• The international reserves of Bank Negara Malaysia (BNM) rose by US$0.2bn to US$105bn in the two weeks ending 30th September 2020 (US$104.8bn as at 15 September 2020).
• The country’s reserves have remained above US$100bn since August 2017 and we continue to expect Malaysia’s reserves level to remain steady underpinned by ongoing trade surplus and current account surplus.
• We expect international reserves to hover around US$100-105bn by end 2020 (US$103.6 as at end-2019).

Reserves to cover 8.4 months of retained imports from 8.6 months in August

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.2bn to US$105bn in the two weeks ending 30th September 2020 (US$104.8bn as at 15 September 2020). Similarly, on a monthly basis, the reserves position rose by US$0.6bn to US$105bn (US$104.4bn in end-August). However, in Ringgit terms, reserves fell by RM11.6bn to RM436.5bn in the second half of September, compared to RM448.1bn as at 15 September 2020. This was partly due to the quarterly foreign exchange revaluation changes. The current level of reserves is sufficient to cover 8.4 months of retained imports (8.6 months in August). The reserve coverage of short-term external debt was unchanged at 1.1 times.

Although the September data for holdings of Malaysian bills and bonds has not been released yet, we believe that higher level of reserves (in US$ term) was led by some net foreign inflow into Malaysia’s bond market. This was reflected possibly by higher foreign holdings of MGS and GII. In September, the 10-year MGS yield rose by 5bps to 2.67%, in line with higher US Treasury yields as the US Fed kept its FFR unchanged at 0-0.25%. BNM also decided to hold OPR at 1.75% in the recent MPC meeting. Meanwhile, in the domestic equity market, foreign investors remained net sellers for the fifteenth consecutive month with a net outflow of RM2.0bn in September compared to RM1.5bn in August. Year-to-date, net outflows from the equity market totalled RM22.3bn (net outflow of RM7.9bn in Jan-Sep 2019).

The country’s reserves have remained above US$100bn since August 2017 and we continue to expect reserves to remain steady underpinned by ongoing trade surplus and current account surplus. In the first eight months of 2020, Malaysia’s trade balance amounted to RM103bn, higher compared to a surplus of RM100bn in Jan-Aug 2019. Going forward, we expect the trade performance to be supported by pickup in global economic activity and healthy global demand for semiconductors. Furthermore, the steady performance of the Ringgit against the US Dollar will also lend some support to reserves level. The Ringgit has appreciated from its low of RM4.37/US$ in May to RM4.16/US$ in September partly due to the weaker US Dollar amid US Fed’s accommodative monetary policy and quantitative easing. However, potential capital inflows may still be dampened somewhat by concerns on Malaysia’s fiscal deficit position as well as uncertainties surrounding the pandemic. We expect international reserves to hover around US$100-105bn by end 2020 (US$103.6 as at end-2019).

Source: Affin Hwang Research - 8 Oct 2020