Slight drop in forex reserves nondeterrent to stable bond market in 2H

KOTA KINABALU: Malaysia registered foreign exchange (forex) reserves of US$104.5 billion as at July 31, representing a drop of US$0.2 billion from US$104.7 billion as at end-June, as concerns over faster-than-expected US interest rate hikes fuelled further portfolio outflows, albeit at a reduced magnitude compared to previous months.

As it stands, the equity market continued to see outflows of RM1.7 billion in July, although this was much lower than the RM5.6 billion and RM4.9 billion recorded in May and June.

In ringgit terms, Malaysia’s forex reserves fell RM0.6 billion to RM422.8 billion as at end-July, in contrast to the RM4.4 billion gain in June.

At the current level, RHB Research Institute Sdn Bhd (RHB Research) said the forex reserves were sufficient to finance 7.5 months of retained imports, which deteriorated from 7.9 months a year earlier.

“Similarly, the reserves covered 1.1 times the short-term external debt of the nation, unchanged from the year before,” it said in a note.

On the currency front, the ringgit weakened further by 0.6 per cent to US dollar to RM4.085 in the first week of August, adding on to the 0.5 pder cent depreciation in July.

“The recent ringgit weakness wiped off earlier gains year to date, and was mainly on the back of persistent US dollar strength,” RHB Research added. “This came as investors adjusted their portfolios while expecting a more hawkish US Federal Reserve (US Fed).

“The ringgit is expected to trade to weaker at RM4.10 by end-2018. We expect the US dollar to remain strong for the rest of the year, amid faster interest rate hike expectations in the US, along with uncertainties on the global trade front.”

The economic research team at Affin Hwang Investment Bank Bhd (AffinHwang Capital) attributed the drop in the country’s reserve to some net outflows by foreigners in the equity market.

“Foreign investors continued to be net sellers of Malaysia’s equity market for third straight month, with total net selling of RM1.7bn in the month of July,” it said in a separate report.

“Nonetheless, the net portfolio outflow from the equity market has slowed, as compared to RM4.6 billion in June and RM5.6 billion in May. Year-to-date, the cumulative net selling by foreign investors in the Malaysian equity market amounted to around RM8.4 billion.

“Similarly, the total foreign holding of debt securities declined in June by RM6.7 billion, due to slight decline in the foreign bond holdings of Malaysian Government Securities (MGS).

“However, we believe the decline in foreign bond holdings of MGS will be either small positive inflow or marginal outflow in July, as this was reflected in the 10-year Government bond yield, which fell by 13 basis points from 4.20 per cent at the end of June to 4.07 per cent at the end of July.”

In the near future, Kenanga Investment Bank Bhd (Kenanga Research) we expect the local bond market to stabilise and capital flows to turn positive by the second half of 2018 (2H18).

“The average yield spread between the benchmark 10-year US Treasury yield and the local 10-year MGS bond yield declined to 122 basis points in July from 130 basis points the preceding month.

“The average yield of 10-year US Treasury in July was the lowest in three months amidst the escalation of trade war between the US and China.

“Despite the continued outflow of capital and the weak ringgit we expect BNM to maintain the overnight policy rate at 3.25 per cent for the year. As global trade tensions have further escalated, the impact on the capital market and the economy is expected to remain uncertain.

“Hence, the monetary policy is biased towards easing as BNM’s priority would be to support growth and price stability.”