● Bank Negara Malaysia (BNM) international reserves declined for the third straight month, falling by USD0.2b or -0.1% MoM (Feb: -0.3%) to USD115.6b as of 31 March 2022

- Sufficient to finance 6.1 months of imports of goods and services (previously retained imports) and is 1.2 times total short-term external debt.

● A sharp decline in other reserve assets masked a rise in gold and foreign currency reserves

- Other reserve assets (-USD0.3b or -11.0% MoM to USD2.7b): slumped at the fastest pace in two years.

- Gold (+USD0.2b or 6.7% MoM to USD2.4b): largest holdings on record due to rising safe-haven buying amid increased geopolitical uncertainty.

- Foreign currency reserves (+USD0.1b or 0.1% MoM to USD103.1b): increased marginally after declining for two consecutive months, partly due to revaluation gains.

● In ringgit terms, the value of BNM reserves registered a positive flip, rising by RM3.6b or 0.7% MoM to RM485.8b

- USDMYR monthly average (4.199; Feb: 4.187): despite a near 20.0% surge in average Brent crude oil price, the ringgit depreciated by 0.3% against the USD as the overall market sentiment remained fragile in a volatile March amid worsening Russia-Ukraine crisis and resurgence of lockdown measures in China's major cities. However, the local note remained supported by Malaysia’s strong macroeconomic readings and positive economic outlook.

- Regional currencies: tracking the same path, most of the regional currencies also weakened against the USD, led by THB (-1.8%), followed by PHP (-1.5%) and SGD (-0.9%), mainly as the USD index climbed to an average of 98.5 in March (Feb: 96.0) amid rising safe-haven inflows. However, IDR bucked the trend and appreciated slightly by 0.02% due to Indonesia’s strong trade dynamics and optimism surrounding the reopening of the country’s borders.

● BNM is likely to stand pat on overnight policy rate (OPR) until the economic recovery becomes more entrenched

- Despite increased downside risks to both the global and domestic economy due to the Russia-Ukraine war and China’s zero-COVID-19 policy, the reopening of Malaysia’s international borders on April 1, coupled with BNM’s continued accommodative policy stance are seen to prop up economic growth in the 2H22. Hence, the BNM is only expected to raise the OPR after major economic indicators point to a sustainable recovery, probably in the 3Q22.

- USDMYR year-end forecast (4.10; 2021: 4.17): the local note may continue to trade under pressure in the next few months due to the volatile market environment brought about by the ongoing crisis in the Eastern Europe, China's stringent pandemic-control measures and the Fed increasing hawkishness. However, despite heightened uncertainty, we still retained our end-2022 USDMYR forecast at 4.10 as we are still cautiously bullish on the direction of the ringgit amid the country’s strong economic recovery outlook.

Source: Kenanga Research - 8 Apr 2022