OVERVIEW

● Forex reserves surprisingly retained an uptrend for the fourth successive month, in spite of the elevated concerns over the on-going US-China trade war, prospects of a waning global growth and of being removed from a global bond index. Bank Negara Malaysia (BNM) international reserves rose by USD0.4b or 0.4% MoM to an 8-month high of USD103.4b as at April 30, after it increased by USD0.6b in March. April’s reserves position is adequate to finance 7.4 months of retained imports and is 1.0 time the short-term external debt.

● The increase in foreign reserves was equally driven by a rise in foreign currency reserves and IMF reserve position. In particular, foreign currency reserves edged up by USD0.2b or 0.2% MoM (Mar: 0.6%) to USD97.3b in April, in part reflecting widening trade surplus, while the IMF reserve position marked its first increase in 11 months, rising by USD0.2b or 22.2% MoM to USD1.1b.

● In Ringgit terms, the value of forex reserves rose by 0.4% MoM or RM1.7b, to RM421.9b as at end-April from RM420.2b previously. In April, the USDMYR was traded at an average of RM4.11 versus RM4.08 in the preceding month, weakening by 0.9% MoM (Mar: -0.1%), charting its second month of depreciation. This is primarily due to the bond index provider, FTSE Russell’s announcement on potential exclusion of Malaysian debt from the FTSE World Government Bond Index following its inaugural fixed income country classification review, placing Malaysian debt under a watch list for a 6-month period, with another cycle of review slated in September 2019. The performance of other regional currencies were mixed, suggesting the play out of domestic factors, with Thai Baht depreciating by 0.4% on political gridlock following its first general election since the 2014 military coup. In contrast, the Indonesian Rupiah strengthened by 0.6% as President Jokowi won his second term in the recent general election.

● Despite ample foreign reserves, uncertainties arising from external factors continue to exert risk to domestic financial market and economic growth. On the trade war front, uncertainty with regards to the final outcome of the negotiation has been amplified by Trump’s threat to hike tariffs on USD200b of Chinese goods to 25% from the current level of 10%. Slowdown in key export markets, including in China, the US and eurozone, in spite of an aggressive fiscal stimulus, may weigh on Malaysia’s domestic activity. As the US Federal Reserve and the European Central Bank adopt a more dovish stance this year, with larger monetary injections and fewer or no rate hike expected, outflow of hot money would likely wither but continue in dribs and drabs amidst prolonged uncertainty.

● In line with expectations, BNM has slashed the OPR by 25 basis points to 3.00% at its Monetary Policy Committee meeting yesterday, citing the goal of preserving the degree of policy accommodativeness against the global backdrop of moderating underlying economic conditions. For the rest of the year, we foresee the OPR to remain at 3.00%, amid subdued inflation. On the ringgit outlook, we maintain our USDMYR year-end forecast at 4.10 as economic fundamentals remain strong, weathering the prospects of softer economic growth and the natural tendency for foreign funds to flee to safe-haven assets.

Source: Kenanga Research - 8 May 2019