• The international reserves of Bank Negara Malaysia (BNM) fell by US$0.6bn to US$108.6bn in the two weeks ending 31st March 2021 (US$109.2bn as at 15 March 2021).
• The current level of reserves is sufficient to cover 8.8 months of retained imports (8.6 months in February.
• We expect international reserves to hover around US$105bn level by end 2021 (US$107.6bn as at end-2020).

Reserves Is Sufficient to Cover 8.8 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) fell by US$0.6bn to US$108.6bn in the tw o weeks ending 31st March 2021 (US$109.2bn as at 15 March). How ever, when compared on a monthly basis, the reserves position fell by US$0.4bn to US$108.6bn (US$109bn as at end-February 2021). On a quarterly basis, BNM’s international reserves was still higher at US$108.6bn as at end 1Q21 (compared w ith US$107.6bn as at end 4Q20). In Ringgit terms, reserves rose by RM11.9bn to RM451.1bn in the second half of March, compared to RM439.2bn as at 15th March. The current level of reserves is sufficient to cover 8.8 months of retained imports (8.6 months in February). The reserve coverage of short-term external debt w as also unchanged at 1.2 times, the same level as at end-February.

The slightly low er level of reserves (in US$ term) in March may have been attributed to the low er net inflow from the domestic bond market, w hich amounted to RM5.8bn compared to RM7.2bn in February. Most of the inflow w as seen in Malaysian Government Securities (MGS) and Government Investment Issue (GII) w hich increased by RM1.5bn and RM2.9bn, respectively. The low er inflow may have been reflected in MGS yields, w here in March, the 10-year MGS yield rose by 16bps to 3.2%, in line w ith higher US Treasury yields amid increasing confidence over stronger boost to US economic grow th following Biden administration’s US$1.9trn new fiscal rescue package, w hich led to increasing inflationary expectations. On the domestic front, BNM decided to leave its Overnight Policy Rate (OPR) unchanged at 1.75% in its March MPC meeting. In the domestic equity market, foreign investors remained net sellers for the tw enty-one consecutive month, but w ith a slightly smaller net outflow of RM0.1bn in March from RM0.9bn in February 2021.

Going forward, we believe the level of reserves will likely remain steady, bolstered by sustained trade and current account surplus supported by the country’s diversified exports. In February, Malaysia’s trade surplus w idened to RM17.9bn compared to RM16.6bn in January. The current account balance holds up but narrow ed to RM19bn in 4Q20 (5.1% of GNI) from RM26.1bn in 3Q20 (7.3% of GNI). We expect export growth to be supported by healthy demand for E&E products w hile the anticipated sustained recovery of China’s economy w ill support regional trade as well as demand for Malaysia’s exports. The country’s economic fundamentals are expected to remain stable w hich will lend support the country’s reserves level. We expect international reserves to hover around US$105bn level by end 2021 (US$107.6bn as at end-2020).

Source: Affin Hwang Research - 8 Apr 2021