OVERVIEW

● Bank Negara Malaysia’s foreign international reserves fell for the second straight month by a marginal USD0.1b or 0.1% MoM to USD104.4b as at August 30. The month’s reserves position remains adequate to finance 7.5 months of retained imports and is 0.9 time the short-term external debt. Latest data from BNM showed that the level of forex reserves remained relatively healthy despite escalation of US-China trade tension and emerging market (EM) currencies’ rout.

● The month's declined in foreign reserves was largely attributable to fall in other reserve assets. It declined by 14.8% MoM (July: -3.6%) to USD2.3b in August. Meanwhile, foreign currency reserves rebounded by 0.3% MoM (July: -0.1%) to USD98.5b.

● In Ringgit terms, the forex reserves fell marginally by 0.1% MoM or RM33.0m to RM422.5b from RM422.8b in July. On average, the Ringgit was traded at RM4.0469 against USD in August, losing 1.1% MoM (July: -1.3%), its third straight month of decline. So far, the Ringgit remains relatively unscathed amid EM currency rout triggered by the Turkish Lira crisis. Year to date, the Ringgit has fallen by just 2.2% against USD while other EM currencies mainly the Turkish Lira, Argentinian Peso and Indonesian Rupiah fell sharply by 43.4%, 50.7% and 9.4% respectively.

● Portfolio equity outflows slowed in August. Net foreign equity outflow slowed to a marginal -RM0.1b in August compared to -RM1.7b in July. We expect the foreign equity outflow to continue for the rest of the year but to be slower than the 1H18. This is because we expect investor sentiment to improve on the expectation that policy direction would be clearer, and the new government under the Pakatan Harapan would table its first 2019 Federal Budget on 2 November.

● Additionally, we expect the bond market to improve in the 2H18 as the dust settles and the business of running the new government gradually stabilise after the unprecedented GE14 result. The average yield spread between the benchmark 10-year US Treasury and the 10-year Malaysian Government Securities widened to 117 basis points (bps) in August from 122 bps in July. The average yield of 10-year US Treasury in August was similar to July’s 2.87%.

● We expect the continued outflow of hot money and the threat of further depreciation of the Ringgit would not tempt BNM to raise interest rates like some of its EM counterparts. This is mainly because we believe BNM’s perennial concern would still be to maintain growth and price stability as it emphasised in its latest Monetary Policy Committee statement. This was the basis for its decision to maintain its overnight policy rate at 3.25%. On improving sentiment and economic fundamentals we maintain our USDMYR forecast of RM4.05 for this year.

Source: Kenanga Research - 7 Sept 2018