Increase in international reserves is positive for Malaysia

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MALAYSIA’s international reserves have grown over the past five years, with Bank Negara adding nearly US $ 22 billion (RM 59 billion) to its holdings since 2016.

This is an encouraging trend, given that the central bank recovered around 48% of the value of international reserves or US $ 45.25 billion that it lost between 2012 and 2016.

This was the period when the ringgit had weakened considerably, from just over RM3 per US dollar to over RM4.40, and the reduction in international reserves indicates that Bank Negara may be intervened to stem a decline in the ringgit.

However, over the past five years, Malaysia’s international reserves have further strengthened to reach US $ 116.3 billion (approximately RM 483.6 billion) as of August 30, 2021, although they remain well in good shape. below the record high of US $ 139.7 billion in 2012.

The growth of international reserves is not exclusive to Malaysia. In fact, the current international reserves of Singapore, Indonesia, Thailand and the Philippines have exceeded levels seen in 2012.

As an economy heavily reliant on trade, it is very important for Malaysia to have strong foreign exchange reserves.

Foreign exchange reserves serve as a “relief fund” to support national currencies, or the ringgit in Malaysia’s case, in the event that legal tender undergoes rapid depreciation.

Reserves also act as a buffer against severe episodes of capital flight which can, in turn, trigger financial shocks.

Speaking to StarBizWeek, Center for Socio-Economic Research (SERC) Executive Director Lee Heng Guie said the gradual increase in Malaysia’s international reserves was due to continued current account surpluses (trade and services) , which more than offset the sustained capital outflows.

Since 2013, significant and persistent outflows of portfolio investments have been recorded, mainly from the equity market.

Meanwhile, Malaysian Rating Corp Bhd (MARC) Chief Economist Firdaos Rosli (pictured below) said Bank Negara’s international reserves may have increased due to demand for safe-haven assets, including the US dollar, since the start of the pandemic in early 2020.

MARC Firdaos Rosli

Another possible reason is the anticipation of the US Federal Reserve’s tapering and the possible impact on emerging markets, including Malaysia.

“Lowering expectations will eventually lead to a bullish view of the greenback. In addition, reserves may have increased due to higher crude oil prices and a turbulent global recovery, ”says Firdaos.

In 2019, Malaysia’s international reserves increased by $ 2.2 billion and $ 4 billion in 2020.

In August 2021, international reserves increased by US $ 8.7 billion (RM36.02 billion), largely boosted by an additional allocation of Special Drawing Rights (SDRs) to Malaysia of SDR 3.5 billion. , equivalent to $ 5 billion (RM20.68 billion), from the International Monetary Fund (IMF).

On August 2, the IMF announced an SDR allocation of $ 650 billion (2.69 trillion ringgit) – the largest in its history – to all members, to meet the long-term global need for reserves, to strengthen confidence and foster the resilience and stability of the global economy.

SDRs are international reserve assets, but not cash in the classic sense, as they cannot be used to buy anything.

The value of an SDR is based on a basket of the five major world currencies: the US dollar, the euro, the yuan, the yen and the pound sterling.

Malaysia’s international reserves of US $ 116.3 billion (RM481.48 billion) as of August 30 include foreign exchange reserves (US $ 103.4 billion or RM 428.08 billion), the reserve position of IMF (US $ 1.4 billion or RM 5.8 billion), SDRs (US $ 6.1 billion or RM 25 0.25 billion), gold (US $ 2.2 billion or 9, RM11 billion) and other reserve assets ($ 3.2 billion or RM13.25 billion).

The reserve position is sufficient to finance 8.3 months of retained imports and represents 1.3 times the total short-term external debt.

With the increasing position of the country’s reserves amid the soft ringgit conditions, one wonders whether Bank Negara used its ammunition adequately to strengthen the currency.

After all, the ringgit has remained mostly above the RM4 per US dollar level for the past six years.

As for this year, the performance of the ringgit was affected by the strengthening of the US dollar.

According to Firdaos, Bank Negara has less incentive to intervene because the country’s non-ringgit debt is very low.

“In addition, a flexible ringgit is helping net exports to become an engine of economic growth during the current crisis.”

Malaysia has a floating exchange rate regime managed for its ringgit, which allows the central bank to intervene to support the exchange during times of extreme fluctuations.

Lee says the demand for and supply of currencies will determine the level of foreign exchange reserves by accumulation or depletion.

“Bank Negara has taken short term positions to manage the ringgit liquidity of the market. In July 2021, the net short forward position was US $ 7.5 billion (RM 31.05 billion).

“We believe that the central bank will focus on building up external reserves and gradually unwind net foreign exchange short positions, depending on the size and speed of increase in external reserves,” he said.

Meanwhile, Bank Islam Malaysia Bhd Chief Economist Dr Mohd Afzanizam Abdul Rashid (pictured below) points out that Bank Negara has been consistent in not targeting any specific level of ringgit but rather to ensure l order and stability in foreign exchange markets.

MARC Firdaos RosliMARC Firdaos Rosli

“In this sense, the value of the ringgit is always a reflection of the state of the country’s economy as well as the state of global monetary policy which is mainly influenced by the US Federal Reserve,” he said. declared.

A strong reserves position secures the country’s salary for months of imports and covers the short-term external debt obligation, thus signaling credibility and financial soundness while building investor confidence.

Mohd Afzanizam believes Malaysia’s reserves remain sufficient to deal with any volatility in the forex market which can be very persistent and unpredictable.

“According to the IMF’s Reserve Adequacy Assessment (ARA) guidelines, the rule of thumb for foreign exchange reserve adequacy would be between 100% and 150% of the ARA metric.

“So far, Malaysia has recorded over 100% of ARA metrics from 2016 to 2020,” he said.

In 2020, Malaysia’s foreign exchange reserve adequacy was 118% of the ARA metric, compared to 114% in 2018 and 115% in 2019.

Regarding the additional SDR allocation by the IMF, SERC’s Lee said it would supplement Malaysia’s foreign exchange reserves, support liquidity and reduce debt dependency.

“We believe that Bank Negara will manage and make the best use of the SDR allocation space of total foreign exchange reserves within the macroeconomic stability framework of the IMF.

Members of the IMF may also use SDRs in a range of other transactions permitted among themselves (such as loans, payment of bonds, pledges) and in operations and transactions involving the IMF, such as payment of bonds. interest and loan repayments, or payment for quota increases, ”he said.

Meanwhile, MARC’s Firdaos doesn’t think the central bank would need to dip into SDRs right now, given the country’s plentiful liquidity amid high savings.

“All the government needs to do for now is reopen the economy quickly and allow the market to self-correct more quickly,” he said.


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