PETALING JAYA: Malaysia’s external reserves position has rarely looked stronger. Bank Negara Malaysia (BNM) reported that international reserves reached US$122.7bil as of Aug 29, the highest level in a decade.
This milestone, equivalent to 4.8 months of import cover and 0.9 times short-term external debt, is more than just a statistical achievement.
It has significant implications for capital flows, the ringgit’s trajectory, and valuations across Malaysian equities and bonds.
On paper, Malaysia has surpassed the conventional adequacy benchmark – three months’ import cover – by a comfortable margin. But do record-high reserves finally put to rest fears of capital flight?
“In current circumstances, capital movements remain very volatile and the political protests around the region are linked to currency speculation.
“While large foreign currency reserves can provide stability and a buffer against economic shocks, they can also lead to inefficiencies and vulnerabilities if not managed properly.
“The impact largely depends on the context of the economy, the reasons for accumulating reserves, and how they are utilised,” Centre for Market Education chief executive office Dr Carmelo Ferlito told StarBiz.
That said, how does Malaysia’s reserve position compare with its Asean peers? Is 4.8 months of import cover still enough in today’s volatile global environment?
Indonesia’s external reserves, at around US$152bil, cover more than six months of imports. The Philippines holds US$106bil, sufficient for over seven months of imports.
Thailand’s US$262bil stockpile offer even longer coverage, while Singapore towers over the region with nearly US$389bil in reserves.
“Malaysia’s reserves are therefore adequate, above the conventional threshold of three months.
“However, Asean peers have stronger reserves with import covers of six to nine months, and Malaysia’s import cover has drifted down slightly,” noted MARC Ratings Bhd chief economist Dr Ray Choy.
He added that while the reserve position is solid, “there is room for improvement over time, which aligns with the government’s vision of advancing industrialisation and exports, to boost economic growth and external balances.”
This underscores Malaysia’s middle- ground strategy: strong enough to inspire confidence, but not so large as to carry heavy opportunity costs.
“Malaysia’s current reserve position is broadly adequate rather than excessive, which entails little opportunity costs.
“The priority, therefore, should be to continue building reserves at a measured pace,” Choy said, highlighting that a stronger buffer not only reinforces external stability but also helps lower risk premiums on Malaysian assets.
For monetary policy, higher reserves also translate to greater flexibility.
With BNM having trimmed its overnight policy rate to 2.75% in July to support slowing growth, some investors worry the easing could trigger renewed capital outflows.
Instead, Malaysia’s record-high external reserves provide a crucial cushion – offering reassurance that the central bank can maintain an accommodative stance without immediately undermining the ringgit or sovereign bonds.
“As a goal, it would be beneficial for Malaysia’s import cover to climb the ranks and to also achieve at least one-time short-term external debt cover,” Choy added, suggesting that stronger reserves would expand BNM’s room to manoeuvre.
However, Ferlito cautioned that context matters. “If a country accumulates reserves through excessive monetary easing or by printing money, it can lead to inflation. This is particularly relevant if the reserves are held in a way that increases the money supply in the domestic economy,” he said.
For Ferlito , it is not just about the headline figure, but the economic mechanisms that underpin reserve accumulation.
Meanwhile, the ringgit has gained more than 6% against the US dollar this year, helped in part by the confidence that stronger reserves bring.
This raises the question: Could the ringgit become “too strong” – potentially denting export competitiveness?
Choy dismissed this concern.
“A stronger reserve position is vital to safeguard the value of the ringgit and sustain its relatively low-volatility profile.
“As currency markets are generally efficient, long-term trends and levels tend to reflect underlying fundamentals, suggesting limited risk of the ringgit becoming ‘too strong’.”
Instead, Choy argued that the real policy focus should be on ensuring durable growth drivers beyond consumption.
“What is needed is a shift toward investing, innovating, producing, building, selling, and exporting – particularly in the context of adequate reserves and modest current account balances,” he said.
Ferlito offered a slightly different perspective, noting that “while reserves play a role, I doubt they are the main reason behind (currency) appreciation or depreciation, which remains mostly speculative.”
This serves as a reminder that while reserves help anchor stability, market flows are still heavily influenced by sentiment and speculation.
When it comes to equities, stronger reserves alone are unlikely to trigger a re-rating.
As Choy puts it: “The performance of equities ultimately hinges on two key drivers: expected earnings growth and valuation multiples. Given that reserves have increased (only) slightly, the macro narrative on this front is limited.”
He added that Malaysia’s price-to-earnings multiples currently are in line with historical averages, and earnings expectations are broadly neutral.
Choy expressed hope that the upcoming Budget 2026 will deliver fresh catalysts for gross domestic product growth and, by extension, corporate earnings.
Bonds, on the other hand, may benefit more directly.
Greater reserve coverage reassures foreign investors of Malaysia’s ability to meet its obligations, helping to keep credit spreads tight.
Over time, sustained reserve accumulation could lower the risk premium on Malaysian sovereign debt, translating into lower yields and higher prices for Malaysian Government Securities.
One lingering question is whether parking US$122.7bil in reserves represents a missed opportunity for domestic investment.
“Holding large reserves means that funds are not being used for domestic investments. Holding reserves is better than bad investments, but here too, striking the right balance is important,” argued Ferlito.
Choy, however, stressed that Malaysia is not in an excessive position where opportunity costs bite.
“Over time, this improved perception of resilience could support a re-rating of domestic financial markets, particularly in sovereign bonds and equities.
“Sustained reserve accumulation also strengthens perceived policy credibility, giving the country greater flexibility in navigating external shocks and anchoring the ringgit,” he said.
Compared with Singapore, Thailand and Indonesia, Malaysia’s reserves are modest. But reserves are only part of the investor calculation.
“For now, although Malaysia’s reserves rank below its Asean peers, it benefits from relatively lower political risk premiums – especially when contrasted with potential policy uncertainties following Thailand’s recent change of its prime minister and the replacement of Indonesia’s finance minister amid social unrest,” Choy said.
In other words, Malaysia’s comparative political stability can partly offset its smaller reserve buffer in the eyes of global investors.
More sceptically, Ferlito suggested that “the inflow and outflow of capital is mainly driven by speculative reasons, with little anchor toward reserves.”
This divergence of views underscores that external reserves are just one piece of the puzzle, not the sole determinant of foreign capital flows.
Malaysia’s decade-high foreign reserves provide a stronger cushion against volatility, boost policy flexibility for BNM, and underpin a more stable ringgit.
This backdrop reduces tail risks in equities and bonds, though earnings growth and policy reforms remain the real catalysts for re-ratings.
As Choy summed it up: “A stronger reserve buffer not only reinforces external stability but also enhances investor confidence, which translates into lower risk premiums on Malaysian assets.”
For now, Malaysia may not match the firepower of Singapore or Thailand, but it is carving a path that blends adequacy with stability.
In a region rife with political and policy uncertainty, that combination could make Malaysia an increasingly attractive bet for global investors seeking both resilience and reasonable returns.
