OVERVIEW

● Bank Negara Malaysia (BNM) foreign international reserves fell by USD1.4b or 1.3% MoM to USD103.0b as at September 28 from USD104.4b a month before. It was the fifth straight-month of decline. The month’s reserves position is sufficient to finance 7.4 months of retained imports and is 0.9 time the short-term external debt.

● According to BNM, the reserves level has taken into account the quarterly adjustment for foreign exchange revaluation changes following the strengthening of the US dollar against various foreign currency reserve assets held by BNM. In a statement BNM indicated that shortterm external debt which are held by banking institutions (accounting for 69.3% of short-term external debt), are manageable. BNM said it also reflects the centralisation of liquidity management of Malaysian banks operating in the region and the sizeable presence of foreign banks in Malaysia, holding substantial external assets (RM293.0b), which can be drawn upon to meet their external obligations without creating a claim on BNM’s international reserves.

● The month's declined in BNM reserves was largely attributable to a fall in foreign currency reserves by USD1.2b or -1.2% MoM (August: +0.3%). Additionally, special drawing rights (SDRs) declined by 8.3% MoM to USD1.1b while other reserve assets declined by 4.3% MoM (August: -14.8%) to USD2.2b in September.

● In Ringgit terms, the forex reserves expanded marginally by 1.1% MoM or RM4.5b to RM427.0b from RM422.5b in August. On average, the Ringgit was traded at RM4.1396 against USD in September, losing 1.2% MoM (August: - 1.0%). So far, the Ringgit remains relatively unscathed amid EM currencies’ rout triggered by the Turkish Lira crisis and the highly anticipated US Fed interest rate hike on 26 September by 25 basis points to 2.25%. Year to date, the Ringgit has fallen by 2.3% against USD while other Asian currencies like Indonesian Rupiah, Philippines Peso and Singapore Dollar fell by 10.6%, 8.2% and 3.4% respectively.

● Subsequently, we expect the continued outflow of hot money and the threat of further depreciation of the Ringgit as US dollar continue to strengthen following another US Fed interest hike by year end would not prompt BNM to raise interest rates like some of its EM counterparts. We believe BNM’s perennial concern would still be to maintain growth and price stability. Hence, it is likely that BNM would retain its overnight policy rate at 3.25% for the year. On improving sentiment and economic fundamentals we maintain our USDMYR end of period forecast of RM4.05.

Source: Kenanga Research - 8 Oct 2018