Malaysia’s forex reserves position may improve

By NUR HANANI AZMAN / Pic by TMR GRAPHIC

MALAYSIA’S foreign exchange (forex) reserves position could improve further, thanks to improving global sentiment following the rapid Covid-19 vaccination drive that will gather speed in the second half (2H) of this year.

Public Investment Bank Bhd economist Dr Rosnani Rasul in a research note yesterday said this would be underpinned by full economic openings and sustained recoveries in capital markets and trade.

“Though forex reserves may be subject to some volatility in 1H amid the still- brewing headwinds of Covid-19, this is expected to improve steadily in 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 second trade talks which could begin in 2H. This may put pressure on trade and ringgit’s risk premium and therefore, our forex reserves position,” she said.

Bank Negara Malaysia’s (BNM) first-quarter of 2021 (1Q21) forex reserves jumped by US$6.9 billion (RM28.5 billion) year-on-year (YoY) to US$108.6 billion, a rise consistent with regional peers.

Forex reserves in ringgit terms increased by almost RM11 billion to RM451 billion, a multi-year high thanks to the rebound in trade and capital markets performance.

Forex reserves at the end of 1Q21 are sufficient to finance 8.8 months of retained imports and 1.2 times of short-term external debt, an improvement against the previous quarter.

Malaysia’s forex reserves position is resilient and comfortably above the international adequacy standards which is able to offset shocks and contagion effects.

Rosnani said its steady position will also underpin macroeconomic and financial system stability, especially during volatile capital and currency market conditions.

“The bright prospect ahead is the receding threat of the global Covid-19 pandemic following the rapid vaccination drive that will gather speed in 2H, further underpinning rebounds in our forex reserves position.

“Our forex 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 currencies — such as US dollar and Japanese yen) no thanks to the strong Covid-19 headwinds,” she added.

She said a better handling of the pandemic by now also suggests uninterrupted economic activities amid Asean authorities opting for more targeted containment measures and therefore, a lesser impact on output.

Meanwhile, AxiCorp Financial Service Pte Ltd chief global market strategist Stephen Innes said the fact that reserves are increasing is a testament that the ringgit is able to carry its own weight.

“But it’s not unusual for central banks to top up on reserves for future black swan events like the Covid-19 crash when a dash for dollars sent the greenback soaring.

“Right now, the US Federal Reserve is keeping the policy taps open effectively offering cheap dollars to the rest of the world so some central bank chiefs may view this as a good opportunity to stock on excess dollars as a hedge for future markets,” he told The Malaysian Reserve.

However, he thinks there will be many differences of views on this as we are not entirely privy to what BNM’s motivation is.