OVERVIEW

● Bank Negara Malaysia (BNM) foreign international reserves fell by USD1.3b or 1.3% MoM to USD101.7b as at October 31 from USD103.0b a month before. It was the sixth straight-month of decline since the unprecedented 14th general election result in May while trade war jitters and the US Fed interest rate hike continue to exert pressure on the Ringgit. According to its official release, the month’s reserves position is sufficient to finance 7.5 months of retained imports and is 0.9 time the short-term external debt.

● In Ringgit terms, the forex reserves declined sharply by 1.3% MoM or RM5.5b to RM421.5b from RM427.0b in September. On average, the USDMYR was traded at RM4.1584 in September, losing 0.5% MoM (Sept: - 1.2%). Year-to-date, the Ringgit has fallen by 2.8% against USD while other Asian currencies like Indonesian Rupiah, Philippines Peso and Singapore Dollar fell by 8.3%, 6.0% and 2.8% respectively.

● Although the current level of foreign reserves remains healthy, rising uncertainty from external factors could weigh on domestic growth in the following months. This includes the highly anticipated US Fed decision to increase its interest rate in December, three more next year and one increase in 2020, following a resilient domestic economy and tight labour market in the US. Consequently, we expect the continued outflow of hot money and the threat of further depreciation of the Ringgit as US dollar continue to strengthen would not prompt BNM to raise interest rates like some of its EM counterparts, namely Indonesia and the Philippines. In fact, the domestic inflation remains subdued as the latest Consumer Price Index only marginally up by 0.3% YoY in September, in spite of the imposition of Sales & Services tax takes into effect in the same month.

● To maintain growth and price stability would remain BNM’s principal concern as domestic economic growth is expected to taper by year end. Hence, we expect BNM would retain its overnight policy rate at 3.25% in its Monetary Policy Committee meeting today. On a different note, we have revised our USDMYR end of year forecast to RM4.15 from earlier projection of RM4.05 due to uncertainty in the global economy and the prospect of a stronger USD. In the past week the USDMYR is trading within 4.16-4.18.

Source: Kenanga Research - 8 Nov 2018