UOB analysts see a narrower interest rate differential between regional central banks including BNM and the Fed 

By ANIS HAZIM / Pic By MUHD AMIN NAHARUL

UOB Asset Management (M) Bhd expects foreign investors’ interests in Malaysian assets to remain strong as non-resident portfolio inflows into the country reached a six-month high at RM5.9 billion in February. 

Its economists Julia Goh and Loke Siew Ting said Malaysian debt and equity markets witnessed net foreign purchases of RM3.1 billion and RM2.8 billion respectively last month. 

Foreign debt inflows in February were propelled by all sub-instruments, led by government investment issues (GII). Non-resident holdings of Malaysian government bonds (Malaysian Government Securities [MGS] and GII) jumped for the third straight month by RM2.2 billion to a new all-time high of RM240.4 billion as at end-February. 

Bank Negara Malaysia’s (BNM) foreign reserves, however, fell for the second straight month by US$0.3 billion (RM1.26 billion) month-on-month to a five-month low of US$115.8 billion as at end of February. The amount is sufficient to finance 6.1 months of imports of goods and services and is 1.2 times total short-term external debt. 

“At present, risk-off sentiment and sky-rocketing commodity prices sparked by Russia-Ukraine tensions and sanctions are initiat- ing some asset reallocation into commodity-producing countries including Malaysia,” the econo- mists stated in a report yesterday. 

Goh and Loke added that expectations of narrower interest rate differentials, domestic policy uncertainty, constrained fiscal policy space and increasing downside risks to domestic growth prospects are wildcards for Malaysia’s foreign portfolio flows and currency out- look, should geopolitical risks escalate further. 

The US Federal Reserve (Fed) is anticipated to start its rate hike cycle at next week’s Federal Open Market Committee meeting on March 15 and 16, while most regional central banks including BNM are projected to begin their monetary policy normalisation at a more measured pace and later than the Fed, the UOB report noted. 

The economists opined this will likely lead to a narrower interest rate differential between regional central banks including Malaysia and the Fed.