MALAYSIA’S international reserves have been increasing in the past five years, with Bank Negara adding almost US$22bil (RM59bil) to its holding since 2016.
This is an encouraging trend, considering that the central bank has recouped about 48% of the international reserves value or US$45.25bil it lost between 2012 to 2016.
This is the period when the ringgit had weakened substantially from slightly over RM3 per US dollar to above RM4.40, and the reduction in international reserves indicates that Bank Negara may have intervened to stem a slide in the ringgit.
However, in the past five years, Malaysia’s international reserves have strengthened once again to US$116.3bil (about RM483.6bil) as of Aug 30, 2021, although it remains well below the US$139.7bil record-high level in 2012.
The growth in international reserves is not exclusive to Malaysia. In fact, the current international reserves of Singapore, Indonesia, Thailand and the Philippines have surpassed the levels seen in 2012.
As an economy that is heavily-reliant on trade, having a strong foreign reserves position is very important for Malaysia.
Foreign reserves act as a “back-up fund” to support national currencies, or the ringgit in the case of Malaysia, in the event the legal tender faces rapid depreciation in value.
Reserves also act as a buffer against severe episodes of capital flight that may, in turn, trigger financial shocks.
Speaking to StarBizWeek, Socio-Economic Research Centre (SERC) executive director Lee Heng Guie says the gradual increase in Malaysia’s international reserves was due to continued surpluses in the current account (trade and services), which more than offset the sustained capital outflows.
Since 2013, there were persistent large outflows of portfolio investment, mainly from the equity market.
Meanwhile, Malaysian Rating Corp Bhd (MARC) chief economist Firdaos Rosli (pic below) says the international reserves of Bank Negara may have increased due to the demand for safe-haven assets, including US dollar, since the pandemic started in early 2020.
MARC Firdaos Rosli
Another possible reason is the anticipation of tapering by the US’ Federal Reserve and the possible impact on the emerging markets, including Malaysia.
“Tapering expectations will eventually lead to a bullish view of the greenback. In addition, the reserves may have risen due to the increase in crude oil prices and a choppy global recovery,” says Firdaos.
In 2019, Malaysia’s international reserves grew by US$2.2bil and US$4bil in 2020.
As of August 2021, international reserves rose by US$8.7bil (RM36.02bil), largely boosted by an additional allocation of Special Drawing Rights (SDR) to Malaysia of SDR3.5bil, equivalent to US$5bil (RM20.68bil), by the International Monetary Fund (IMF).
The IMF has on Aug 2 announced a US$650bil (RM2.69 trillion) SDR allocation – the largest in its history – for all members, in order to address the long-term global need for reserves, build confidence and foster the resilience and stability of the global economy.
SDRs are international reserve asset, though not money in the classic sense because they cannot be used to purchase anything.
The value of an SDR is based on a basket of the world’s five leading currencies – the US dollar, euro, yuan, yen and the British pound.
Malaysia’s international reserves of US$116.3bil (RM481.48bil) as of Aug 30 comprises foreign currency reserves (US$103.4bil or RM428.08bil), IMF reserve position (US$1.4bil or RM5.8bil), SDRs (US$6.1bil or RM25.25bil), gold (US$2.2bil or RM9.11bil) and other reserve assets (US$3.2bil or RM13.25bil).
The reserves position is sufficient to finance 8.3 months of retained imports and is 1.3 times total short-term external debt.
With the country’s rising reserves position amid the soft ringgit conditions, one wonders whether Bank Negara has been utilising its ammunition adequately to buttress the currency.
After all, the ringgit has mostly remained above the RM4 per US dollar level in the past six years.
As for this year, the ringgit’s performance has been affected by the strengthening of the US dollar.
Firdaos says there is less incentive for Bank Negara to intervene as the country’s non-ringgit debt is very small.
“Besides, a soft ringgit helps net exports to become a driver of economic growth during the present crisis.”
Malaysia has a managed floating exchange-rate regime for its ringgit, which allows the central bank to step in to support the foreign exchange in times of extreme fluctuations.
Lee says the demand and supply of foreign exchange will determine the level of foreign reserves through accumulation or depletion.
“Bank Negara has been taking short forward positions to manage the ringgit liquidity in the market. As of July 2021, the net short forward position stood at US$7.5bil (RM31.05bil).
“We believe that the central bank will be focusing on building up the external reserves and will gradually unwind net short foreign exchange positions, depending on how much and how fast the external reserves rise,” he says.
Meanwhile, Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid (pic below) points out that Bank Negara has been consistent by not targeting any specific level of ringgit but rather to provide order and stability in the foreign exchange markets.
MARC Firdaos Rosli
“In that sense, the value of the ringgit is always a reflection of the state of the country’s economy as well as the state of the global monetary policy which is mainly influenced by the US Federal Reserve,” he says.
Strong reserves position guarantees the country’s pay for the months of imports and covers the obligation of short-term external debt, hence, signals credibility and financial strength as well as boost investors’ confidence.
Mohd Afzanizam believes that Malaysia’s reserves remain adequate to face any volatility in the foreign exchange market that can be very persistent and unpredictable.
“Under the IMF guidelines of Assessing Reserve Adequacy (ARA), the rule of thumb for foreign exchange reserve adequacy would be between 100% to 150% of the ARA metric.
“Thus far, Malaysia has recorded more than 100% of the ARA metrics from 2016 to 2020,” according to him.
In 2020, Malaysia’s foreign exchange reserve adequacy was at 118% of the ARA metric, up from 114% in 2018 and 115% in 2019.
On the additional SDR allocation by the IMF, SERC’s Lee says it will supplement Malaysia’s foreign exchange reserves, support liquidity and reduce reliance on debt.
“We believe that Bank Negara will best manage and use the space of the SDR allocation of total foreign reserves within the IMF’s macroeconomic stability framework.
The IMF members can also use SDRs in a range of other authorised operations among themselves (such as loans, payment of obligations, pledges) and in operations and transactions involving the IMF, such as the payment of interest on and repayment of loans, or payment for quota increases,” he says.
Meanwhile, MARC’s Firdaos does not think the central bank would need to tap into the SDRs at present, considering the country’s ample liquidity amid high savings.
“All the government needs to do right now is to reopen the economy quickly and allow the market to self-correct in a speedier manner,” according to him.