Reserves Sufficient to Cover 8.3 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.6bn to US$103.4bn in the two weeks ending 30th June 2020 (US$102.8bn as at 15 June 2020). Likewise, on a monthly basis, the reserves position rose by US$0.5bn to US$103.4bn (US$102.9bn in end-May). Meanwhile, in Ringgit terms, reserves fell by RM1.8bn to RM443.1bn in the second half of June, compared to RM444.9bn as at 15 June 2020. The current level of reserves is sufficient to cover 8.3 months of retained imports (8.1 months in May). The reserve coverage of short-term external debt was unchanged at 1.1 times. 

We believe that higher level of reserves level was partly attributed to the second consecutive month of net foreign inflow into Malaysia’s domestic bond market in June, which amounted to RM11.6bn compared to a net inflow of RM1.5bn in May. This was possibly due to rising expectations of further OPR cut by BNM. Most of the net inflow was seen in MGS and GII, which rose by RM7.8bn and RM2.4bn, respectively. However, in June, the 10-year MGS yield rose by 6.1bps to 2.9%, possibly due to some fiscal concerns following the announcement of the Penjana Plan, where an additional RM10bn in direct fiscal spending is anticipated to raise the government’s fiscal deficit position to 5.8-6% of GDP in 2020. In addition, the 10-year yield may have also been impacted by the decision of S&P Global Ratings to revise Malaysia’s credit rating outlook to negative from stable. In the domestic equity market, foreign investors remained net sellers for the twelfth consecutive month with steady net outflows of RM3bn in June (net outflow of RM3bn in May). Year-to-date, net outflows from the equity market totalled RM16.3bn (net outflow of RM4.7bn in Jan-Jun 2019).

In the first five months of 2020, Malaysia’s trade balance remained in surplus at RM43.7bn, but this was lower than RM56.8bn in Jan-May 2019. Despite some relaxation under Malaysia’s RMCO, containment measures in other countries will still cause supply disruptions in production and exports for global markets. Furthermore, the possibility of a second wave as countries gradually reopen and renewed trade tensions could also weigh on the country’s trade. Moreover, concerns on Malaysia’s fiscal deficit position, weaker global growth prospects, uncertainties surrounding the development of the pandemic may weigh on potential capital inflows. However, after the latest 25bps rate cut by BNM and expectations of further easing could support inflows into Malaysia’s domestic bond market. Furthermore, the country’s economic fundamentals are expected to remain stable, which will lend support the country’s reserves level. We are maintaining our projection for international reserves to hover around US$97- 100bn by end 2020 (US$103.6 as at end-2019).

Source: Affin Hwang Research - 8 Jul 2020