• The international reserves of Bank Negara Malaysia (BNM) fell by US$0.7bn to US$109bn in the two weeks ending 26th February 2021 (US$109.7bn as at 15 February 2021). 

• Reserves level will continue to be supported by sustained trade and current account surplus due to the country’s diversified exports. 
   
• We expect international reserves to hover around US$100-105bn level by end 2021 (US$107.6bn as at end-2020).

Reserves is sufficient to cover 8.6 months of retained imports

The international reserves of Bank Negara Malaysia (BNM) fell by US$0.7bn to US$109bn in the two weeks ending 26th February 2021 (US$109.7bn as at 15 February). However, on a monthly basis, the reserves position rose albeit at a slower pace of US$0.4bn to US$109bn (US$108.6bn as at end-January 2021). In Ringgit terms, reserves dropped by RM3.1bn to RM437.9bn in the second half of February, compared to RM441bn as at 15th February. The current level of reserves is sufficient to cover 8.6 months of retained imports (8.6 months in January). The reserve coverage of short-term external debt was also unchanged at 1.2 times, the same level as at end-January.

The slightly lower level of reserves (in US$ term) in February may have been attributed partly to some possible outflow from the domestic bond market. Although the February bonds and bill data has not been released, we expect some outflows were from Malaysian Government Securities (MGS) and Government Investment Issue (GII). The outflow may have been reflected in MGS yields where in February, the 10-year MGS yield rose by 38bps to 3.1%, in line with higher US Treasury yields amid increasing confidence over recovery in US economic growth and increasing inflation expectations. Meanwhile, in the domestic equity market, foreign investors remained net sellers for the twentieth consecutive month with a slightly larger net outflow of RM0.9bn in February from RM0.8bn in January 2021.

Moving forward, we still anticipate the level of reserves to likely remain steady, bolstered by sustained trade and current account surplus supported by the country’s diversified exports. In January, Malaysia’s trade balance remained in surplus albeit narrower at RM16.6bn compared to RM20.7bn in December. Furthermore, the current account balance holds up but narrowed to RM19bn in 4Q20 (5.1% of GNI) from RM26.1bn in 3Q20 (7.3% of GNI). We expect export growth to be continually supported by healthy demand for E&E products while the anticipated strong recovery of China’s economy to boost demand for Malaysia’s exports. In the near term, we believe there may continue to be some gradual capital outflows due to uncertainties surrounding the pandemic as cases remain high. However, the commencement of the vaccine roll out in Malaysia as well as in other regional economies will support inflows back to emerging markets including into Malaysia. In addition, the economic fundamentals are expected to remain sound and stable which will lend support the country’s reserves level. 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 - 8 Mar 2021