PETALING JAYA: Malaysia’s international reserves are projected to be at around US$97-100 billion (RM421.47-RM434.51 billion) by the end of the year, compared with end-2019’s position of US$103.6 billion, according to a note by Affin Hwang Capital Research.
The research house said the country’s reserves level are expected to trend slightly lower due to narrower trade surplus and potential capital outflows.
“Weaker export growth in 2020 amid low commodity prices (namely crude oil and gas prices and crude palm oil prices), as well as slower global economic activity and global supply chain disruptions will lead to weaker external demand for Malaysia’s exports,” it said.
In addition, reserves may be under some pressure from potential capital outflows from Malaysia amid ongoing concerns of growth prospects, especially if global commodity prices remain low and the US dollar continues to be strong.
However, it noted that Bank Negara Malaysia’s (BNM) net short foreign exchange (forex) positions from the use of forex swaps with domestic banking system was lower in previous months, signalling a healthy reserves position to reflect the country’s sound macroeconomic fundamentals.
As at March 31, BNM’s international reserves fell by US$1.3 billion to US$101.7 billion. On a monthly basis, the reserves position fell by US$1.7 billion to US$103.4 billion, compared with US$103.4 billion in end-February, making this its second consecutive month of decline.
The current level of reserves is sufficient to cover 7.7 months of retained imports. The reserve coverage of short-term external debt was unchanged at 1.1 times.
“Although the March data for holdings of Malaysian bills and bonds has not been released yet, we believe that level of reserves trended lower due partly to the net foreign outflow from Malaysia’s domestic bond market in March, as reflected possibly the lower foreign holdings of Malaysian Government Securities (MGS) and Government Investment Issue (GII),” said Affin Hwang.
In March, the 3-year and the 10-year MGS yield rose by 17 basis points (bps) and 53bps to 2.8% and 3.3%, respectively, partly due to outflows from emerging market economies led by ‘flight to safety’ over concerns about the economic impact of Covid-19 outbreak and as well as fears of a global recession.
This is despite the two emergency cuts by the US Federal Reserve to 0-0.25% and another 25bps Overnight Policy Rate cut by BNM in March.
Similarly, the domestic market saw total outflows of RM17.8 billion of Malaysian bonds and equities in March in tandem with the exodus of capital flows from emerging markets amid Covid-19 fears, marking the highest monthly outflow since May 2018.
For March, RM12.3 billion in bonds were sold, bringing cumulative sell-off to RM16.9 billion in the first quarter. Meanwhile, RM5.5 billion in equities were sold, amounting to RM7.6 billion in total foreign equity outflows for the first quarter.
UOB said this brings the overall amount of outflows to RM24.5 billion in 1Q20, which more than offset the inflows of RM12.3 billion in the previous quarter.
“The substantial drop in March’s foreign flows contributed to the 1.8% month-on-month (m-o-m) depreciation in the ringgit against the US dollar last month,“ said the research house in a report.
However, UOB pointed out that the March sell-off is not as steep as experienced during the worst points of the global financial crisis, likely due to the lower foreign holdings of Malaysian debt and equities prior to the Covid-19 pandemic given cumulative selling of RM53 billion since 2016.
“The Fed’s easing measures in recent weeks have also helped to stabilise liquidity conditions for emerging markets. As such, we do not expect intensified ringgit weakness to play out in the near term unless oil prices suffer another steep decline or yuan depreciates sharply due to economic weakness,“ explained UOB.
source https://www.thesundaily.my/business/malaysia-s-international-reserves-position-to-weaken-slightly-by-year-end-JC2235209
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