PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 7 May 2021, 9:38 AM


1Q21 Forex Reserves - Bright Prospect for the Year

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Overview. Bank Negara Malaysia’s (BNM) 1Q21 foreign exchange reserves (FX reserves) jumped by USD6.9bn YoY to end at USD108.6bn, a rise that is consistent with regional peers. FX reserves in Ringgit terms, in the meantime, increased by almost RM11.0bn to end at RM451.0bn, a multi-year high thanks to the rebound in trade and capital markets performance. FX reserves at the end of 1Q21 is sufficient to finance 8.8 months of retained imports (RI) and 1.2x of short-term external debt (ST debt), an improvement against the previous quarter (4Q20 RI: 8.6 months; ST debt: 1.2x) and a year ago (1Q20 RI: 7.7 months; ST debt: 1.1x).

Malaysia’s FX reserves position is resilient and comfortably above the international adequacy standards which is able to offset against shocks and contagion effects. Its steady position will also underpin macroeconomic and financial system stability especially during volatile capital and currency market conditions. The bright prospect ahead following the receding threat of the global COVID-19 pandemic following the rapid vaccination drive that will gather in speed in the 2H will underpin further rebounds in our FX reserves position. Our FX reserves position will be shored-up by the projected turnaround in trade activities across ASEAN amid full economic openings post COVID-19 lockdown and also a rise in the risk premium of major economies currencies (USD, Yen) no thanks to the strong COVID-19 headwinds. Better handling of the COVID-19 pandemic by now also suggests uninterrupted economic activities amid ASEAN authorities opting for more targeted containment measures and therefore, a lesser impact on output.

The YoY jump in Malaysia’s 1Q21 FX reserves is consistent with regional trends, led by Singapore (+USD102.8bn), Thailand (+USD19.0bn) and Indonesia (+USD22.7bn). Assessment on Philippines is not possible as its FX figures are not up-to-date. The strong jump in Singapore’s FX reserves were driven by the acceleration in Singapore’s Dollar (SGD) during the quarter (1Q21: +5.6%). Without the central bank’s intervention, Singapore’s competitiveness may have been hurt especially when its trade was about to recover from the strong headwinds of COVID-19. This underpinned the Monetary Authority of Singapore’s (MAS) steady intervention, leading to a sharp increase in Singapore’s FX reserves level. Singapore’s FX reserves position were also boosted by a steady trade surplus thanks to a full economic opening since last year (cumulative February: SDG11.8bn).

Malaysia 1Q21 FX Reserve Analysis. The rise in 1Q21’s FX reserves was supported by encouraging trade surplus which remained strong to-date (YTD 2021: RM34.4bn; +43.4% YoY). This was offset however by sustained foreign selling in the equity market though the selling pressure has eased considerably against a year ago (1Q21: -RM1.7bn; 1Q20: -RM7.6bn). It is important to note that the selling pressure by foreign investors has slowed down markedly in 1Q especially in March (-RM9mn), which could be a cue for their return soon especially when Malaysia is on track to reach COVID-19 herd immunity by year-end and therefore, a potential economic rebound. The month of March marked twenty one straight months of foreign outflow in the equity market however no thanks to the headwinds caused by US-China trade tensions and the COVID-19 pandemic.

Foreign investor sentiment in the debt market improved further however (1Q21: RM239.7bn, 1Q20: RM187.8bn) which pushed foreign holdings to jump to 14.5% in 1Q21 (1Q20: +12.3%). On a net basis, foreign investors puchased RM16.7bn of our debt instruments in 1Q21, a significant turnaround against an outflow of RM16.8bn a year ago.

Foreign holdings of Malaysian Government Securities (MGS) increased to 40.8% in 1Q21 (1Q20: 36.8%) with foreigners purchasing significant amounts of MGS during the quarter (1Q21: +RM7.2bn; 1Q20: -RM16.2bn). Foreign holdings in private corporate bonds decreased marginally by RM37mn YoY to end at RM6.4bn though it jumped convincingly for the Sukuks (+RM1.1bn, RM7.3bn).

1Q21 Currency Analysis. Ringgit was traded at an average of RM4.145 per Dollar in 1Q21, a 4.08% rise on a YoY basis. This is consistent with regional trends though a sharper increase was seen for Indonesia’s Rupiah (+10.9%) followed by the Singapore Dollar (+5.6%), Thailand’s Baht (+4.5%) and the Philippines’s Peso (+4.2%). Advancement in ASEAN currencies is expected to continue in the immediate term driven by the bright prospects of ASEAN economies especially its trade which is projected to rebound further in the near term. An effective management and handling of the COVID-19 pandemic which underpins its full economic openings will also keep ASEAN in the radar of investors. Its rise could be interrupted however by the start of US-China 2nd trade talks which could begin in the 2H. Uncertainty of the outcome may push ASEAN currencies risk premium higher, potentially weighing on its recovery.

Outlook. Malaysia’s FX reserves position could improve further thanks to improving global sentiment following rapid COVID-19 vaccination drive that will gather in speed in the 2H. This will be underpinned by full economic openings and sustained recoveries in capital markets and trade. Though FX reserves may be subject to some volatility in the 1H amid the still-brewing headwinds of COVID-19, this is expected to improve steadily in the 2H especially when Malaysia is expected to achieve COVID-19 general immunity by then. We remain cautious however due to the impending start of US-China 2nd trade talk which could begin in the 2H. This may put pressure on trade and Ringgit’s risk premium and therefore, our FX reserves position.

Source: PublicInvest Research - 15 Apr 2021

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