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BNM’s reserves manageable despite macro volatility, uncertainties

KUCHING: Despite uncertainties in US’ market which could impact the overall global market trend, analysts sees minimal downside risk to Malaysia’s reserves and fund flows for at least in the near term.

In its economic viewpoint report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) said: “While we expect outflow of foreign funds and some downward pressure on the ringgit in the short term, we see the fundamentals supporting the local economy to continue attracting foreign funds in the medium.”

It noted that the recent US equity market rout which stemmed from worries over more aggressive rate hikes by the US Federal Reserves, has dimmed the outlook for the pace and frequency of the Fed rate hikes.

As news flows indicate, Kenanga Research believe that the market appears to be reverting to the original three rate hikes narrative for the year.

“As indicators point to lesser, if not delayed interest rate hike, we see minimal downside risk to the local reserves and fund flows for at least in the first quarter of 2018 (1Q18).

“Nonetheless, we remain cautious that Fed may proceed with the three rate hikes after 1Q18 once market stabilises and growth indicators point north,” it opined.

It noted that Malaysia’s foreign exchange reserves continued its uptrend in January, rising by another US$1.3 billion to reach US$103.7 billion as at end-January, marking its thirteenth consecutive month of expansion.

“At this level, it is sufficient to finance 7.2 months of retained imports and is 1.1 times the short-term external debt,” it highlighted.

According to Kenanga Research, the expansion in reserves also continued to reflect sustained net inflow of portfolio funds into the financial market following steady repatriation of exports receipts and sustainable inflows of foreign direct investments (FDI).

As for the movement of the ringgit, the research team noted that the ringgit value of reserves rose in spite of appreciation.

It explained, “The local currency equivalent of foreign reserves rose RM5.1 billion to RM419.7 billion as at end-January despite an appreciation of ringgit against the US dollar. The average US dollar to ringgit rate at the end of January was around 3.9561 compared to 4.0077 in the preceding month.”

The research team expect the ringgit to remain volatile with the US dollar-ringgit pair to hover between 3.80 to 4.00 in the short term on the back of uncertainty in commodity prices and event risks such as the US-North Korean tension.

“Fundamentals aside, the ringgit would still feel the adverse effect of the global stock market downturn, but it might fizzle out by 1Q18,” it cautioned.

As such, Kenanga Research maintained its year-end US dollar-ringgit target at 3.90.

Meanwhile, it noted that Malaysia’s equity fund inflows surged in January at RM3.38 billion (an increase from RM0.96 billion recorded in December), the highest recorded in 10 months.

It believed that the yield gap between local and Treasury bonds remains at a comfortable position, thereby minimising the impact of likely outflows in the bond market.

“While BNM’s decision to raise the Overnight Policy Rate by 25 basis points in its January meeting has yet to widen the yield gap between the US Treasury 10-year yield and the local 10-year MGS bond yield, the current yield gap remains at a manageable level of 105 basis points (as at the week ending February 2, 2018), favouring MGS.

“The average yield gap for 2017 was about 167 bps.

“In spite of the narrowing yield gap, we expect the local bond market to be able to endure pressure from the upcoming Fed rate hikes and therefore withstand the impact of fund outflows,” Kenanga Research said.