Some forex analysts and dealers concurred that after a US$1.9bil (RM8.4bil) drop in foreign exchange reserves as at November 30, there could be some selling of Malaysian bonds and equities by foreign investors in view of the strengthening of the US dollar with President-elect Donald Trump’s infrastructure spending and tax cuts on the cards which could trigger inflation. This they added could see stronger chances of a hike in US interest rates to stem rising inflation.
External reserves as at Nov 30 fell by US$1.9bil to US$96.4bil (RM399.6bil) from US$98.3bil (RM407.8bil) at mid-November amid foreign selling in the equity and bond markets and Bank Negara’s intervention in the foreign exchange market to stabilise the ringgit.
This latest reserve numbers is equivalent to support 8.3 months of retained imports and 1.2 times of short-term external debt.
Meanwhile, Affin Hwang Capital Research believe the country’s foreign reserve would come under some pressure this month and in the first quarter of 2017 with potential risk of portfolio capital outflows.
“Market observers are concerned on capital outflows as the levels of foreign holdings in Malaysian Government Securities (MGS) remains high at 48.4% as at end-November 2016 (51.5% as at end-October 2016). The foreign holdings of MGS fell by RM11.5bil to RM173bil as at end-November, whereas the total bond foreign holdings (including MGS) declined by RM19.9bil to RM221bil as at end November.
“We believe that if the strength of US dollar continues, this will likely lead to increase foreign investors’ appetite for US dollar-denominated assets. There is still some possibility of selling pressure on foreign holdings of Malaysian bills and bonds as well as MGS, but will remain manageable.
"However, we believe that the sustainability of trade surplus, and hence current account surplus, will continue to support reserve level in the country, where we project reserves to be about US$94.5bil by end-2016 (US$95.3bil by end 2015), it noted.
The research house said that Bank Negara’s latest measures effective December 5 on export proceeds is expected to support the country’s reserves and ringgit though uncertainties in the forex market remains, especially in the first half of 2017.
Under the measures, exporters will still have six months to repatriate their new export proceeds, but once the new proceeds are repatriated back, the measure would require exporters to convert 75% of their new export proceeds to ringgit and retaining 25% of proceeds in foreign currency.
However, the existing foreign currency balances are not affected. The central bank has also proposed that exporters placing their ringgit proceeds from exports in local commercial banks can earn a special deposit rate of 3.25% per annum.
Maybank IB Research expect external reserves level to stabilise by early next year as the impact of the repatraition of export earnings on external reserves kick in.