BANK Negara Malaysia will unveil on Aug 21 the status of its reserves as at mid-August, when the ringgit weakened past the key psychological level of 4.00 to the US dollar for the first time in 17 years. The expectations are for a further decline.
Last week, the central bank’s data showed that in July, its reserves had fallen by US$8.8 billion to US$96.7 billion by the end of the month, breaching the US$100 billion mark for the first time since August 2010. During the month, the ringgit depreciated from 3.77 to 3.83 against the US dollar and had sunk as low as 4.127 by mid-morning on Aug 14 before ending the week at 4.0805.
Economists say the decline was likely caused by the net selling of Malaysian equities and bonds. Year to date, the cumulative net foreign outflow from the equity market totals RM11.8 billion, trumping the RM6.9 billion seen for the whole of 2014, Shazma Juliana Abu Bakar of TA Securities says in an Aug 13 note. And according to CIMB Research’s Jaratt Ma, overseas investors were net sellers of Malaysian equities for the third straight month, offloading RM3 billion’s worth in July compared with RM3.1 billion in June. This caused the foreign holding of equities to fall to 22.7% of total market capitalisation in July from 22.9% in June, he tells clients in a recent note.
Foreign holding of Malaysian Government Securities had fallen to about 40% recently from 48.5% as at end-June while yields had spiked. As at Aug 13, the yield of the benchmark 10-year MGS had risen to 4.18% while that of the three-year MGS had inched up to 3.36%. A month ago, the yields were 4.02% and 3.27% respectively.
A stronger US dollar on expectations of a rise in US interest rates, softer commodity prices and global growth is likely to continue to weigh on Malaysia’s reserves, economists say. The current uncertain political situation has also scarred investor confidence, exacerbating the ringgit’s weakness and affecting the reserves.
“This is compounding the capital outflow, as reflected in the dumping of equities and bonds by foreigners, while domestic residents are diversifying their ringgit holding into other currencies,” says independent economist Lee Heng Guie, adding that while foreign currency deposits stood at RM92.8 billion in 2014, as at June this year, they totalled RM108.7 billion.
During periods of large net outflows, a sizeable reserve base puts central banks in a more comfortable position to intervene in the market, should they choose to, and smooth out any big fluctuation in the local currency.
The International Monetary Fund’s Balance of Payments Manual refers to international reserves as external assets readily available for meeting balance of payments financing needs. International reserves are also useful to maintain confidence in a currency and economy and serve as a basis for foreign borrowings.
With the ringgit hovering above 4.00 to the US dollar — levels last seen during the 1997/98 Asian financial crisis before a 3.80 peg to the greenback and capital controls were instituted in September 1998 — it is perhaps no surprise that talk of capital controls has resurfaced.
According to Lee, Bank Negara’s reserves totalled only US$21.7 billion in December 1997 when the ringgit was at around 3.80 before spiking to 4.00 to the greenback 17 years ago. At its weakest, the ringgit tumbled to 4.885 in March 1998 before a peg was announced six months later. The older generation will recall the then prime minister Tun Dr Mahathir Mohamad lashing out at “international manipulators” such as financier George Soros for the region’s currency turmoil.
Fielding questions at a news conference on the morning of Aug 13, Tan Sri Zeti Akhtar Aziz, Bank Negara’s governor for nearly 16 years, said the central bank is “very comfortable” with its level of reserves.
“We have held reserves way beyond the level that is needed for our country. Therefore, the current level is well within what we are comfortable with; it will take us through the next few months and next year,” she told reporters.
“The fact that we have a surplus in our current account and that we have a steady inflow of foreign direct investment is also supporting that. If it was not the case, it would be more challenging,” she reassures, calling fluctuations “normal” during periods of high volatility. She also commented that the reserves had fallen by a bigger magnitude before.
During the 2008/09 global financial crisis, the reserves fell to a low of US$87.7 billion in April 2009, down 30.3% or RM38.1 billion over 10 months from US$125.8 billion in June 2008. They were built up again to a peak of US$141.4 billion in May 2013.
The reserves have fallen by nearly a third since then, though, to US$96.7 billion in July 2015 — which was down 26.7% or RM35.3 billion over the past 11 months alone — from US$132 billion in August 2014.
At US$96.7 billion in July, the reserves were sufficient to sustain 7.6 months of retained imports and cover 1.1 times short-term external debt. The latter has created much consternation and is likely to be watched in the coming weeks and months.
However, Zeti pointed out that much of the short-term external debt consisted of inter-company loans and loans by the banking system, whose assets matched its liabilities and about 90% of whose activities was funded by domestic deposits.
She said she was confident the country could grow its reserves again on the back of the current account surplus and believes that Malaysia will still look attractive to investors because of its growth potential.
“The whole of Asia is a profit centre. Asean, in particular, has been a growth centre in the global economy. Therefore, funds will continue to look at our economy and our financial markets — because we are an important growth centre in the global economy,” she explained.
In the meantime, however, the veteran central banker is expecting headwinds to continue until global and domestic uncertainties are resolved. That Malaysia’s pension funds and insurance companies have large balance sheets offers stability to the domestic market, should there be excessive and unwarranted foreign selling. But that alone will not rectify the confidence crisis Malaysia is faced with now.
“It is not a disaster, it is a perception issue. The ringgit’s depreciation has created uncertainty and this will continue until the situation has stabilised. It is about confidence now,” says Maybank Investment Bank’s chief economist Suhaimi Ilias.
This article first appeared in digitaledgeWeekly, on August 17 - 23, 2015.