Cautious optimism on foreign reserves hitting new highs
KUALA LUMPUR: Analysts are slightly dovish on news of Bank Negara Malaysia’s (BNM) international reserves in the two weeks ending March 29, 2019 rising by US$0.4 billion to reach US$103 billion, its highest level since end September last year.
UOB senior economist Julia Goh saw that overall foreign flows improved to MYR3.8 billion in the first quarter of 2019 (1Q19), mainly lifted by bond inflows which offset equity outflows.
Meanwhile, foreign holdings of Malaysian government bonds stood at RM169 billion or 22.8 per cent of total outstanding as at end of March.
“Some positive catalysts for emerging markets include the dovish shift from the Federal Reserve and more constructive talks between China and the US,” Goh added in her notes yesterday.
“However, Asian currencies continued to drift sideways against the US dollar amid the bearish global outlook.
“The US dollar-ringgit is holding in a tight range of 4.06 to 4.08 as growth risks take center stage.”
Meanwhile, Affin Hwang Investment Bank Bhd (AffinHwang Capital) expect Malaysia’s reserves level, which has remained above US$100 billion since August 2017, to be supported by the country’s healthy trade balance.
On a cumulative basis, country’s trade surplus widened to RM22.6 billion compared to RM18.7 billion in the corresponding period in 2018.
“Despite the decline in exports in February of 5.3 per cent, we believe demand for Malaysia’s manufactured goods especially E&E exports will continue to support export performance, as reflected by the stable growth of electric and electronic exports,” it stated in its report.
Therefore, we believe this will contribute to a healthy trade balance of around RM100 billion. We also expect nonresident portfolio inflows to be supported by the US Fed’s pause in its rate hike cycle as well as potentially stable performance of the ringgit against the US dollar, which has appreciated by 1.3 per cent year-to-date.
“However, downside risks remain amid uncertainties surrounding trade talks between the US and China as well as Brexit developments. We expect the country’s reserves to be about US$100 billion to US$105 billikon by end-2019.”
In spite of BNM’s ample foreign reserves, Kenanga Investment Bank Bhd (Kenanga Research) saw that uncertainties arising from external factors continued to pose a downside risk to the domestic financial market and economic growth.
“On the trade war front, we stay cautiously optimistic as there seem to be signs of positive developments in the anticipated trade rapprochement between US and China,” it forewarned in its notes.
“So far, China has agreed to purchase large US agricultural products and cut tariffs on US-made car imports, as well as laid out new domestic laws and regulations to enhance market access and addressing intellectual property protection issues.
“Meanwhile, the growth slowdown in key export markets may hamper Malaysia’s domestic growth, particularly in the export-oriented sector. As growth momentum slows, the US Fed has turned dovish and the European Central Bank likely to extend its bond buying exercise.
“As a result, we expect the outflow of hot money from the emerging markets would likely be more stable and less.”
Though it maintained its view that BNM would hold the Overnight Policy Rate (OPR) steady at 3.25 per cent in 2019, Kenanga Research said the shift in global monetary trend towards a more dovish stance might have tilt BNM’s policy bias towards easing.
It said BNM’s next meeting in May could be a turning point should there be heighten signs, both from domestic or external indicators, threatening the economy.
“Our ringgit outlook remained unchanged, maintaining the US dollar-ringgit year-end forecast at 4.10 as economic fundamentals would continue to buffer against expectations of slower global trade and the natural tendency for foreign funds to flee to safehaven assets,” it concluded.