PETALING JAYA: Malaysia’s foreign exchange (FX) reserves could ease in the immediate term, due to a rise in risk premium caused by Covid-19, according to PublicInvest Research.
“This is not unique to Malaysia but across the emerging market economies (EMEs) and a rebound could be forthcoming once the economy resumes normally. Though the drop in FX reserves is largely expected, declines are unlikely to be sharp,“ the research house said in a report yesterday.
It added that the government is unlikely to tap into the FX reserves to fund fiscal stimulus measures, as it is cheaper to borrow given the current low interest rate environment, which is expected to last for quite some time.
Bank Negara Malaysia’s FX reserves decreased by US$1.7 billion (RM7.43 billion) to US$101.7 billion in March – a back-to-back drop from February. This, however, is sufficient to finance 7.7 months of retained imports and 1.1 times of short-term external debt, an improvement against the previous month and a year ago.
FX reserves in ringgit terms, on the other hand, jumped by RM16.8 billion to RM440.1 billion, its best since December 2013.
The ringgit-denominated rise in March’s FX reserves was supported by encouraging trade surplus which has remained resilient so far. This was offset however by accelerated foreign selling in the equity market (-RM5.5 billion in March) as sentiment was pummeled by rising fears over Covid-19.
“Malaysia’s FX reserves position is resilient as it is above the international standards of adequacy, with a strong position to support the country against external factors and maintain macroeconomic and financial system stability.
“Our current FX reserves position is more than one- and three-fold higher than during the 2009 global financial crisis and 1997/98 Asian financial crisis,“ said PublicInvest.
Foreign investor sentiment in the debt market was equally fragile as reflected in the RM12.2 billion outflow in March which pushed foreign stakes lower to 12.3% from 13.2% in February.
Foreign holdings of Malaysian Government Securities reduced to 36.8% in March, amid yield pressures on the back of accelerated selling by foreign investors.
Foreign holdings in private corporate bonds remained resilient following a marginal disposal of RM212 million for the month. Sukuks bucked the trend following a net gain of RM65 million.
“Should foreign selling pressure in capital markets continue, local funds may step in to support the market, more so when there is ample liquidity (over RM1 trillion) which proved to be the case during the 2009 global financial crisis.”
Foreign holdings in the bond market reached a low of 7.4% in May 2009 but jumped gradually to reach a high of 22.5% in slightly more than two years (July 2011).
“The total liquidity of the local funds is more than five times the total foreign holdings in the bond market, suggesting that the market should be able to withstand persistent selling pressure should foreign investor sentiment remain fragile and weak,” PublicInvest said.