Maybank Research: Portfolio capital flows to determine external reserves

File pic of Bursa Malaysia screens. CIMB lowered its end-2015 target for the KLCI to 1,700 from 1,800.

KUALA LUMPUR: Portfolio capital flows will play a key role in determining Malaysia’s direction and level of external reserves, against a backdrop of sustained but narrower account surplus.

Maybank Investment Bank Research said on Friday the volatile foreign portfolio flows so far this year reflected a range of factors that have affected market sentiment.

This includes shifting expectations on the US Federal Reserves’s interest rate policy and China’s economic outlook, crude oil price movements, rebalancing in Malaysia’s weightage in MSCI, and the latest being Britain’s exit from the European Union which adds politics to the list of headwinds and downside risks facing the global economy, financial markets and currencies, it said.

The research house said portfolio capital flows will play a crucial role in determining the direction and level of external reserves against the backdrop of sustained but narrower current account surplus, as well as a better prospect for FDI inflows.

This, it said, was as approved FDI by MIDA rebounded 10.6% on-year to US$3.1bil in the first quarter of 2016 after the 6.3% drop to US$10.1bil in actual FDI into Malaysia last year.

Malaysia’s external reserves on June 30, 2016 fell US$0.2bil to US$97.2bil from US$97.4bil on 15 June 2016, and equal to 8.1 months retained imports and 1.2 times short-term external debt. 

However, the ringgit value of external reserves jumped RM7.2bil to RM390.4bil from RM383.2bil over the same period, reflecting quarterly foreign exchange revaluation gain as ringgit weakened against the US dollar to 4.03 at end-June 2016 and 3.90 at end March 2016. 

While the June 2016 data on foreign flows in Malaysian bond market is not yet out, foreigners remained net sellers of Malaysian equities last month, totaling –RM1.8bil, it said.