• The international reserves of Bank Negara Malaysia (BNM) rose by US$0.4bn to US$105.3bn in the two weeks ending 30th November 2020 (US$104.9bn as at 13 November 2020).
• The country’s reserves will remain at healthy level bolstered by trade surplus and ongoing current account surplus.
• We expect international reserves to hover around US$105bn level by end 2020 (US$103.6 as at end-2019).

Reserves to cover 8.6 months of retained imports in November

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.4bn to US$105.3bn in the two weeks ending 30th November 2020 (US$104.9bn as at 13 November 2020). Similarly, on a monthly basis, the reserves position rose by US$0.7bn to US$105.3bn (US$104.6bn in end-October). Meanwhile, in Ringgit terms, reserves increased by RM1.5bn to RM437.5bn in the second half of November, compared to RM436bn as at 13 November 2020. The current level of reserves is sufficient to cover 8.6 months of retained imports (8.4 months in October). The reserve coverage of shortterm external debt was higher at 1.2 times (1.0 times as at end-October).

Even though the November data for holdings of Malaysian bills and bonds has not been released yet, we believe that level of reserves trended higher partly due to the net foreign inflow into the country’s domestic bond market in November, reflected by higher foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issue (GII). However, in November, the 10-year MGS yield rose by 13.6bps to 2.75%, possibly due to uncertainties leading up to the vote to pass Budget 2021 on 26 November as well as some concerns from recent CMCO imposed due to travel restrictions on the domestic economy. Meanwhile, in the domestic equity market, foreign investors remained net sellers for the seventeenth consecutive month with a net outflow of RM1.1bn in November compared to RM0.7bn in October. Year-to-date, net outflows from the equity market totalled RM24.1bn (net outflow of RM9.9bn in Jan-Nov 2019).

We believe the country’s reserves, which have remained above US$100bn level since August 2017, to remain steady bolstered by trade surplus and ongoing current account surplus. In the first ten months of 2020, Malaysia’s trade balance amounted to RM147bn, higher compared to a surplus of RM126.4bn in Jan-Oct 2019. Furthermore, the current account surplus has widened to RM26.1bn in 3Q20 (7.3% of GNI) from RM7.6bn (2.5% of GNI) in 2Q20. The sustained steady performance of the Ringgit against the US Dollar will also lend some support to reserves level. The Ringgit has appreciated from its low of RM4.37/US$ in May to RM4.07/US$ currently partly due to the weaker US Dollar. However, potential capital inflows may be dampened somewhat by uncertainties surrounding the pandemic as well as some concerns that if rating agencies like S&P and Moody’s will follow suit on the country’s long-term foreign-currency issuer default rating (IDR) after the downgrade by Fitch to BBB+ from A-. Nevertheless, we expect international reserves to remain healthy and hover around US$105bn level by end 2020 (US$103.6 as at end-2019).

Source: Affin Hwang Research - 8 Dec 2020