Reserves Sufficient to Cover 8.1 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.3bn to US$102.9bn in the two weeks ending 29th May 2020 (US$102.6bn as at 15 May 2020). Similarly, on a monthly basis, the reserves position rose by US$0.4bn to US$102.9bn (US$102.5bn in end-April). In Ringgit terms, reserves also rose by RM1.8bn to RM445.8bn in the second half of May, compared to RM444.1bn as at 15 May 2020. The current level of reserves is sufficient to cover 8.1 months of retained imports (7.9 months in April). The reserve coverage of short-term external debt was unchanged at 1.1 times.

The May data for holdings of Malaysian bills and bonds has not been released yet but we believe that level of reserves were supported by some inflow into Malaysia’s domestic bond market, which possibly reflected in some rise in foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issue (GII). In May, the 3-year and the 10-year MGS yield fell by 13bps and 10bps to 2.3% and 2.8%, respectively possibly due to the 50bps cut to the Overnight Policy Rate (OPR) at the last MPC meeting on 5th May. Similarly, in the domestic equity market, foreign investors remained net sellers, where net outflows continued for the eleventh consecutive month by RM3bn in May (net outflow of RM2.7bn in April). Year-to-date, net outflows from the equity market amounted to RM13.3bn larger than the net outflow of RM4.8bn in the same period in 2019.

Going forward, we believe there remains some downside risks to the country’s reserves level, possibly stemming from persistent capital flows and the recent trade deficit. In the first four months of 2020, Malaysia’s trade surplus remained positive at RM33.5bn but lower than RM47.8bn in Jan-Apr 2019. However, we anticipate exports growth will remain in negative territory on a yearly comparison in 2Q20 and 3Q20, given signs that the weakness in global trade will likely bottom out only in 3Q20. We remain cautious that exports growth will remain weak, where recovery in global trade will be gradual and dependent upon the revival in the external economic environment, especially on the US economy. Furthermore, reserves may continue to be under some pressure amid sustained capital outflows due to amid concerns of growth prospects and low global oil prices but we expect the gradual reopening and easing of containment measures of the Malaysian economy as well as other regional economies to likely support flows back to emerging markets (including Malaysia). In addition, the economic fundamentals are also expected to remain stable which will lend support the country’s reserves level. Therefore, 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 - 9 Jun 2020