BNM maintains rigorous surveillance on markets

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KUCHING: Bank Negara Malaysia (BNM) is unlikely to implement short-term capital control measures except through intervention in the foreign exchange market to manage the currency appreciation.

According to RHB Research Institute Sdn Bhd’s (RHB Research) research report, the BNM governor, Tan Sri Dr Zeti Akhtar Aziz said on November 18 that Malaysia was not considering restricting capital inflows but would maintain rigorous surveillance to ensure the markets were not overwhelmed.

To recap, foreign exchange reserves rose by a smaller magnitude of RM1.5 billion in the first half (1H) of November to RM326.5 billion as at November 15, compared with plus RM2.2 billion in the second half (2H) of October.

The research firm said that this was due to the repatriation of export proceeds and inflow of foreign portfolio funds, which were offset partially by the payment of import bills. As it stands, foreign portfolio investment in fixed income papers rose sharply by RM9.6 billion in September, compared with plus RM3.4 billion in August and plus RM5.9 billion in July.

As a result, their holdings in fixed income instruments rose to RM115 billion at end-September, from RM105.5 billion at end-August and the amount was almost approaching the previous peak of RM126.5 billion recorded in April 2008.

Year-to-date (YTD), the foreign exchange reserves rose by US$9.1 billion, compared with an increase of US$4.7 billion in the corresponding period of 2009. In ringgit terms, the reserves fell by RM4.9 billion YTD, compared with an increase of RM17.9 billion in the corresponding period of 2009, due partly to the exchange revaluation loss as a result of the appreciation of the ringgit against the major currencies.

At the current level, the foreign exchange reserves were sufficient to finance 8.8 months of retained imports and cover 4.5 times the short-term external debt of the nation, compared with a high of 10 months of retained imports and 4.3 times of short-term external debt cover as at end-February.

Despite the increase in the foreign exchange reserves, the ringgit had weakened slightly in recent weeks. It fell by 1.2 per cent against the US dollar between October 14 and November 18, after appreciating by 5.5 per cent between June 18 and October 14.

The reversal came about on the back of a strengthening US dollar, partly because the US dollar had overshot on the downside and as investors covered their short positions in the US dollar after the Fed announced its initatives quantitative easing on November 3.

RHB Research highlighted that the strengthening of the US dollar was further supported by a weakening euro, as concerns over the contagion arising from sovereign debt problem in Ireland and Portugal came back to haunt investors.

As a result, the euro depreciated by three per cent between October 14 and November 18, after appreciating by 13.7 per cent between June 18 and October 15, while the yen weakened by 2.3 per cent, after a gain of plus 11.7 per cent during the same period.

Similar movement also occurred in other regional currencies such as the baht, peso, rupiah, rupee and won. YTD, the ringgit had appreciated by 9.7 per cent against the US dollar, the third strongest gain afterthe Japanese yen and Thai baht.

Going forward, the research firm expected the ringgit to remain volatile and would likely to fluctuate at around RM3.10 to RM3.20 per US dollar over the next three to six months, as the ‘hot money’ could come and go at anytime.

Furthemore, it expected the ringgit to trade at RM3.00 to RM3.10 per US dollar in the latter part of 2011, on the back of a weakening US dollar, a sustained surplus in the country’s current account of the balance of payments and interest rate differential in favour of Malaysia versus the US.

Meanwhile, the amount of excess liquidity (including repos) mopped up by the central bank rose to anestimate of RM238.1 billion in mid-November, from RM230.3 billion at end-October 2010 and compared with RM223.3 billion at end-2009.

This was reflected in a pick-up in liquidity mopped up by the central bank through interbank borrowings, which rose to RM116.2 billion in mid-November, from RM107.4 billion at end-October 2010 and RM168.3 billion at end-2009.

Similarly, liquidity mopped up by the central bank through the issuance of BNM bills increased to RM102.6 billion in mid-November, from RM102.2 billion at end-October 2010 and RM33.4 billion at end-2009.

These were, however, offset partially by a drop in the repurchase agreements (repos) to an estimated of RM19.4 billion in mid-November, from RM20.6 billion at end-October 2010 and compared with RM21.6 billion at end-2009.

Excluding the repos, the amount of excess liquidity mopped up by the central bank rose to an estimate of RM218.7 billion in mid-November, from RM209.6 billion at end-October 2010 and compared with RM201.7 billion at end-2009.