OVERVIEW

● Bank Negara Malaysia (BNM) foreign international reserves increased by USD0.3b or 0.3% MoM to USD102.0b as at November 30 from USD101.7b a month before, after declining for the past 6 straight months, since the unprecedented 14th general election result in May while trade war concerns and the US Fed interest rate hike continued to exert pressure on the Ringgit. According to its official release, the month’s reserves position remains adequate to finance 7.5 months of retained imports and is 1.0 time the short-term external debt.

● On a similar direction, Ringgit value of reserves rose by 0.3% MoM or RM1.4b to RM422.8b from RM421.5b in October. In November, the Ringgit was traded at an average of RM4.1867 against the USD, losing 0.7% MoM (Oct: -0.5%), its seventh consecutive month of decline. Year to date, the Ringgit has depreciated by 3.0% against the USD while other Asian currencies, such as Indonesian Rupiah, Philippines Peso, Thailand Baht and Singapore Dollar depreciated by 6.3%, 5.6%, 0.8% and 2.5% respectively.

● The month's larger foreign reserves were mainly attributable to an increase in foreign currency reserves. It registered a positive turnaround, growing by USD0.3b or 0.3% MoM (Oct: -1.3%) to USD96.3b in November. Apart from a large repatriation of exports’ earnings, it could also be due to a large inflow of FDI related to investment in RAPID.

● Despite ample foreign reserves, uncertainties emanating from external factors could weigh on domestic growth in the short to medium term. This includes the ongoing monetary policy tightening by the US Fed. A rate hike for December is still in the works, as indicated in the FOMC meeting minutes, although the pace is expected to be slower for next year, as signalled by key Fed officials, including its Chairman Jerome Powell. With regards to trade war, uncertainties are likely to persist despite the announcement of 90-day new tariff halt by President Trump, as investors await further concrete resolutions to be put forward. Against this backdrop, we expect continued outflow of hot money and the threat of further depreciation of the Ringgit. Nevertheless, this will unlikely prompt BNM to raise OPR, as domestic indicators are pointing towards growth moderation, among others, the latest manufacturing PMI dipped fastest in 6 months, while consumer price index only inched up marginally by 0.6% YoY in October, amid muted impact from the imposition of Sales & Services Tax.

● As domestic economic growth is expected to taper off and inflation is expected to remain subdued, we believe BNM will hold the OPR unchanged at 3.25% till year end and potentially next year, in ensuring price stability and to remain supportive of growth. With this in mind, coupled with on-going trade tensions and prospect of strong USD bias at the external front, we maintain our USDMYR end of year forecast at RM4.15 (end-2017: 4.05).

Source: Kenanga Research - 10 Dec 2018