BNM’s FX reserve to ease in near term

Bank Negara Malaysia

KUALA LUMPUR: Bank Negara Malaysia’s (BNM) foreign exchange (FX) reserves is expected to ease in the immediate term due to a rise in risk premium caused by the Covid-19 pandemic, an investment bank said.

Public Investment Bank Bhd (PIB) said this is not unique to Malaysia but across the emerging markets economies (EMEs), but a rebound could be forthcoming once the economy resumes.

“Though the drop in FX reserves is largely expected, declines are unlikely to be sharp.

“The government is unlikely to tap into the FX reserves to fund fiscal stimulus measures as it is cheaper to borrow given the low interest rate environment at present, one which is expected to last for quite some time,” the investment bank said in a research note today.

It said the FX reserves decreased by $1.7 billion ($1=RM4.35) to $101.7 billion in March, a back-to back drop from February while in ringgit terms, it jumped by RM16.8 billion to end at RM440.1 billion, its best since December 2013.

It said this is sufficient to finance 7.7 months of retained imports and 1.1 times of short-term external debt, an improvement against February 2020 and March 2019.

PIB said Malaysia’s FX reserves position is resilient as it is above the international standards of adequacy with a strong position to support the country against external factors and maintain macroeconomic and financial system stability.

“Our current FX reserves position is more than one- and three-fold higher than during the 2009 Global Financial Crisis and 1997/98 Asian Financial Crisis.

“It may, however, ease in the immediate term driven by rising risk premiums due to escalating fears over Covid-19. This uncertainty is consistent across Asean and EMEs due to flights to safety,” it said.

It said the drop in Malaysia’s FX reserves for March is consistent with regional trends, among them Indonesia (-$9.4 billion), Singapore (-$3.8 billion) and Thailand (-$2.9 billion).

Public Investment Bank said the ringgit-denominated rise in March’s FX reserves was supported by encouraging trade surplus which has remained resilient so far.

“This, however, was offset by accelerated foreign selling in the equity market as sentiment was pummelled by rising fears over Covid-19,” it said.

It said foreign investor sentiment in the debt market was equally fragile as reflected in the RM12.2 billion outflow in March, pushing foreign stakes lower to 12.3 per cent from 13.2 per cent in February.

On a net basis, it said foreign investors had disposed of RM16.8 billion of the debt instruments until March, versus a net inflow of RM5.1 billion for the same period a year ago.

It said foreign holdings of Malaysian Government Securities (MGS) also reduced by 2.8 per cent to 36.8 per cent in March amid yield pressures on the back of accelerated selling by foreign investors while holdings in private corporate bonds (PCB) remained resilient with a marginal disposal of RM212 million for the month.

However, it said Sukuks bucked the trend following a net gain of RM65 million.

“Should foreign selling pressure in capital markets continue, local funds might step in to support the market more so when there is ample liquidity (over RM1 trillion) which proved to be the case during the 2009 Global Financial Crisis,” it said.

It said the total liquidity of the local funds is also more than 5-times of the total foreign holdings in the bond market (March: RM187.8 billion), suggesting that the market should be able to withstand persistent selling pressure should foreign investor sentiment remained fragile and weak.

Meanwhile, Public Investment Bank said the ringgit was traded at an average of RM4.3212 against US dollar in March, a 2.5 per cent drop on a month-on-month basis,

It said this is consistent with regional trend though a sharper decrease was seen for the Indonesian rupiah (-13.9 per cent), Thailand’s baht (-3.8 per cent) and Singapore dollar (-2.21 per cent) while only the Philippines’ peso made advancement for the month though not so significant (+0.56 per cent).

The investment bank said the decrease in ringgit was consistent with a net outflow in the capital markets, the highest in more than two years, especially for bonds.

It added that Asean currencies might experience heighten volatility in the immediate term due to escalating fears over Covid-19 which has yet to show signs of abating. – Bernama