Reserves should continue to grow


  • Business
  • Saturday, 15 Mar 2003

BY RUBIN KHOO

 

THE international reserves of Bank Negara hit a new high in February reaching RM132.2 billion or US$34.8 billion. 

The RM1.2 billion increase which came during the second half of the month was attributed to two main factors; the continued large inflows from the repatriation of export earnings following a continued trade surplus, and net external borrowings by the private sector as well as revaluation gains on the expectation of a weaker US dollar against other major currencies. 

The reserves position, which is now adequate to finance 5.4 months of retained imports and is 4.3 times the short-term external debt, surpasses an earlier high of RM131.5 billion or US$34.6 billion, achieved at the end of January.  

Nonetheless, economists remain optimistic about continued growth in the level of reserves.  

“This year we have seen a good trade surplus,” says CIMB's Lee Heng Ghuie. “We have seen reserves going up as a result of return flows of export earnings. As long as there is a surplus of the current account and there is no continued significant outflow, we will see a continued rise in the reserves.” 

A recent report by Affin-UOB Securities states that external reserves are expected to reach US$37.5 billion by the end of the year. Higher reserves will basically lead to a positive balance of payment, which will in turn enable the ringgit peg to the US dollar to be maintained at 3.8. This is the major reason why higher reserves are important, explains Nor Zahidi Alias, head of research at Alliance Merchant Bank. 

However, Zahidi believes that the increase in reserves has more to do with revaluation gains stemming from a softening of the US dollar rather than with the trade surplus. While the trade numbers have been satisfactory thus far, he expects them to come under pressure soon.  

The industrial production index for January 2003 grew by just one per cent compared to the corresponding period last year, indicating a possible slowdown in export growth in months to come.  

Furthermore, while exports for the month of January surpassed market expectation growing by 11.3 per cent year-on-year, imports grew at a moderate rate of just 4.6 per cent, below market expectations.  

This was largely due to lower imports of capital goods and consumption goods. 

Imports of intermediate goods, which constitute the largest component of total imports, also rose only moderately at 3.9 per cent, reflecting a lower import demand from local manufacturers and indicating that local manufacturers could be cutting back on operations.  

Adding to the downside is that exports of electrical and electronic products (E&E), which are integral to overall export growth, declined for two consecutive months.  

One economist at a research house says the actual trend for exports can thus only be observed after March.  

With these factors bearing in on us, Zahidi stresses that the trade surplus cannot be dependent upon as being the major contributor to stronger reserves. It will instead be the softer US dollar, which is likely to come off sharply in the coming months.  

The weak dollar coupled with a growing current account deficit is likely to cause investors to pull out of the capital markets and add further downward pressure on the US currency.  

But this does not necessarily bode well for the Malaysian economy. While our reserves position may benefit, the equity market could be adversely affected as investors could avoid the local market as a result of the dollar-ringgit peg. 

Earlier this week, Second Finance Minister Datuk Dr Jamaludin Jarjis also confirmed that the government would be issuing new bonds as a means to finance its operations.  

There had been speculation that bonds to the value of RM18 billion would be issued by the government to finance its pump-priming measures. The timing, according to economists, is unavoidable.  

“Because of the budget deficit, the need for funding is there,” says CIMB's Lee. 

However, a comparison of US treasuries against the ringgit indicate that the spread has gone up as investors shift to pull out of emerging markets and shift to developed economies instead.  

“We could have had a better interest rate a few months ago,” says Zahidi, “because the spread is going up now.” 

But despite this, he nonetheless feels that the timing is right given the fact that the scenario for the second half of the year looks bleak.  

The increasing prospects of war coupled with the softening of the US dollar with the added possibility of exports coming under pressure all point to the fact that the issuance should be done as quickly as possible. 

Lee, however, says that it may not be necessary to look for funding abroad. He suggests that the government should first look to tapping local sources. Going overseas will undoubtedly have an impact on the national debt.  

While this is still manageable, the capacity to repay will, nonetheless, be a factor in the overall rating of the Malaysian economy.  

This is also the sixth consecutive year that government will be incurring a budget deficit. But the level, according to Lee, is still manageable compared to other countries in the region. This is the third consecutive budget deficit for Singapore. Thailand also has a growing budget deficit while in Hong Kong and the Philippines; the deficit has reached the critical stage.  

“It is the whole region that is affected,” agrees Zahidi, “But what choice do you have. This is my personal opinion but I believe that the surplus generated in previous years should be used at a time like this.  

“Some argue that a big budget deficit would in the long-term undermine productivity. But in the meantime, there is a problem to fix. We don't want to have things like high unemployment and that's why the deficit is needed.” 


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