Foreign reserves stabilising, but ringgit movement still volatile

KUCHING: Malaysia’s foreign reserves remained stable in February, suggesting that the foreign out f low could have subsided. However, analysts observed that the ringgit foreign exchange (forex) movement could remain volatile in the near term.

RHB Research Sdn Bhd ( RHB Research) in a report explained that Malaysia’s forex reserves remained stable at US$ 95 billion as at February 28, which was unchanged from the previous month.

It added, this was after it increased by US$ 0.4 billion at endJanuary 2016, which suggests that the outflow of foreign capital could have subsided in February, while the requirement to convert 75 per cent of export proceeds might have helped as well during the month, despite a sizeable RM9 billion of Malaysian Government Securities ( MGS) reaching maturity during the month, compared to about RM1 billion in January.

“At the current level, the forex reserves are sufficient to finance 8.5 months of retained imports, improving from 8.3 months a year ago.

“Similarly, the reserves covered 1.1-folds the short-term external debt of the nation, which was slightly lower than the 1.2-folds recorded a year ago,” it said.

On the currency front, the research team pointed out that the ringgit weakened further by 0.2 per cent against the US dollar to RM4.452 in the first week of March, after falling 0.3 per cent in February.

“The depreciation of the ringgit in February was mainly due to the strengthening of the US dollar, on the back of a stronger likelihood of a US interest rate hike in March.

“We believe the ringgit had overshot on the downside, due to the strengthening of the US dollar and earlier uncertainty after the Central Bank introduced measures to stop speculation by offshore traders,” it opined.

While RHB Research believed that the ringgit would remain volatile in the near term, it also believed that it could see a recovery, underpinned by Malaysia’s stable economy.

“As fundamentals remain intact, we expect the ringgit to recover gradually over time on higher commodity prices and when policies by US president Donald Trump’s administration start to disappoint, due to the lack of clarity,” it said.

Nevertheless, it cautioned that volatility in the ringgit could persist in the near term, given the expectation of further US rate hikes, vulnerability from large foreign holdings of fixed income instruments in the country, and volatility of oil prices.

Meanwhile, RH B Research noted that Malaysia’s amount of excess liquidity, including repurchase agreements (repos), mopped up by the Central Bank rose in February 2017. This was due to the increase in Bank Negara Malaysia’s (BNM) interbank borrowings and BNM bills, it added.

“Excluding the repos, the amount of excess liquidity mopped up by BNM rose to an estimate of RM136.9 billion at end-February 2017, from RM127.1 billion at endJanuary 2017 and compared with RM134.4 billion at end-December 2016,” RHB Research noted.

In a separate report, Affin Hwang Investment Bank Bhd (AffinHwang Capital) said, since the beginning of 2017, with the stabilisation of portfolio flows and rising global crude oil prices, the stable reserves level reflected some inflows from export earnings.

“We believe the country’s international reserves will likely continue to benefit from continued trade surplus position in the first quarter of 2017 (1Q17). The trade surplus, which improved from RM18 billion in 3Q16 to RM27.5 billion in 4Q16, will likely be sustained at around RM20 billion to RM25 billion in 1Q17, supported by higher export of petroleum related products as well as healthy growth in export of manufactured goods,” it opined.

I n the months ahead, AffinHwang Capital expected some uncertainties on the movement of portfolio fund flows, as the US Federal Reserve (US Fed) prepares to hike the Fed Funds Rate (FFR) further.

“However, despite the possible Fed rate hikes, we continue to expect Malaysia’s reserves to hover around US$ 95 billion to US$ 98 billion throughout 2017, supported by the country’s sustained and possibly higher current account surplus.

“This should also provide some buffers to the reserve level from volatility of portfolio flows,” it added.

At the current level, the forex reserves are sufficient to finance 8.5 months of retained imports, improving from 8.3 months a year ago. RHB Research