Coupled with continued weakness in domestic economic indicators, BNM may decide to slash the OPR by 25 basis points to 2.75 per cent as soon as early 1Q20. — AFP photo
KUCHING: Analysts expect the level of Malaysia’s reserves to remain steady this year, supported by its sustained trade surplus and current account surplus.
This is further backed by the US Federal Reserve guiding in its latest dot plot in December 2019 that it will likely hold rates at 1.5 to 1.75 per cent in 2020, which Affn Hwang Investment Bank Bhd (AffinHwang Capital) believe would maintain a favourable interest rate differential between US and Malaysia and possibly support some inflows into the domestic bond market.
“Besides that, we also anticipate inflows to be bolstered by positive developments surrounding US-China trade talks as the “phase one” deal is anticipated to be signed on January 15, 2020,” it said in a review note.
“However, we continue to expect some uncertainties around Malaysia’s position in FTSE Russell’s World Government Bond Index until the next interim review in March 2020 to possibly weigh on inflows into the domestic bond market.
“In 2020, we project international reserves of BNM to hover around US$100 to US$105 billion by end 2020.
This came after Bank Negara Malaysia (BNM) unveiled its the international reserves rising by US$0.4 billion to US$103.6 billion in December 2019.
“The higher level of reserves may have been attributed partly to the sustained inflow into the domestic bond market. Although December’s data on Malaysia’s foreign holdings of bills and bonds has not been released yet, we believe some inflow as reflected in lower Malaysian Government Securities (MGS) yields.
“In December, the 10-year MGS yield fell by 10 basis points (bps) to 3.3 per cent, while the 3-year yield fell by 5bps to three per cent potentially due to Malaysia’s November headline inflation, which registered a six month low of 0.9 per cent year on year (y-o-y).
“In addition, higher inflows may have also been partly attributed to higher commodity prices seen during the month. However, in the domestic equity market, net outflows continued for the sixth consecutive month with a net outflow of RM1.2 billion in December.
“Therefore, in 2019, net foreign outflows amounted to RM11.1 billion compared to an outflow of RM11.7 billion in 2018, making this its second consecutive year of equity outflows,” AffinHwang Capital added.
Meanwhile, Kenanga Investment Bank Bhd (Kenanga Research) believed BNM was likely to lean towards further easing as soon as early 1Q20 to support growth.
“Our cautious growth outlook retained, in spite of the phase-1 US-China trade deal, as the impact of existing tariffs would still weigh on global trade and growth in the immediate term,” it said in another note.
“Coupled with continued weakness in domestic economic indicators, we reckon that the BNM may decide to slash the OPR by 25 basis points to 2.75 per cent as soon as early 1Q20.
On the currency front, RHB Research Institute Sdn Bhd (RHB Research) economist Ahmad Nazmi Idrus predicted for the ringgit to strengthen slightly to 4.09 against the US dollar in December 2019 when compared to the prior month.
“The strengthening of the currency was in tandem with regional trends, but also came as the market balanced weaker growth with more optimistic prospects – this is with regards to the US-China trade war,” he said in a separate note.
“For the year as a whole, the MYR was down 1.1 per cent – extending the 1.8 per cent loss registered in 2018. Despite negative headwinds and near-term volatility, we expect the ringgit to strengthen further towards 4.00 versus the US dollar by end 2020.
“The positive development coming from the US-China Phase One deal and relative attractiveness of Malaysian assets will likely favour the currency’s appreciation.
“In addition, the weakness in US economic growth – as support from the corporate tax cut lapses – will likely cause the US Federal Reserve to ease rates further, weakening the US dollar.”