OVERVIEW

• Market correction affects reserves gain in February. Following an equity market correction in February the net gain of Malaysia’s foreign reserves fell sharply to just USD58.4m from USD1.2b in January.
• Foreign equity outflow weigh in on reserves. The capital market saw a large foreign fund outflows of RM1.1b in February (Jan: +RM3.4b).
• Slower exports’ receipts to lower reserves. We expect a moderation in export growth to lead to a lower repatriation of export earnings and thus reserves.
• Bond yield spread widens. BNM’s January decision to raise interest rates by 25 basis points has widened the yield gap between local and Treasury bonds, thereby minimizing the impact of likely outflows of capital in the financial market.

Reserves gain sharply lower in February. Malaysia’s foreign reserves inched higher by USD58.4m in February to USD103.7b, marking its fourteenth consecutive month of expansion. However, it was sharply smaller compared to USD1.2b rise in January primarily due to the major correction in the financial market. The reserve position remains sufficient to finance 7.2 months of retained imports and is 1.1 times the short-term external debt.

Ringgit value of reserves falls. The local currency equivalent of foreign reserves fell by RM0.13b to RM419.5b as at end-February mainly due to the appreciation of the Ringgit against the USD during the month. The average USDMYR rate at the end of February was around 3.9129 compared to 3.9561 in January.

Foreign equity outflow weigh in on reserves. February’s capital market saw a large outflow of foreign fund outflows of RM1.1b in February (Jan: +RM3.4b). The outflow of foreign funds from the local stock market was due to concerns of a more hawkish Fed, leading foreign investors to sell stocks on Bursa and head towards safe haven assets. However, moving into 2018, we expect the growth and earnings prospects of local listed companies to revive interest in the domestic debt and equity markets. Despite the uninspiring 4Q17 results reporting season, we raised our FY18E/FY19E earnings growth estimates for FBMKLCI to +7.4%/+6.0% (from -0.2%/+3.4% previously) due mainly to earnings upgrades in banking sector and some minor tweaks across various sectors.

Moderating exports growth to weigh on reserves. The gain in reserves was also reflective of the sustained growth in exports at the beginning of the year. However, moving forward, we expect a moderation in export growth. We therefore foresee lower repatriation of export earnings to contribute less to reserves.

Bond yield spread begins to widen, supporting BNM’s decision at its Monetary Policy Committee meeting yesterday to retain the Overnight Policy Rate (OPR) at 3.25%. The central bank’s January decision to raise the OPR by 25 basis points has widened the yield gap between the US Treasury 10-year yield and the local 10-year MGS bond yield to a favorable level. The current yield gap remains at a favorable level of 113 basis points (as at the week ending 2nd March 2018), favoring MGS. On the back of the widening yield gap, we do not expect significant risk from the heightened concerns of US Fed rate hike’s pace to the level of Malaysia’s foreign reserves.

Erosion expected in March. While we expect foreign funds to return to the local equity market further moving into 2018, we see the ongoing concern on the Fed rate hikes and the lackluster momentum of the local equities market to withdraw foreign funds from the domestic market in the months ahead.. Based on the current financial market performance we may see a mild erosion in the March’s reserves level.

Source: Kenanga Research - 8 Mar 2018