1H Aug 14 2H Aug 14 1H Sep 14 2H Sep 14 1H Oct 14 2H Oct 14 1H Nov 14 2H Nov 14 1H Dec 14 2H Dec 14 1H Jan 15 2H Jan 15 1H Feb 15 2H Feb 15 1H Mar 14 2H Mar 15 1H Apr 15 2H Apr 15 1H May 15 2H May 15 1H Jun 15 2H Jun 15 1H Jul 15 2H Jul 15 1H Aug 15 2H Aug 15 1H Sep 15 Economic Research, Strategic Management Mohd Afzanizam Abdul Rashid Chief Economist 03-2088 8075 afzanizam@bankislam.com.my BNM s international reserve assets rose to USD95.3 billion as of 15 September Facts As of September 15, the BNM international reserve assets increased to USD95.3 billion (RM360.1 billion) from USD94.7 billion (RM357.7 billion) recorded on August 28. This represents the second fortnightly increases amidst heightening concern on weak Malaysian Ringgit (MYR). The reserve level is deemed to be sufficient to fund 7.3 months of retained imports as well as 1.1 times of short-term external debt. From a year ago, the reserve assets have fallen by USD36.2 billion. Chart 1: International reserve assets (USD billion) 140.0 130.0 132 120.0 110.0 100.0 95.3 90.0 80.0 Source: BNM Our view The latest reserve statistics showed that the intervention by the BNM in the foreign exchange market has been minimal. It also suggests high tolerance level on the part of the central bank with respect to MYR. The recent interview with the BNM Governor was a clear manifestation that the value of MYR was not a reflection of its prevailing fundamental. Therefore, efforts or rather aggressive intervention can be futile as the market has become increasingly punitive. In that case, it s better to conserve. In addition, the external macro environment has been unpredictable and this may not help in setting the proper value of MYR in the short-term. For instance, the probability of US Federal Fund Rate (FFR) hike at December meeting was put at 35.9% as implied by the FFR futures. This was lower compared to a month ago which place such odds at 45.3%. Page 1
Situation in China is also brewing with the economy is anticipated to grow 6.8% in 2015 and 6.7% in 2016 based on the latest prediction by Asian Development Bank (ADB). This was lower compared to the earlier estimates which pegged the GDP growth rates at 7.2% and 7.0% for 2015 and 2016 respectively. Therefore, we are not sure whether China s official would incline to devalue its currency again particularly when their exchange rate continue to rise against Asian countries. Be that as it may, the research paper written by the IMF researchers could give some perspective on our reserve level. In a paper entitled Assessing Reserve Adequecy in 2011, the author suggested the word Adequecy should be considered against total resources available to meet shocks which is a broader concept than the balance of payment-determined definition reserve assets. This comprises central bank swap lines, sovereign wealth funds (SWF) and access to financing from the IMF. In this regard, the BNM has taken proactive measures when they signed renewal of bilateral currency swap arrangement with the People s Bank of China (PBOC) on April 17 this year. Such arrangement will promote the use of local currencies for payment settlement and thus, limiting the country exposure to US dollar. As for the SWF, we may want to consider our International Investment Position (IIP) which records a comprehensive data on Malaysia assets and liabilities abroad. As for the 2Q 2015, the country recorded a net surplus IIP (assets minus liabilities) of RM33.9 billion, the first surplus balance since 2012 (see Chart 2). The IIP assets and liabilities include direct investment, portfolio investment, financial derivatives, and other investment and reserve assets made by corporations, GLCs, GLIC and BNM. As such, any income accrues or gains from this investment will definitely help to sustain our balance of payments and ultimately, the BNM reserve assets. Chart 2: Net international investment position (IIP) in RM billion 40.0 30.0 20.0 10.0 - (10.0) (20.0) (30.0) (40.0) (50.0) (60.0) 33.9 (1.2) (17.8) (13.1) (47.1) 2012 2013 2014 1Q 2015 2Q 2015 Source: Department of Statistics Malaysia (DOSM) On a broader sense, the reserves are only part of a country s defense against shocks. Other factors would include sound macroeconomic and prudential policy framework which could limit the country s vulnerability. These may take a form of sustainable level of public debt, monetary policies that maintain stable inflation rate as well as effective supervision that limit contingent risks from the financial sector. Thus far, Malaysia s government debt remained below than the self-imposed limit of 55% of GDP while BNM has normalised its Overnight Policy Rate (OPR) by 125 basis points between 2010 and 2014. Meanwhile, macro prudential measures which were introduced way back in 2010 have produced desirable result when growth in household loan continues to moderate. Page 2
