Overview

• Rising for tenth month. Malaysia foreign reserves continue to expand for the tenth straight month. It inched up USD0.3b to USD101.5b in October, sufficient to finance 7.6 months of retained imports and 1.1 times short term external debt. The ringgit value of reserves rose RM1.2b to RM428.9b as ringgit turned weaker against the US dollar.
• On stronger exports and FDI. The inflows could have primarily be due to a large repatriation of exports earnings and net inflow of long term capital in spite of declines in portfolio capital flows in both equity and bond markets in October.
• Capital market faces selling pressure. Foreigners remained net seller in local equity market for three consecutive months in October, with a net withdrawal of RM0.2b foreign funds in October. Meanwhile, foreign holdings of debt securities fall by RM2.8b in October.
• Lingering threat of reserves erosion. We expect ringgit to face downward pressure as the FOMC December’s meeting looms nearer. As such, we reiterate our view that there is still some threat of reserves erosion in the near term, though we expect Bank Negara to take a light-handed approach in managing ringgit. For now, we expect the USDMYR to hit around 4.15 by the end of the year.
• OPR to stay put at 3.00%. In view of the stable financial and monetary conditions, we maintain our view for OPR to stay at 3.00% for the remainder of the year, though we see a slight tightening bias in 2018 in consideration of stronger economic prospects.

Up USD0.3b in October. Malaysia’s foreign exchange reserves extended its rising trend in October, rising by USD0.3b to reach a 28-month high of USD101.5b as at end-October. It has also been rising for the tenth consecutive months with a net gain of about USD7.0b year-to-date. The current reserves level is sufficient to finance 7.6 months of retained imports and is 1.1 times the short-term external debt.

Ringgit value of reserves rises. Concurrently, the local currency equivalent of foreign reserves increased by RM1.2b to RM428.9b as at endOctober. The slight depreciation of ringgit against the U.S. dollar in October has further boosted the reserves valued in ringgit. The USDMYR averaged around 4.23 in October compared to 4.21 in the prior month. Year-todate, the ringgit value of reserves has increased by around RM4.8b.

Strong export receipts and net FDI flow. The inflows could have primarily been due to larger repatriation of exports earnings and net inflow of long term capital in the form of foreign direct investments (FDI). Exports saw a strong growth of 22.1% YoY in the 3Q17 and a year-to-date (Jan-Sep) expansion of 21.3%. Given that the economy has been on the uptrend, business and investment sentiment could have improved resulting in a possible turnaround in net flow of FDI in October, following a decline in 2Q17 (-RM7.1b).

Outflows in the capital market. At the same time portfolio capital flows in both equity and bond markets experienced a decline in October. Foreigners stayed as net seller in local equity market for three consecutive months in October, pulling a relatively small amount of RM0.2b funds out of the market in October (Sept:- RM0.7b). Meanwhile, foreign holdings of debt securities fell RM2.8b in October. Nonetheless, the outflows are to be expected judging by the fickle nature of short term portfolio investors, Hence, we expect a relatively more stable financial market going forward and to be conducive for the continued expansion in the foreign reserves, as Malaysia is poised to register stronger-than-expected economic growth for the year and to improve further next year.

Threat of reserves erosion to remain. Despite the Fed’s hawkish tone in its November FOMC statement and rising expectations of another Fed rate hike in December, the ringgit has stayed resilient with the USDMYR pair hovering within a tight range of 4.22-4.24 for the past few days following the FOMC meeting. However, we expect ringgit to face additional depreciation pressures as the FOMC’s final meeting in December looms nearer. Furthermore, geopolitical tensions in North Korea serve as additional downside risk on the ringgit, at least for the medium term.

As such, we reiterate our view that there is still some threat of reserves erosion in the near term, though we expect Bank Negara to take a light-handed approach in managing ringgit in the absence of imminent downside risks on the currency. While we expect the ringgit trend to be volatile and trading in a range between 4.20-4.30 in the short term we maintain our year-end target of 4.15 by the end of the year. In view of the relatively stable financial and monetary conditions, we maintain our view for OPR to stay at 3.00% for the remainder of the year, though we see a slight tightening bias in 2018 in consideration of stronger economic prospects.

Source: Kenanga Research - 8 Nov 2017