KUCHING: Malaysia’s foreign reserves expanded for its 16th consecutive month in April 2018, rising by US$1.7 billion or 1.6 per cent to US$109.5 billion.
At current levels, Bank Negara Malaysia (BNM) deemed the foreign reserves to be adequate as it would finance 7.5 months of retained imports and is 1.1 times the short-term external debt.
In an economic view point report, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) detailed that the reserves were able to sustain it uptrend on higher foreign buying into the local equity market and higher exports repatriation following higher trade surplus. This also suggests possibility of foreign direct investments flowing into the economy.
“Higher global oil prices could have also renewed investors’ confidence in the fundamentals of the local economy, diminishing the effect of ongoing uncertainties on global trade and monetary policies,” explained the research arm.
Moreover foreign equity flows were also observed to have surged to a record high of 1,895.18 points on April 19 due to a faster pace of US Fed’s rate hike and confidence in foreign investors of low political risk premium in Malaysia.
That being said, the local bond market on the other hand may not have been spared from rising global uncertainties as the average local benchmark 10-year MGS bond yields surged higher to 4.04 per cent in April from 3.95 in March – suggesting limited inflow into the local bond market.
While reserve levels remains at a healthy level, Kenanga Research said foreign interest could be capped in the coming months due to significant uncertainties over the horizon such as the rising US bond yields, trade war risk tempering market sentiments and the after effects of the GE14.
“Recent exports figures and manufacturing indicators further point to a moderating growth trend ahead.
“Hence, we expect the interplay of these various dampeners to cap the level of foreign inflows in spite of the expectation that the reserves level would remain on a marginal uptrend backed by the fundamentals of the economy,” added the research arm.
On the ringgit’s outlook, AmBank Research is expecting that mixed incoming macro data has somewhat contained the slide in the Ringgit against the US dollar.
“The ringgit is expected to experience volatility along the path, the downside risk remains fairly contained, supported by the macro fundamentals.
“Economic growth will be supported by domestic demand such as private consumption while investment remains supportive of the recovery sustained by a buoyant business sentiment, the need to upgrade the capital investment and rising profits.
“The ringgit will benefit from the country’s strong linkage in the global supply chain amid robust global export volumes.
“Expectation of improving public finances, surplus current account, healthy reserves and foreign appetite into the local bourse and bonds space will continue to support the ringgit,” AmBank research opined.
While Bank Negara Malaysia is expected to maintain its accommodative monetary policy with the aim of supporting growth and stabilising inflation, the research house reckons that the possibility of another rate hike could happen if the demand-pull inflation kicks in strongly and the US Fed move into a four rate hike year for 2018.
“And the undervalued currency based on fundamental analysis as well as real effective exchange rate will provide support to the MYR,” added AmBank research.