KUALA LUMPUR: The unexpected turn of events in the fight against COVID-19 -- namely the sharp resurgence of cases -- could hurt Malaysia’s economic fundamentals, especially when currency movement is sensitive to negative newsflows, said Public Investment Bank today.

       The investment bank said the headwind is expected to persist in the third quarter (Q3 2021) before receding in Q4 2021 as the region achieves herd immunity after doubling its efforts to inoculate the population.

       "The downside risks to regional currencies may be offset by the strong turnaround in exports, thanks to the revival in global demand for regional goods such as manufacturing, agriculture and mining,” it said in a research note today.

       Bank Negara Malaysia’s foreign exchange reserves (FX reserves) in Q2 2021 jumped by US$7.7 billion (US$1=RM4.20) year-on-year to US$111.1 billion -- a rise that is consistent with regional peers, and is sufficient to finance 8.2 months of retained imports and 1.1x of short-term external debt.

       Meanwhile, FX reserves in ringgit terms increased by RM18.5 billion to a multi-year high of RM461.5 billion, thanks to the strong trade surplus and steady capital markets performance.

       Public Investment Bank noted that policy surprises by advanced economies were a concern as that could hurt Malaysia’s foreign exchange reserves position.

       The impending start of the United States-China second round of trade talk was another cause for concern, given the potentially negative ramification on trade as well as on regional currencies, it added.

       The investment bank took note of Malaysia’s resilient FX reserve position as it is above international adequacy standards, with current markers likely able to withstand shocks and contagion effects.

       Its steady position may also underpin macroeconomic and financial system stability, especially in extreme conditions.

       "Having said that, the prospect of tightening interest rate in advanced economies could hurt our position as the impact from capital outflow could dent our fundamentals, especially currency,” it added. - Bernama