• The international reserves of Bank Negara Malaysia (BNM) rose by US$0.8bn to US$108.6bn in the two weeks ending 29th January 2021 (US$107.8bn as at 15 January 2021).
   
• The country’s reserves level has remained above US$100bn since August 2017 and we expect the level of reserves to likely remain steady bolstered by sustained trade and current account surplus
   
• We expect international reserves to hover around US$100-105bn level by end 2021 (US$107.6bn as at end-2020).

Reserves sufficient to cover 8.6 months of retained imports in January

The international reserves of Bank Negara Malaysia (BNM) rose by US$0.8bn to US$108.6bn in the two weeks ending 29th January 2021 (US$107.8bn as at 15 January 2021). Similarly, on a monthly basis, the reserves position rose by US$1bn to US$108.6bn (US$107.6bn as at end-December 2020). Meanwhile, in Ringgit terms, reserves increased by RM3.5bn to RM436.6bn in the second half of January 2021, compared to RM433.1bn as at 15th January 2021. The current level of reserves is sufficient to cover 8.6 months of retained imports (8.6 months in December). The reserve coverage of short-term external debt was also unchanged at 1.2 times, the same level as at end-December.

The higher level of reserves (in US$ term) in January may have been attributed partly to the sustained inflow into the domestic bond market. Although the January bonds and bill data has not been released, we expect most of the inflows were in Malaysian Government Securities (MGS) and Government Investment Issue (GII). In January, the 10-year MGS yield rose by 5.6bps to 2.70%, in line with higher US Treasury yields. BNM also decided to leave its Overnight Policy Rate (OPR) unchanged at 1.75% in its January MPC meeting. Meanwhile, in the domestic equity market, foreign investors remained net sellers for the nineteenth consecutive month albeit with a slightly larger net outflow of RM0.8bn in January 2021 from RM0.6bn in December.

The country’s reserves level has remained above US$100bn since August 2017 and we expect the level of reserves to likely remain steady, bolstered by sustained trade and current account surplus supported by the country’s diversified exports. In 2020, Malaysia’s trade balance amounted to RM184.8bn compared to a surplus of RM145.7bn in 2019. We also believe that the recent reaffirmation by Moody’s on Malaysia’s sovereign rating at A3 with a stable outlook could further improve investor confidence in Malaysia. While we believe there may be some downside risk to export growth and potential capital outflows in the near term due to recent rise in Covid-19 cases, the reserves level will remain manageable. The recovery in China’s economy as well as the eventual roll out of vaccines in Malaysia and in other countries will support the external and domestic demand. We expect international reserves to remain healthy and to hover around US$100-105bn level by end 2021 (US$107.6bn as at end-2020).

Source: Affin Hwang Research - 7 Feb 2021