• The international reserves of Bank Negara Malaysia (BNM) rose by US$1.9bn to US$107.6bn in the two weeks ending 31st December 2020 (US$105.7bn as at 15 December 2020)
• In Ringgit terms, reserves fell by RM6.9bn to RM432.2bn in the second half of December, compared to RM439.1bn as at 15 December 2020.
• We expect international reserves to hover around US$100-105bn level by end 2021 (US$107.6 as at end-2020).

Reserves sufficient to cover 8.6 months of retained imports in December

The international reserves of Bank Negara Malaysia (BNM) rose by US$1.9bn to US$107.6bn in the two weeks ending 31st December 2020 (US$105.7bn as at 15 December 2020). Similarly, on a monthly basis, the reserves position rose by US$2.3bn to US$107.6bn (US$105.3bn as at end-November 2020). However, in Ringgit terms, reserves fell by RM6.9bn to RM432.2bn in the second half of December, compared to RM439.1bn as at 15 December 2020. The current level of reserves is sufficient to cover 8.6 months of retained imports (8.6 months in November). The reserve coverage of shortterm external debt was also unchanged at 1.2 times (1.2 times as at end-November).

The higher level of reserves (in US$ term) in December may have been partly attributed to the sustained inflow into the domestic bond market for the eighth consecutive month, which amounted to RM3.6bn compared to RM1.9bn in November. Most of the inflow was seen in Malaysian Government Securities (MGS) and Government Investment Issue (GII) which increased by RM2.4bn and RM1.4bn, respectively. In December, the 10-year MGS yield fell by 10.8bps to 2.65%, possibly amidst the recent strengthening of the Ringgit against the US Dollar. Meanwhile, in the domestic equity market, foreign investors remained net sellers for the eighteenth consecutive month albeit with a smaller net outflow of RM0.6bn in December compared to RM1.0bn in November. In 2020, net outflows from the equity market amounted to RM24.6bn compared to RM11.1bn in 2019, making this the third straight year of net outflows.

Going into 2021, we expect the level of Malaysia’s reserves to remain steady, underpinned likely by sustained trade and current account surplus supported by the country’s diversified exports. In the first eleven months of 2020, Malaysia’s trade balance amounted to RM163.8bn as compared to a surplus of RM133.1bn in Jan-Nov 2019. In 2021, we anticipate export growth to be driven by improving external demand especially from sustained demand from China. In addition, the recent appreciation of the Ringgit which has been partly driven by the weaker US Dollar will also lend some support to the country’s reserves level. The Ringgit has remained steady around RM4.04/US$ currently from its low of RM4.37/US$ in May 2020. However, uncertainties surrounding the pandemic will continue to be a downside risk for potential capital inflows especially if there are any delays in the rollout of the vaccines in Malaysia. Nevertheless, we expect international reserves to remain healthy and to hover around US$100-105bn level by end 2021 (US$107.6 as at end-2020).

Source: Affin Hwang Research - 11 Jan 2021