Reserves Sufficient to Cover 7.9 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.5bn to US$102.5bn in the two weeks ending 30th April 2020 (US$102bn as at 15 April 2020). Similarly, on a monthly basis, the reserves position rose by US$0.8bn to US$102.5bn (US$101.7bn in end-March), after declining for two consecutive months. In Ringgit terms, reserves also rose by RM2.2bn to RM443.7bn in the second half of April, compared to RM441.5bn as at 15 April 2020. The current level of reserves is sufficient to cover 7.9 months of retained imports. The reserve coverage of short-term external debt was unchanged at 1.1 times.

Although the April data for holdings of Malaysian bills and bonds has not been released yet, we believe that level of reserves were higher partly due to some inflow into Malaysia’s domestic bond market in April, which possibly reflected some improvement of foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issue (GII). In April, the 3-year and the 10- year MGS yield fell by 35bps and 46bps to 2.4% and 2.9%, respectively. We believe this partly was attributed to higher market expectations of an Overnight Policy Rate (OPR) cut by BNM prior to its scheduled MPC meeting on 5th May 2020. In the latest MPC meeting, BNM decided to lower its OPR by 50bps to 2% from 2.5%. However, in the domestic equity market, foreign investors remained net sellers, where net outflows continued for the tenth consecutive month by RM2.7bn in April (net outflow of RM5.5bn in March). Year-to-date, net outflows from the equity market amounted to RM10.3bn compared to a net outflow of RM2.8bn in the same period in 2019.

Going forward, despite the country’s reserves holding up well, we believe there are some downside risks to the country’s reserves level, which may be due to capital flows as well as possibly narrower trade surplus. Malaysia’s trade surplus remained sizeable at RM37bn in 1Q20 compared to RM36.9bn in 1Q19, but in the coming months, we believe weak global growth and prolonged global supply chain disruptions amid containment measures in major countries may lead to weaker external demand for Malaysia’s exports. In addition, intra-regional trade will be impacted by the possibility of extended lockdowns and quarantine rules of the Asean countries. Furthermore, we believe reserves may be under some pressure as we anticipate capital outflows from emerging markets (including from Malaysia) to safer assets like the US Dollar, US Treasuries and gold due to amid concerns of growth prospects and low global oil prices. Nevertheless, Malaysia’s economic fundamentals will remain stable which will support the country’s reserves level. In 2020, we project the country’s international reserves to hover around US$97-100bn by end 2020 (US$103.6 as at end-2019).

Source: Affin Hwang Research - 12 May 2020