Chart 3: Federal government debt as % of GDP 60.0% 55.0% 50.0% Self-imposed limit @ 55% 50.8% 51.1% 51.5% 53.3% 54.7% 54.5% 53.8% 45.0% 42.1% 40.6% 40.1% 39.8% 40.0% 35.0% 30.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1H 2015 Source: CEIC and BNM Chart 4: Household loans growth y-o-y% 15.0% 14.0% 13.0% 12.0% 13.2% 11.0% 10.0% 9.0% 8.6% 8.0% Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Source: CEIC and BNM Against such backdrop, we should not overly focus on international reserve assets as a means to gauge country s ability to fend off currency volatility. Furthermore, currency market is extremely volatile and it would be unwise to allocate excessive resources to stablise the exchange rate. What matters is the ability for the country to generate positive growth amidst challenging prospects. In time, the foreign exchange market will adjust accordingly to the fundamentals. Page 3
Table 1: International Investment Position (RM million) Tahun & Suku Tahun/ Year & Quarter 2012 2013 f 2014 p Q115 p Q215 p ASET/ ASSETS 1,225,683 1,354,089 1,450,972 1,489,792 1,531,361 1. Pelaburan Langsung/ Direct Investment 424,484 479,109 534,231 562,827 589,076 1.1 Ekuiti & Dana Pelaburan Saham/ Equity & Investment Fund Shares 235,722 264,461 303,562 314,249 316,152 1.2 Instrumen Hutang/ Debt Instruments 188,762 214,648 230,669 248,578 272,925 2. Pelaburan Portfolio/ Portfolio Investment 155,023 196,867 237,125 258,619 274,581 2.1 Ekuiti & Dana Pelaburan Saham/ Equity & Investment Fund Shares 100,486 132,092 158,871 172,086 179,498 2.2 Sekuriti Hutang/ Debt Securities 54,537 64,775 78,254 86,533 95,083 3. Derivatif Kewangan/ Financial Derivatives 10,501 6,946 9,843 10,326 9,928 4. Pelaburan Lain/ Other Investment 208,471 229,314 264,428 268,371 259,676 5. Aset Rizab/ Reserve Assets 427,204 441,853 405,345 389,649 398,099 LIABILITI/ LIABILITIES 1,243,445 1,401,158 1,464,083 1,491,020 1,497,417 1. Pelaburan Langsung/ Direct Investment 462,104 504,749 527,530 538,041 544,121 1.1 Ekuiti & Dana Pelaburan Saham/ Equity & Investment Fund Shares 382,662 414,110 429,165 434,535 435,641 1.2 Instrumen Hutang/ Debt Instruments 79,442 90,639 98,364 103,506 108,479 2. Pelaburan Portfolio/ Portfolio Investment 557,537 619,778 618,351 626,577 611,498 2.1 Ekuiti & Dana Pelaburan Saham/ Equity & Investment Fund Shares 247,803 282,846 277,534 277,939 258,235 2.2 Sekuriti Hutang/ Debt Securities 309,734 336,932 340,818 348,638 353,263 3. Derivatif Kewangan/ Financial Derivatives 10,920 7,610 9,899 10,401 9,258 4. Pelaburan Lain/ Other Investment 212,884 269,020 308,303 316,001 332,541 KEDUDUKAN PELABURAN ANTARABANGSA BERSIH/ NET INTERNATIONAL INVESTMENT POSITION Source: Department of Statistics Malaysia (DOSM) -17,762-47,069-13,111-1,227 33,943 Page 4
Produced and issued by BANK ISLAM MALAYSIA BERHAD (Bank Islam) for private circulation only or for distribution under circumstances permitted by applicable laws. All information, opinions and estimates contained herein have been compiled or arrived at based on sources and assumptions believed to be reliable and in good faith at the time of issue of this document. This document is for information purposes only and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. No representation or warranty, expressed or implied is made as to its adequacy, accuracy, completeness or correctness. All opinions and the content of this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Bank Islam as a result of using different assumptions and criteria. No part of this document may be used, reproduced, distributed or published in any form or for any purpose without Bank Islam s prior written permission Page 5