Decrease of US$25.8m in April. Malaysia’s foreign exchange reserves decreased slightly in April after six consecutive months of moderate increases. As at end- April 2016, reserves held by Bank Negara Malaysia totalled approximately US$97.0b. This number is almost unchanged from end-March and compares to a RM1.4b increase between end-February and end-March. The current reserves level is sufficient to finance 7.9 months of retained imports and is 1.1 times the short-term external debt.  

A long way from the US$100.0b mark. In total, the US$3.7b increase in reserves over the past seven months is small compared to the US$13.0b decline in June-September 2015. International reserves remain well below the end-2014 total of US$115.9b and the US$100.0b psychological level but they are gradually rising.  

Ringgit value of reserves stable. The local currency equivalent of foreign reserves fell by RM250.9m to RM381.4b. Overall this is a small decrease compared to the decline of RM28.9b in March, which was mostly due to foreign currency revaluation changes that happen at the end of every quarter.  

Slow recovery. Foreign reserves have stabilised following a period of sharp decline in reserves caused by short-term capital outflows and BNM intervention in foreign exchange markets to support the ringgit. The deterioration in reserves was most severe in July last year, when the ringgit faced immense downward pressure. In September the deterioration in reserves began to show a slowing rate of decline followed by a small gain in October-November. From the current level, reserves should continue to increase from more stable financial markets and BNM taking a light-handed approach in foreign exchange management. However, the recent increases have been slight and insufficient to make up for reserves lost during June- September 2015.  

Steady capital inflows. The capital market saw foreign funds turning net sellers of Malaysian equities with a total net outflow of RM0.4b in April. This is a change from 1Q16, when foreign funds were net buyers to the tune of about RM5.5b. Looking forward, we expect a steady repatriation of export earnings and foreign direct investments to contribute to the rise in reserves although the current account balance is expected to narrow to 1.9% of GNI in 2016 from 3.0% of GNI in 2015. Overall, the reserves position of the country is sufficient to maintain the stability of the financial system. However, there is still some threat of reserves erosion later this year given the expectation of at least two more rate hikes by the US Federal Reserve.  

Source: Kenanga Research - 9 May 2016