● Bank Negara Malaysia (BNM) international reserves fell by USD0.5b or 0.5% MoM to USD103.0b as at September 30, its second straight month of decline. According to BNM, the reserves position is sufficient to finance 7.6 months of retained imports and is 1.1 times the total short-term external debt. The reserves level also has taken into account the quarterly adjustment for foreign exchange revaluation changes.

● The decline in foreign reserves was due to a drop in foreign currency (FX) reserves, IMF reserve position, and other reserve assets. FX reserves declined by USD0.4b or 0.4% MoM (Aug: -0.6%) to USD96.7b in September, suggesting smaller repatriation of export earnings which was offset by a large portfolio capital outflows compared to the preceding month. Similarly, the IMF reserve position and other reserve assets fell by 8.3% and 4.3% MoM respectively. Bucking the trend, gold assets increased by USD0.1b or 5.6% MoM to USD1.9b.

● In Ringgit terms, the value of FX reserves increased by 0.6% MoM or RM2.6b to RM431.3b as at endSeptember (Aug: RM428.7b). In September, the USDMYR was traded at an average of RM4.1819 versus RM4.1865 in the preceding month, appreciating a mere 0.1% MoM (Aug: -1.5%). Other regional currencies performed better in September, led by the Indonesian Rupiah (+0.9%), followed by Thai Baht (+0.6%) and Singapore Dollar (+0.4%). The gains in Asian currencies against the US Dollar during the month was spurred by positive developments in the US-China trade talks as both countries agreed to resume high-level talks in Washington in October. However, the Ringgit remained under pressure. Against the USD it depreciated 1.2% and 0.9% YTD and YoY respectively.● Despite ample FX reserves, uncertainties arising from external factors continue to exert risk to domestic financial market and economic growth. This is largely due to growth slowdown in major key markets including China and the EU and rising trade protectionism triggered by the US-China trade war

● Overall, we maintain our view that BNM may still have scope to cut the overnight policy rate by another 25 basis points to 2.75% at its last Monetary Policy Committee meeting in November this year. This is premised upon the prospect of softer economic growth going forward, relatively subdued and controlled inflation steered by government policy measures, and the ongoing easing cycle by major and regional central banks, giving more wiggle room for BNM’s policy decision. On the Ringgit outlook, we maintain our USDMYR year-end forecast of 4.20 (2018: RM4.13), amid continued portfolio capital outflow, a weaker oil price (average Brent price 2019: USD64.6/barrel vs USD71.6/barrel in 2018), the negative impact of prolonged and protracted trade dispute between the US and China. The prospect of PBoC allowing further weakening of its currency to shore up the flagging economy would add to the Ringgit volatility and downside bias in the near term.

Source: Kenanga Research - 8 Oct 2019