Securities (MGS) and Government Investment Issue (GII) which fell by RM7.1bn and RM0.5bn, respectively. In February, the 3-year and the 10-year MGS yield fell by 25bps and 31bps to 2.6% and 2.8%, respectively partly due to ‘flight to safety’ over concerns about the Covid-19 outbreak as well as some political uncertainties during the latter part of the month. In the domestic equity market, net outflows continued for the eighth consecutive month by RM2bn in February (an outflow of RM0.1bn in January), its largest monthly net outflow since August 2019. In January-February 2020, net outflows from the equity market amounted to RM2.1bn compared to a net inflow of RM0.2bn in the same period last year.

Nevertheless, Malaysia’s reserves level remained above RM100bn since August 2017 and we expect it to remain steady in the coming months as the country’s trade balance and current account remain in surplus. In January, the trade surplus narrowed slightly to RM12bn from RM12.5bn in December. In 2020, we believe Malaysia’s export growth to turnaround to expand by 1.5% (-1.7% in 2019) supported by a possible turnaround in global semiconductor sales and improvement in external demand following the signing of the ‘Phase one’ deal. We expect trade balance to narrow slightly but remain large at around RM131bn projected for 2020 (RM137bn in 2019). However, we continue to expect some potential outflows to arise from downside risk from uncertainties around Malaysia’s economic growth prospects due to the impact from Covid-19. As a result, we expect inflows into the Malaysian market in the near term will likely be limited especially if the number of confirmed cases outside of China continues to rise. Therefore, we project international reserves to hover around US$100- US$105bn by end 2020 (US$103.6 as at end-2019).

Source: Affin Hwang Research - 9 Mar 2020