OVERVIEW

● Bank Negara Malaysia (BNM) foreign international reserves gained for the third successive month, in spite of looming concerns over prospects of a waning global growth and trade conditions. It increased by USD0.6b or 0.6% MoM to USD103.0b as at March 29 (Feb: +USD0.2b), bringing its position to adequately finance 7.5 months of retained imports and is 1.0 time the short-term external debt.

● The month’s increase in foreign reserves was driven by a rise in foreign currency reserves, which increased by USD0.6b or 0.6% MoM (Feb: 0.3%) to USD97.1b partly reflected by a steady trade surplus and positive capital flow in 1Q19 compared to 4Q18.

● In Ringgit terms, the value of forex reserves declined by 0.7% MoM or RM3.1b, to RM420.2b as at end-March from RM423.3b in the preceding month. This is largely due to the impact of the quarterly revaluation exercise. The USDMYR was traded at an average of RM4.0770 versus RM4.0759 in February, depreciating marginally by 0.03% MoM (Jan: +1.0%), marking its first month of depreciation after a positive gain for three straight months. Similarly, the downward trend in currency against the USD was observed in other regional currencies led by the Thai Baht and Indonesia Rupiah as both depreciated by 1.3% MoM followed by Philippines Peso at 0.4%, suggesting that the demand for US assets remains high despite the dovish shift of the US Fed.

● In spite of ample foreign reserves, uncertainties arising from external factors continue to pose a downside risk to the domestic financial market and economic growth. On the trade war front, we stay cautiously optimistic as there seem to be signs of positive developments in the anticipated trade rapprochement between US and China. So far China has agreed to purchase large US agricultural products and cut tariffs on US-made car imports, as well as laid out new domestic laws and regulations to enhance market access and addressing intellectual property protection issues. Meanwhile, the growth slowdown in key export markets may hamper Malaysia’s domestic growth, particularly in the export-oriented sector. As growth momentum slows, the US Fed has turned dovish and the European Central Bank likely to extend its bond buying exercise. As a result, we expect the outflow of hot money from the emerging markets would likely be more stable and less.

● Though we maintain our view that BNM to hold the OPR steady at 3.25% in 2019, the shift in global monetary trend towards a more dovish stance may have tilt BNM’s policy bias towards easing. Its next meeting in May could be a turning point should there be heighten signs, both from domestic or external indicators, threatening the economy. Our ringgit outlook remained unchanged, maintaining the USDMYR year-end forecast at 4.10 as economic fundamentals would continue to buffer against expectations of slower global trade and the natural tendency for foreign funds to flee to safe-haven assets. Meanwhile, we are projecting GDP growth to slow in the 1Q19 at an estimated 4.4% from 4.7% registered in 4Q18 on the back of a slowdown in global trade as recent exports data signal slowing growth momentum.

Source: Kenanga Research - 8 Apr 2019