Foreign reserves stops falling (for now). Malaysia’s foreign exchange reserves rose by US$0.6b in the 1H of September following a US$0.2b increase in the 2H of August. The combined increase is modest compared to the US$8.8b decline in reserves in the month of July but is an encouraging sign that the deterioration in reserves seen this year has probably halted. As at 15 September 2015, the international reserves held by Bank Negara Malaysia totalled US$95.3b (RM360.1b). The current reserves level is sufficient to finance 7.3 months of retained imports and is 1.1 times the short term external debt.

Letting market forces dictate. We read the small increase in reserves in the 1H of September, slightly larger than the increase in the 2H of August, as a further sign that BNM has eased off from intervening in foreign exchange markets and that the central bank is now more comfortable with letting market forces decide the value of the ringgit. Recent comments by the BNM governor are in support of a floating exchange rate. Tan Sri Zeti Akhtar Aziz has also assured the market that forex reserves will eventually be rebuilt as the country is running current account surpluses and continues to welcome foreign direct investment.

No go for capital controls. Foreign investors were relieved to hear that capital controls were not among the recommendations made by the Special Economic Committee. The Prime Minister further stated that capital controls were not under consideration. This together with a RM20.0b injection into the stock market through a revived ValueCap appears to have brought some activity into Malaysia’s capital markets. In the past and latest week the value of foreign funds buying into Bursa Malaysia-listed counters was observed to have increased. This translated into net foreign inflows for three out of four working days in the week ended 18 September.

Ringgit will remain weak in near term. There remains a risk that the depletion of reserves could resume in the coming months in anticipation of a US Federal Reserve rate hike before the end of the year. The lead up to the event will put pressure on the ringgit to again test the 4.40 level to the US dollar which it just missed by a whisker on September 10. The probability that the USDMYR would exceed 4.40 by end of December is 33.2% based on our calculation using the three-month ringgit non-deliverable forward contract. 

Source: Kenanga Research - 23 Sep 2015