Overview

• Up USD0.4b in November. Malaysia foreign reserves extended its uptrend, rising USD0.4b in November to reach USD101.9b. Its current position is sufficient to finance 7.5 months of retained imports and 1.1 times short term external debt. In ringgit term it grew by RM1.5b to RM430.4b.
• Support from exports and FDI. The expansion in reserves could have been driven by a steady repatriation of exports receipts and solid inflows of foreign direct investments (FDI) amidst signs of improving business sentiments.
• Capital market outflows wane. The capital market, specifically the equity market, experienced mild foreign outflow in November, with a net withdrawal of RM0.02b foreign funds in November (Oct: -RM0.2b).
• Risks of reserves erosion mounts. We expect some downward pressure on the ringgit stemming from the expected Fed rate hike in December. Geopolitical tensions and price volatility in commodities would further weigh on the ringgit. These factors reaffirm the underlying notion that there remain some risks of reserves erosion in the near term. Nonetheless, we maintain our year-end USDMYR target of 4.15.
• Monetary tightening expected in 2018. In view of the continuous improvements in Malaysia’s financial condition and growth outlook, we expect BNM to raise the overnight policy rate (OPR) by 25 basis points in the 1Q18.

Reserves up USD0.4b in November. Malaysia’s foreign exchange reserves continued its uptrend in November, rising by another USD0.4b to reach USD101.9b as at end-November. November marked its eleventh consecutive month of expansion with a net gain of nearly USD7.4b year-to-date. At this level, it is sufficient to finance 7.5 months of retained imports and is 1.1 times the short-term external debt.

Concurrent rise in ringgit value of reserves. The local currency equivalent of foreign reserves rose RM1.5b to RM430.4b as at end-November despite the depreciation of USD against the ringgit. This came as the rate of increase in USD term of the reserves (Nov: 0.4% MoM) outpaced the depreciation of the USDMYR pair (Nov: 0.078% MoM). The implied USDMYR rate at the end of November was around 4.2236 compared to 4.2269 in the preceding month. Year-to-date, the ringgit value of reserves after taking into account the effect of quarterly revaluation, has grown by about RM6.2b.

Sustained export receipts and net FDI flow. As in the preceding month, in the absence of net inflow of portfolio funds into the financial market, a steady repatriation of exports receipts and likely positive inflows of foreign direct investments (FDI) could be the main reasons driving the expansion in reserves. The exports extended its expansion in October with a robust growth of 18.9% YoY and 5.3% MoM. The recent PMI data also showed signs of improved business spending and investments, which may partly explain the RM6.2b net inflow of FDI as at the end of 3Q17 (2Q17: -RM7.1b).

Moderation in capital market outflows. The capital market saw a mild foreign funds outflow in November, with foreign investors pulling a relatively meagre RM0.02b out of the market in November (Oct: -RM0.2b). Notably, the pace of outflows has moderated for two consecutive months from its recent peak of RM0.7b in September.

But market to remain stable. Meanwhile, we anticipate stable foreign holdings of debt securities in November. This is based on the continuous strengthening of domestic economy lifting investor sentiments. Barring any unforeseen circumstances that may weigh down on investor risks appetite, we expect a relatively stable financial market to be supportive of the expansion in the foreign reserves going forward.

Mounting risk of reserves erosion. Despite the recent stellar performance of ringgit with the USDMYR pair hitting as low as 4.06, the ringgit may reverse its trend and turn weak on the back of the widely expected Fed rate hike in December. Furthermore, geopolitical tensions in North Korea and Middle East together with volatile commodity prices, mainly that of petroleum and palm oil, could present additional downside risk on the ringgit, at least in the short to medium term.

Maintain year-end USDMYR target. As the expected Fed rate hike would reignite short term capital outflow the risk of reserves erosion in the near term mounts. However, we expect Bank Negara to take a light-handed approach in managing ringgit in the absence of impending downside risks on the currency. Hence, we maintain our year-end USDMYR target of 4.15. In view of the continuous improvements in financial condition and growth outlook as well as possibly an effort to partially neutralise the impact of the Fed rate hike on the capital market, we believe Bank Negara would raise the OPR by 25 basis points in the 1Q18.

Source: Kenanga Research - 8 Dec 2017