Malaysia’s re­serves slide be­low $100 bil­lion

The Pak Banker - - COMPANIES/BOSS -

Malaysia's for­eignex­change re­serves dropped be­low $100 bil­lion for the first time since 2010 af­ter the ring­git slid 18 per­cent in the past 12 months. BNP Paribas SA, So­ci­ete Gen­erale SA and Aus­tralia & New Zealand Bank­ing Group Ltd. all cut their fore­casts this week for Asia's worst-per­form­ing cur­rency, which has weak­ened due to a slump in oil, a po­lit­i­cal scan­dal in­volv­ing Prime Min­is­ter Na­jib Razak and odds for a U.S. in­ter­est-rate in­crease. As spec­u­la­tion mounts that the cen­tral bank is buy­ing the ring­git to stem the losses, So­ci­ete Gen­erale said the de­fense of the ex­change rate may stop at about the $90 bil­lion re­serves mark.

The hold­ings fell 3.8 per­cent to $96.7 bil­lion as of July 31 from two weeks ear­lier, Bank Ne­gara Malaysia re­ported Fri­day. The re­serves are suf­fi­cient to fi­nance 7.6 months of re­tained im­ports and are 1.1 times short-term ex­ter­nal debt, ac­cord­ing to the cen­tral bank. That com­pares with 7.9 months and 1.1 per­cent, re­spec­tively for the mid-July fig­ure of $100.5 bil­lion.

"If the pres­sure is too strong, then the dol­lar re­serves that you use be­come less ef­fec­tive," said Sean Yokota, the Sin­ga­pore-based head of Asian strat­egy at Skan­di­naviska En­skilda Banken AB. The in­ter­ven­tion is prob­a­bly lim­ited to pre­vent­ing ex­ces­sive volatil­ity rather than de­fend­ing a cer­tain level for the ring­git, he said.

Global funds have pulled $3 bil­lion from Malaysian eq­ui­ties in 2015, the big­gest out­flow since 2008. For­eign in­vestors also pared hold­ings of gov­ern­ment and cor­po­rate bonds by 2.4 per­cent to 206.8 bil­lion ring­git ($52.7 bil­lion) in July, the low­est level in three years, cen­tral bank data showed on Fri­day.

The cur­rency dropped 2.5 per­cent this week to close at 3.9235 per dol­lar in Kuala Lumpur, ac­cord­ing to prices from lo­cal banks com­piled by Bloomberg. That's the big­gest five-day loss of 2015. It fell to 3.9305 ear­lier on Fri­day, the low­est level since Septem­ber 1998. BNP low­ered its year-end ring­git forecast to 4 per dol­lar from 3.8, cit­ing Malaysia's de­clin­ing re­serves, the im­pact of fall­ing oil prices on the trade bal­ance and the po­lit­i­cal cli­mate. So­ci­ete Gen­erale cut its pre­dic­tion to 3.9 from 3.7, and ANZ re­vised its es­ti­mate to 3.95 from 3.82.

Bank Ne­gara is un­likely to try and pro­tect the ring­git at 4 to the U.S. cur­rency as the for­eign-ex­change hold­ings fell, and af­ter it failed to de­fend the 1998 peg level of 3.8, So­ci­ete Gen­erale strate­gists Jason Daw and Frances Cheung wrote in a re­port on Thurs­day.

The cen­tral bank is dis­cour­ag­ing lo­cal and global fi­nan­cial in­sti­tu­tions from en­ter­ing into trans­ac­tions that would re­sult in selling the ring­git, ac­cord­ing to a July 31 re­port in the Star news­pa­per, which cited uniden­ti­fied deal­ers. It has spent $25 bil­lion on de­fend­ing the cur­rency since July 2014, af­ter ad­just­ing for val­u­a­tion ef­fects, BNP Paribas Sin­ga­pore-based economist Philip McNi­cholas wrote in a July 24 re­port. That's equiv­a­lent to 8 per­cent of gross do­mes­tic prod­uct, he said. The ring­git's de­pre­ci­a­tion isn't sus­tain­able and doesn't re­flect Malaysia's un­der­ly­ing fun­da­men­tals, cen­tral bank Gover­nor Zeti Akhtar Aziz said in Switzer­land on June 29.

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