Frankly Speaking: Exercise prudence in managing international reserves

This article first appeared in The Edge Malaysia Weekly, on June 27, 2022 - July 03, 2022.
Frankly Speaking: Exercise prudence in managing international reserves
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In times of excessive volatility in financial markets, Bank Negara Malaysia’s international reserves will be closely monitored due to their function in preserving macroeconomic and financial stability.

The central bank’s foreign reserves of US$109.2 billion (RM480.9 billion) as at June 15, 2022, was the lowest since early 2021; and the drop of US$3.6 billion from May 31, 2022, was also the largest in seven years, according to Bloomberg calculations.

However, economists do not think the decline in international reserves has reached alarming levels yet as the reserves position is sufficient to finance 5.5 months of imports of goods and services, and is 1.1 times the total short-term external debt. 

Having said that, it should warrant concern if the amount continues to fall at the current pace.

International reserves are primarily accumulated through cross-border trade and investment inflows, which are often influenced by external developments. It is also a tool for the central bank to take the necessary steps to maintain an orderly market through intervention in exchange rates to absorb the impact of external shocks.

Over the years, Bank Negara has built strength in external financial assets, with the level of reserves increasing substantially from about US$20 billion during the 1997/98 Asian financial crisis to US$91 billion in the 2008 global financial crisis period.

While the central bank has sufficient buffer to counter the external headwinds, it should prepare for more capital flight, as the acceleration in global monetary tightening has contributed to heightened capital flows.

Some economists have cautioned that Bank Negara is now under pressure to make a bold move in monetary policy normalisation, following the super-sized US rate hikes as well as the need to tackle high inflation.

There are three more monetary policy committee meetings scheduled in the second half of the year — in July, September and November. The expectation is for a hike of 50 basis points by September, to bring the overnight policy rate to 2.5% from the current 2%. To ensure the economy stays resilient, prudence must be exercised in managing international reserves.

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