Malaysia’s reserves up fourth consecutive month

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Malaysia’s reserves level is expected to remain steady in the coming months supported by trade balance and current account balance which remain in surplus. — AFP photo

KUCHING: As Malaysia’s reserves position has increased for the fourth consecutive month despite the ongoing Coronavirus Disease 2019 (Covid-19) pandemic, analysts believe that conditions appear to have normalised.

Source: Bloomberg, RHB Research

In a report, RHB Research Sdn Bhd (RHB Research) noted that Malaysia’s international reserves rose by US$0.8 billion to US$104.2 billion as at end-July (June: US$103.4 billion).

In ringgit terms, the international reserves fell RM1.3 billion to RM441.8 billion. At the current level, the reserves are sufficient to finance 8.4 months of retained imports, while the nation’s short-term external debt cover remained stable – at 1.1-folds – during the same period.

“Conditions appear to have normalised, with reserves increasing for four consecutive months. However, recent concerns over the rise of new waves of Covid-19 infections imply that any improvement in economic data is fragile and subject to disruptions,” RHB Research opined.

Meanwhile, the amount of excess liquidity (including repos) mopped up by Bank Negara Malaysia (BNM) is estimated at RM147.4 billion as at end-June, relative to the RM145.6 billion booked during the previous month, the research team noted.

“The slightly higher amount was mainly caused by the increase in excess reserves by the financial sector,” it explained.

In a separate report, the research team at Affin Hwang Investment Bank Bhd (Affin Hwang) believed that higher level of reserves level was partly attributed to the third consecutive month of net foreign inflow into Malaysia’s domestic bond market in July, which amounted to RM7.1 billion compared to a net inflow of RM11.6 billion in June.

In July, it noted that most of the net inflow was seen in MGS which increased by RM7.7 billion compared to RM7.8 billion in June.

This was also reflected in the 10-year MGS yield in July, which fell by 31bps to 2.6 per cent, possibly due to the 25bps rate cut by BNM in its July MPC meeting to a record low of 1.75 per cent, while guiding that it would continue to “utilise its policy levers as appropriate to create enabling conditions for a sustainable economic recovery”.

“In the domestic equity market, foreign investors remained net sellers for the thirteenth consecutive month with steady net outflows of RM2.5 billion in July (net outflow of RM3 billion in June). Year-to-date, net outflows from the equity market totalled RM18.8 billion (net outflow of RM4.7 billion in January to July 2019),” it said.

All in, Affin Hwang said that Malaysia’s reserves level is expected to remain steady in the coming months supported by trade balance and current account balance which remain in surplus.

“In the first six months of 2020, Malaysia’s trade balance amounted to RM64.6 billion, but this was lower than surplus of RM67.4 billion in January to June 2019,” it added.

However, it pointed out that Malaysia’s external demand for its exports could continue to remain uncertain.

“Nevertheless, with the commencement of the RMCO, where almost all businesses are allowed to resume operations at a higher capacity, this would continue to support trade performance in the coming months.

“In addition, rising sales of global semiconductor sales will also support exports of Malaysia’s E&E products,” it opined.

Furthermore, it noted that Malaysia’s economic fundamentals remain stable, which could lend support to the country’s reserves levels.

“However, some concerns on Malaysia’s fiscal deficit position, government debt and the possibility of a second wave of Covid-19 cases may weigh on potential capital inflows. Therefore, we are maintaining our projection for international reserves to hover around US$97 billion to US$100 billionn by end 2020 (US$103.6 billion as at end-2019),” it added.

On the currency front, RHB Research noted that the ringgit gained to RM4.24 per dollar in July compared to the prior month’s RM4.29 per dollar.

“The currency appreciated amid the improved sentiment following increased domestic economic momentum, as well as a weaker US dollar as the US Fed indicated the possibility of a prolonged low interest rate period,” it said.

“That said, we shift our forex outlook from bearish to bullish with the US dollar-ringgit is expected to trade at 4.15 by end-2020 (compared to RM4.35 per earlier).

“The rise in the number of infections in the US has led the US Fed to send a signal that its monetary policy outlook will likely remain relaxed for as long as it takes to revive the economy. This could imply that the appeal for the US dollar could wane, at the benefit of emerging market currencies including the ringgit,” it added.