Foreign exchange reserves adequate for 8.8 months of imports

KUCHING: Despite a drop in foreign exchange (forex) reserves to RM95.3 billion as at end-December, the current levels are considered to be adequate by international standards as it is sufficient to finance 8.8 months of retained imports and cover 1.3 times the short-term external debt of the nation.

The research arm of RHB Investment Bank Bhd ( RHB Research) commented that the continuing fall in forex reserves were likely due to portfolio investment outflows, mainly from the fixed income markets.

The team pointed out that these outflows were the results of emerging markets such as Malaysia suffering sell- offs following the surprise outcome of the US presidential election as well as the US Federal Reserve’s (Fed) recent rate hike of 0.25 per cent.

“At the same time, Bank Negara Malaysia’s ( BNM) intervention in the forex market to smoothen the sharp fluctuation of the Ringgit may have also contributed to the drop in forex reserves,” RHB Research added, referring to the set of several measures to broaden and improve liquidity of the onshore forex market.

Meanwhile, the research arm of Affin Hwang Investment Bank Bhd (AffinHwang Capital) believed BNM’s measure requiring 75 per cent of export proceeds to converted into ringgit will likely provide some support to the currency and hence the country’s reserves towards the second half of 2017 (2H17).

Additionally, it believed BNM’s regular intervention of selling and buying the ringgit to support the ringgit against the US dollar has actually recently reduced which has led to more manageable decline in forex reserves.

“Net foreign selling in equity market alone amounted to RM1.0 billion in December (from RM3.9 billion in November), the fourth month of net outflows, while foreign holdings of bonds fell by RM19.9 billion in November,” said AffinHwang Capital.

On this point, the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) argued that while BNM’s recent measures are aimed to reduce volatility of the ringgit, it has inadvertently led to the currency’s downside bias.

“BNM’s recent decision to trifle the offshore ringgit, particularly the non- deliverables forwards ( NDF) along with the Financial Market Committee’s (FMC) move to expand Malaysia’s onshore ringgit market, further exacerbated the ringgit’s downside bias in the short-term,” explained the research arm.

It also believed that further intervention is on the horizon as the FMC is expected to provide further build on the onshore ringgit framework, possibly through the development of a robust futures market, while continuing to clamp down on facilitation of the offshore ringgit market.

“However, given that NDF is effectively outside BNM’s jurisdiction, pockets of NDF transactions are likely to persist,” Kenanga research added.

Going forward, AffinHwang Capital believes there will still be significant pressure on capital outflows from region countries, such as Malaysia, to advanced economies, especially the US, which will undermine the forex reserves and region’s currencies level.

“However, this will only be premised on the expectations of a more aggressive rate hikes by the US Fed, from current guidance and expectations of three rate hikes of 25 basis points each time,” said the research arm.

On the ringgit’s performance, both Kenanga Research and RHB Research believed that it will likely remain weak in the near term, with a slow gradual recovery over time as markets start to return to calmness with more clarity of US monetary and political policies, and should oil prices continue to strengthen further.

“On the expectation of diminishing negative sentiments and economic shocks along with a more stable economic environment on the back of better exports we expect the US dollar-ringgit to settle around 4.35 by end of the year,” opined Kenanga Research.