‘RESERVES SOLID TO COVER SHORTFALL’
Malaysia can sustain stability during any financial shock, say economists
DESPITE the continued weakening of the ringgit against the US dollar, Malaysia can still sustain currency stability during any financial shock that may add to the risk of contagion in the emerging markets.
Economists said Malaysia and a few emerging economies are expected to be spared from the threat as it has strong current account surplus and import to cover, while the risk of foreign outflows to the reserves is small.
The country is also committed to improving its fiscal deficit level, which could avoid the “twin deficit” situation, they added.
“Yes, we are ‘safe’. Theoretically, reserves are only important for the central bank (Bank Negara Malaysia) to intervene in the currency market.
“And the maximum amount for them to intervene is basically the amount of foreign money that is here in the Malaysian capital market. That is the only money that could go in and out of the country in a short period of time,” an economist told NST Business.
Weakening emerging markets’ currencies have led to shrinking reserves, thereby exposing creditors to the contagion risk, said economists.
Reserves depletion limits the extent to which sovereigns can maintain currency stability during a financial shock, they added.
In total, the risk of foreign outflows from the capital market is about RM220 billion, while Bank Negara reserves in ringgit amounted to RM422 billion, said the economist.
As in July this year, the total foreign holding in debt securities was RM187.4 billion, while there was only about RM30 billion of hot money leaving the equity market.
“We have enough reserves to cover our shortfall. The risk is much lower as ringgit is only allowed to be traded onshore. And Bank Negara has taken the appropriate action needed to stop any speculative activity via offshore trading on ringgit. Hence, the risk of our ringgit being suppressed due to speculative activity is very low, if not nil.”
The economist said among the emerging markets, Malaysia and Thailand are the “silver lining”, as the countries are among a few which do not experience a twin deficit.
“As such, the risk of a contagion is much lower compared to other emerging economies. However, we are still going to feel the impact from the portfolio outflow due to the tightening of monetary policy in developed economies,” the economist added.
According to Bloomberg Intelligence, while China and Malaysia’s reserves are below the International Monetary Fund (IMF) threshold, their economies benefit from a current account surplus.
“Of the 53 emerging market sovereigns with available data, 42 per cent are below the IMF reserve-adequacy threshold. However, the risk is most acute in South Africa and Turkey, where reserves are 36 and 26 per cent below par, respectively,” it added.
The market value of emerging market dollar bonds, whose sovereign parent failed the IMF reserve-adequacy threshold, was US$625.7 billion (RM4.14 trillion), or 33 per cent, of the Bloomberg Barclays EM US Dollar Aggregate, said Bloomberg Intelligence.