OVERVIEW

● Bank Negara Malaysia (BNM) foreign international reserves fell by USD1.1b or 1.1% MoM to a 3-month low of USD102.3b as at May 31 from USD103.4b a month before. According to BNM, the reserves position is sufficient to finance 7.3 months of retained imports and is 1.1 time the short-term external debt. The month’s decline in forex reserves was the first this year after rising for four consecutive months since January.

● The decline in foreign reserves was mainly attributable to a fall in foreign currency reserves and other reserve assets. Specifically, foreign currency reserves fell by 1.0% MoM (Apr: +0.2%) to USD96.3b in May, while other reserve assets dropped sharply by 4.3% MoM to USD2.2b.

● In Ringgit terms, the value of forex reserves fell by 1.1% MoM or -RM4.5b, to RM417.4b as at end-May from RM421.9b in the preceding month, its lowest since May 2018. On average, the USDMYR was traded at RM4.17 in May versus RM4.11 in the previous month, weakening as much as 1.3% MoM (Apr: -0.9%), charting its third month of depreciation. The continued depreciation in Ringgit could be attributable to the US-China trade war escalation as well as another knock-on effect following US Treasury’s decision to include Malaysia in the Monitoring List of Potential Currency Manipulator. Earlier, investors were shaken by FTSE Russell’s announcement on the potential exclusion of Malaysian debt from the FTSE World Government Bond Index. BNM’s decision to cut the OPR by 25 basis point could have further exacerbated investors concern. The performance of other regional currencies were mixed with the Thai Baht bucking the trend or up by 0.2% MoM outperforming other regional peers while the Indonesian Rupiah was among the worst performer or down by 1.7% MoM in May.

● Uncertainties arising from external factors continue to exert risk to the domestic financial market and economic growth. On the trade war front, the US has raised tariffs to 25.0% from 10.0% on USD200.0b of Chinese goods on May 10, with President Trump vowing to impose tariffs on the remaining USD300.0b untaxed imports from China. So far total US tariffs applied exclusively to Chinese goods has increased to USD250.0b. Meanwhile, the growth slowdown in major economies including the US, China, and Eurozone is expected to weigh on domestic activity. Nonetheless, the dovish stance by the US Fed and European Central Bank may put a damper on the outflow of hot money from the domestic market. However, we reckon capital outflows would continue in dribs and drabs on the back of lingering uncertainties in the global economy and financial market.

● For the rest of the year, we foresee the Overnight Policy Rate to remain at 3.00% amid subdued inflation associated with the impact of policy measures, though there is still room to cut the OPR in anticipation of further deterioration on the domestic economy. On the Ringgit outlook, we maintain our USDMYR year-end forecast of 4.10 on the back of relatively sound economic fundamentals despite heightened economic risk and uncertainty. An increasingly dovish US Fed and elevated crude oil price may also provide some support to the Ringgit.

Source: Kenanga Research - 12 Jun 2019