KUALA LUMPUR (June 9): The return of positive net total foreign flows in the past two months contributed to the faster pace of increase in the external reserves in April to May 2017 of +US$2.6 billion versus +US$0.8 billion in 1Q17.

The positive net total foreign flows should ease concerns over the build-up in Bank Negara Malaysia (BNM)’s “net short positions in forwards and futures of foreign currencies, vis-à-vis domestic currency (including the forward leg of currency swaps)” which jumped from US$2.8 billion in October 2016 to US$19.1 billion in April 2017.

“The surge in central bank’s net FX short positions reflects BNM’s borrowing US dollar from the banking system by swapping with ringgit to meet the demand for foreign currencies — namely US dollar — due to the earlier capital outflows rather than via depletion of external reserves to manage the market liquidity,” said Maybank IB Research in a report dated June 8. 

“According to BNM, its current FX swaps position is around 20% of the official external reserves, which is in line with the positions in other regional central banks,” said Maybank IB.

Maybank IB opined reversal of net portfolio capital outflows into net inflows over the past two months, suggest buildup in BNM’s net FX short positions is peaking.

Furthermore, Maybank IB noted total amount consists of US$3.2 billion in positions up to 1 month, US$6.8 billion in positions over 1 month to 3 months, and US$9.1 billion in positions over 3 months to 12 months, pointing to BNM rolling over the positions into longer maturity.

This indicates the central bank is currently focusing on building up the external reserves and will gradually unwind net short FX positions, depending on how much and how fast the external reserves rise, Maybank IB said.

“From BNM’s standpoint, the domestic bond market is now more resilient, as speculative positions have mostly exited the market and there is a larger composition of stable and longer term investors, which should help in the process of unwinding its FX swap positions,” Maybank IB added.

Reported last Wednesday, BNM international reserves rose 0.7% to US$98 billion (RM433.3 billion) as at May 31, 2017, from US$97.3 billion (RM430.5 billion) as at May 15, 2017.

The central bank said the reserves position is sufficient to finance 8.1 months of retained imports and is 1.1 times the short-term external debt.

Of the reserves, foreign currency made up the biggest portion at US$91.6 billion.

As at May 31, 2017, total assets were RM460.54 billion, while currency in circulation rose 1.4% to RM100.47 billion, from RM99.06 billion as at May 15, 2017, the central bank said.