Friday 29 Mar 2024
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KUALA LUMPUR: Malaysia’s foreign exchange (forex) reserves fell to the lowest in almost five years yesterday, but local economists said the dwindling currency reserves are not yet a cause for concern.

Bank Negara Malaysia (BNM) yesterday reported RM379.4 billion (US$100.5 billion) in its forex holdings as of July 15, 2015, down from RM398.1 billion a month earlier. The international reserves with the central bank amounted to RM328.7 billion in December 2010.

“I don’t see the risk of reserves eroding significantly this year as I don’t think BNM will defend the ringgit all the way,” former CIMB Investment Bank Bhd regional head of economics, Lee Heng Guie, told The Edge Financial Daily yesterday.

He said the exchange rate policy adopted by the central bank is under a managed floating exchange rate regime, which gives it flexibility yet allowing for some intervention to defend the ringgit and weed out excessive volatility in the local currency.

“We’ve seen many rounds of capital outflows, which saw forex reserves falling below the US$100 billion mark. We are not in a crisis of an extreme level requiring drastic intervention. BNM will not allow forex reserves to fall too sharply as that will erode confidence in the economy,” said Lee.

Lee opined that going forward, it is more important for Malaysia to strengthen its fiscal position.

“A narrower fiscal deficit by 2020 is not good enough. The government needs to be more ambitious in achieving a balanced budget, and eventually [to sustain] consistent years of comfortable balance or surplus,” he said.

To achieve this, managing government debt and containing contingent liability risk are equally crucial.

“The self-imposed 55% government debt-to-gross domestic product (GDP) ratio needs to be brought down even lower, and this requires the Ministry of Finance to impose more stringent discipline on its spending programme and not just by increasing its revenue,” Lee pointed out.

Kenanga Investment Bank Bhd economist and deputy head of research Wan Suhaimie Wan Mohd Saidie concurred that BNM should be able to manage the drop in forex reserves for now.

“It (forex reserves level) was far worse during the 1998 Asian financial crisis,” he said. Wan Suhaimie pointed out that the dwindling forex reserves since late last year were primarily due to the ‘taper tantrum’.

“Domestically, we have issues such as Fitch Ratings’ downgrade of Malaysia’s credit rating [in July 2014]. Lower exports were also not sufficient to replenish the level of reserves,” he said, noting that the 1Malaysia Development Bhd (1MDB) debacle is more of a “confidence issue” exacerbating the outflow of capital from the country.

Still, not all economists are optimistic about Malaysia’s economy, given the near ceaseless stream of negative news flow and the governance concerns it has created. Bloomberg reported that the ringgit dropped 0.4% to 3.8063 a US dollar yesterday, the biggest loss since July 6. It has fallen 8.1% this year and reached a 16-year low of 3.8130 this month.

BNP Paribas said the country still faces the risk of a “multi-notch downgrade” of its sovereign credit rating, despite Fitch affirming its “A-” rating last month.

In its Asia Desknote yesterday, the French bank said investors should remain “fundamentally wary” of Malaysia due to the marked deterioration in the country’s external finances, which may result in a “BBB-” rating.

“Malaysia’s public finance performance trends against rating peer medians are a particular concern,” it said, noting that the persistence of a relative deterioration against the country’s peers in the region suggests that Malaysia’s sovereign rating should have been downgraded regardless of fiscal reforms implemented,” it added.

It noted that the country had rolled out two important fiscal reforms to bolster its public finances — the implementation of the goods and services tax and the abolishment of fuel subsidies — which should result in greater future fiscal flexibility and narrowing its fiscal deficit.

However, BNP Paribas said the lower global oil prices and consistently negative political news flow had aggravated the balance of payments deterioration and produced an escalation in ringgit volatility and depreciation pressure.

“Data on the nation’s forex reserves may provide an indication of whether the central bank intervened after the ringgit weakened beyond 3.80 a US dollar, the level it was pegged at during the 1997-1998 Asian financial crisis before the fixing was abandoned in 2005,” it said.

“If history is any guide, rating agencies’ attempt to catch up with the market may further escalate the balance of payments strain, leading to a substantial market overshoot in USD/MYR beyond 4.0,” warned BNP Paribas, adding that BNM’s response to currency strains by depleting forex reserves has led to a weakening of external solvency.

“We estimate BNM’s defence of its MYRNEER (Malaysian Ringgit Nominal Effective Exchange Rate) peg has cost about US$40 billion since April 2013,” said BNP Paribas, adding that Malaysia’s forex reserves could soon dip below US$100 billion for the first time since 2010.

 

This article first appeared in The Edge Financial Daily, on July 24, 2015.

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