KUALA LUMPUR: CIMB Economics Research said the continued portfolio rebalancing by foreign investors in the run up to the Fed tapering squeezed US$800mil out of Malaysia’s foreign reserves stock in November to end the month at US$136.3bil.
It said on Monday net foreign selling in the domestic equities market accelerated in November but foreign investors continued to stock up on Malaysia bonds.
“Going into 2014, we expect the volatile capital flows, triggered by the Fed's dialing back of monetary stimulus, to weigh on foreign reserves accumulation. As such, we project a lower foreign reserves stock of US$126.4bil as at end-December 2014 versus an estimated US$136.5bil at end-2013,” it said.
To recap, the research house said Malaysia's foreign reserves fell by US$800mil on-month to US$136.3bil at end-November (+US$600mil to US$137.1bil at end-October).
“The reserves are sufficient to finance 9.5 months of retained imports and are 3.7 times short-term external debt. In the January-November 2013 period, foreign reserves had decreased by US$3.4bil compared to a US$5.5bil increase in the same period last year,” it said.
CIMB Research said foreign investors sold RM3.2bil worth of domestic equities in November (the second consecutive month after -RM900mil in October) as they continue to rebalance their portfolios and lock in gains on lingering uncertainty about the timing of the Fed's dialing back of monetary stimulus.
“The latest foreign ownership of Malaysian equities eased to 22.6% in October from 24.1% in September. In contrast, foreign ownership of Malaysian debt securities rose for the second month in a row to RM235.5bil at end-October (RM228.6bil at end-September),” it said.
The 10-year Malaysian government securities (MGS) bond yields have risen by 59 basis points year-to-date to 4.07% at end-November, though lower than the 4.13% at the height of foreign selling on July 31.
Foreign holdings of MGS stood at 46.7% of total MGS outstanding as at end-October (versus 42.8% at end-September), driving foreign holdings of government bonds to 30.5% during the same period (versus 28.2% at end-September).
“We maintain our end-2013 foreign reserves estimate at US$136.5bil and introduce a lower foreign reserves forecast of US$126.4bil for end-2014.
“The main risk factor to scale back foreign reserves accumulation ahead is capital reversals as investors step up their portfolio rebalancing given the looming Fed tapering, which we expect to start in Q2, 2014. The anticipated small current account surplus also weighs on the pace of the reserves buildup,” it said.