• The international reserves rose by US$0.2bn to US$104.2bn in the two weeks ending 30th July 2020 (US$104bn as at 15 July 2020).
• Higher level of reserves was partly attributed to net foreign inflow into Malaysia’s domestic bond market in July, the third consecutive month
• We are maintaining our projection for international reserves to hover around US$97-100bn by end 2020 (US$103.6 as at end-2019).

Reserves Sufficient to Cover 8.4 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.2bn to US$104.2bn in the two weeks ending 30th July 2020 (US$104bn as at 15 July 2020). Likewise, on a monthly basis, the reserves position rose by US$0.8bn to US$104.2bn (US$103.4bn in end-June). In Ringgit terms, reserves increased by RM1bn to RM446.4bn in the second half of July, compared to RM445.4bn as at 15 July 2020. The current level of reserves is sufficient to cover 8.4 months of retained imports (8.3 months in June). 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 third consecutive month of net foreign inflow into Malaysia’s domestic bond market in July, which amounted to RM7.1bn compared to a net inflow of RM11.6bn in June. In July, most of the net inflow was seen in MGS which increased by RM7.7bn compared to RM7.8bn in June. This was also reflected in the 10-year MGS yield in July, which fell by 31bps to 2.6%, possibly due to the 25bps rate cut by BNM in its July MPC meeting to a record low of 1.75%, while guiding that it will continue to “utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery”. In the domestic equity market, foreign investors remained net sellers for the thirteenth consecutive month with steady net outflows of RM2.5bn in July (net outflow of RM3bn in June). Year-to-date, net outflows from the equity market totalled RM18.8bn (net outflow of RM4.7bn in Jan-Jul 2019).

Malaysia’s reserves level is expected to remain steady in the coming months supported by trade balance and current account balance which remain in surplus. In the first six months of 2020, Malaysia’s trade balance amounted to RM64.6bn, but this was lower than surplus of RM67.4bn in Jan-Jun 2019. Going forward, we believe external demand for Malaysia’s exports will continue to remain uncertain. Nevertheless, with the commencement of the RMCO, where almost all businesses are allowed to resume operations at a higher capacity, this would continue to support trade performance in the coming months. In addition, rising sales of global semiconductor sales will also support exports of Malaysia’s E&E products. Furthermore, the country’s stable economic fundamentals are expected to remain stable, which will lend support the country’s reserves level. However, some concerns on Malaysia’s fiscal deficit position, government debt and the possibility of a second wave of Covid-19 cases may weigh on potential capital inflows. Therefore, 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 - 10 Aug 2020