Reserves Sufficient to Cover 7.7 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) fell by US$1.3bn to US$101.7bn in the two weeks ending 31st March 2020 (US$103bn as at 13 March 2020). On a monthly basis, the reserves position fell by US$1.7bn to US$103.4bn (US$103.4bn in end-February), making this its second consecutive month of decline. In Ringgit terms, reserves rose by RM18.3bn to RM440.1bn in the second half of March, compared to RM421.8bn as at 13 March 2020. The current level of reserves is sufficient to cover 7.7 months of retained imports. The reserve coverage of short-term external debt was unchanged at 1.1 times.

Although the March data for holdings of Malaysian bills and bonds has not been released yet, we believe that level of reserves trended lower due partly to the net foreign outflow from Malaysia’s domestic bond market in March, as reflected possibly the lower foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issue (GII). In March, the 3-year and the 10-year MGS yield rose by 17bps and 53bps to 2.8% and 3.3%, respectively partly due to outflows from emerging market economies led by ‘flight to safety’ over concerns about the economic impact of Covid-19 outbreak and as well as fears of a global recession. This is despite the two emergency cuts by the US Fed to 0-0.25% and another 25bps OPR cut by BNM in March. Similarly, in the domestic equity market, net outflows continued for the ninth consecutive month by RM5.5bn in March (net outflow of RM2bn in February), its largest monthly net outflow since May 2018. In the first three months of 2020, net outflows from the equity market amounted to RM7.6bn compared to a net inflow of RM1.3bn in the same period in 2019.

Going forward, we expect the country’s reserves level to trend slightly lower due to narrower trade surplus and potential capital outflows. Weaker export growth in 2020 amid low commodity prices (namely crude oil and gas prices and crude palm oil prices), as well as slower global economic activity and global supply chain disruptions will lead to weaker external demand for Malaysia’s exports. In addition, reserves may be under some pressure from potential capital outflows from Malaysia amid ongoing concerns of growth prospects, especially if global commodity prices remain low and the US Dollar continues to be strong.

For 2020 as a whole, we project the country’s international reserves to hover around US$97-100bn by end 2020 (US$103.6 as at end-2019). The BNM net short FX positions (i.e. from the use of forex swaps with domestic banking system) was lower in previous months, signalling healthy reserves position to reflect the country’s sound macroeconomic fundamental.

Source: Affin Hwang Research - 8 Apr 2020