Kenanga Research & Investment

BNM International Reserves - Fell to Its Lowest Level in Six Months in May Due to Further Depletion of FX Reserves

Publish date: Fri, 09 Jun 2023, 09:14 AM

● Bank Negara Malaysia (BNM) international reserves slipped to a six-month low, declining by USD1.7b or 1.5% to USD112.7b as of 31 May 2023

- Sufficient to finance 4.8 months of imports of goods and services (previously retained imports) and is 1.0 time total short-term external debt.

● The decline can be attributed primarily to a continuous reduction in foreign currency reserves

- Foreign currency reserves (-USD1.6b or -1.6% MoM to USD100.3b): the biggest monthly decline since June 2022, potentially due to the BNM foreign exchange intervention operations to support the ringgit.

- Other reserve assets (-USD0.1b or -2.9% MoM to USD2.7b): fell the sharpest in eight months.

- IMF reserve position (-USD0.1b or -3.5% MoM to USD1.4b): dipped to its lowest position in six months.

- Meanwhile, gold and special drawing rights remained fairly unchanged.

● In ringgit terms, BNM reserves dipped below RM500b (-RM8.2b or -1.6% MoM to RM496.8b), a seven-month low

- USDMYR monthly average (4.516; Mar: 4.424): despite BNM's surprise 25 basis points (bps) policy rate hike and US consensus-matching CPI readings, the ringgit weakened above the 4.50 threshold on average against the USD. This decline was primarily driven by a resurgence of risk aversion triggered by the US debt ceiling crisis, solid US economic data and hawkish remarks from several Fed officials. The local note was also further pressured by the depreciation of the yuan amid weaker-than-expected China's macroeconomic indicators.

- Regional currencies: tracking the same path as the ringgit (-2.0%) but less severe, PHP (-0.8%) and SGD (-0.6%) fell against the greenback as the USD index surged to an average of 102.8 in May (Apr: 101.8) due to increasing bets of another 25 bps rate hike by the Fed in June and a prevailing risk-off sentiment. Bucking the weak emerging currencies trend, IDR (0.3%) and THB (0.04%) managed to appreciate against the USD.

● BNM to maintain status quo on policy rate for the rest of 2023 as inflation rates are expected to decelerate

- As core and headline inflations are expected to trend lower in the coming months, it is likely that the BNM will opt to keep the overnight policy rate (OPR) at 3.00% until at least the end of 2023. We believe that maintaining this level of OPR strikes an appropriate balance between promoting growth and managing inflation.

- USDMYR year-end forecast (4.11; 2022: 4.40): although the ringgit may continue to trade above the 4.60 level in the coming days, we maintain a neutral-to-bullish outlook for the local note in 2H23. The ringgit is poised to benefit from the potential appreciation of the yuan as China's recovery is expected to gain traction going forward. This, coupled with Malaysia's relatively stable political landscape and solid economic outlook, is expected to provide support for the ringgit. Moreover, as US economic growth decelerates, there may be a decline in the demand for USD, which would benefit the local note. However, any upside surprise in US inflation readings may change this narrative.

Source: Kenanga Research - 9 Jun 2023

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