• The international reserves of Bank Negara Malaysia (BNM) rose by US$1.5bn to US$110.8bn in the two weeks ending 30 April 2021 (US$109.3bn as at 15 April 2021).
• The current level of reserves is sufficient to cover 8.7 months of retained imports (8.8 months in March).
• 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 8.7 Months of Retained Imports

The international reserves of Bank Negara Malaysia (BNM) rose by US$1.5bn to US$110.8bn in the two weeks ending 30st April 2021 (US$109.3bn as at 15 April). When compared on a monthly basis, the reserves position rose by US$2.2bn to US$110.8bn (US$108.6bn as at end-March 2021). In Ringgit terms, reserves rose by RM6bn to RM459.7bn in the second half of April, compared to RM453.7bn as at 15th April. The current level of reserves is sufficient to cover 8.7 months of retained imports (8.8 months in March). The reserve coverage of short-term external debt was higher at 1.3 times (1.2 times as at end-March).

Even though the April data for holdings of Malaysian bills and bonds has not been released yet, we believe that the level of reserves trended higher partly due to the net foreign inflow into the country’s domestic bond market during the month, reflected by higher foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issue (GII). The higher inflow may have been reflected in MGS yields, where in April, the 10-year MGS yield fell by 13bps to 3.1%, possibly amidst the recent strengthening of the Ringgit against the US Dollar. On the domestic front, BNM decided to leave its Overnight Policy Rate (OPR) unchanged at 1.75%, noting that latest macro indicators point to continued improvements in economic activity, which reflected the strengthening global economic recovery. In the domestic equity market, foreign investors remained net sellers for the twenty-two consecutive month with net outflow of RM1.1bn in April from RM0.03bn in March 2021. Year-to-date, net outflows from the equity market totalled RM2.8bn (net outflow of RM10.3bn in Jan-Apr 2020).

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. On a cumulative basis, trade surplus balance remained sizeable at RM58.6bn in 1Q21, compared to RM37bn in the corresponding period of 2020 (RM59.9bn in 4Q20). In the months ahead, we believe the country’s exports will remain in positive growth, due to low base effect as well as sustained healthy demand for Malaysia’s E&E products. As China remains one of Malaysia’s main export partner accounting for 15.3% of total exports, the strong demand will support Malaysia’s exports, together with healthy global semiconductor sales. With the country’s economic fundamental remaining stable, supported by current account surplus, we expect the international reserves to hover around US$105bn level by end 2021 (US$107.6bn as at end-2020).

Source: Affin Hwang Research - 7 May 2021