BANK Negara Malaysia (BNM) international reserves increased by USD2.1bil or 1.9% month-on-month, reaching USD116.8bil as of 30 August 2024, the highest level since December 2021.

“Despite this increase from July, reserve adequacy in terms of import coverage dipped to 5.4 months (July: 5.5 months), likely due to a surge in imports,” said Kenanga Research (Kenanga) in the recent Economic Viewpoint Report.

Additionally, the reserves remain just sufficient to cover 1.0 time the total short-term external debt, barely meeting the International Monetary Fund (IMF)’s minimum recommended adequacy level.

The rise in reserves was primarily driven by a sharp increase in foreign currency reserves, boosted by significant capital inflows. 

Foreign currency reserves increased to an almost 10-year high, supported by significant foreign inflows (RM11.5bil) into the capital market, along with potentially higher repatriation of export earnings and foreign direct investment. 

Notably, BNM’s net FX reserves increase rose for the third consecutive month to USD59.3bil in July (Jun: USD59.1bil). 

However, the short position in FX swaps surged to a record high of USD29.3bil, indicating continued BNM intervention.

Gold, special drawing rights, other reserve assets and IMF reserve positions remained relatively unchanged. In ringgit terms, the value of BNM reserves hit another record high of RM550.5bil.

The ringgit surged in August, becoming the world’s best-performing currency with a sharp 6.0% appreciation-the fastest September 1998, when the local note was pegged to the USD. 

This was primarily driven by a sharp correction in the USD, as the Fed hinted at a possible rate cut in September amid cooling inflation and a weakening labour market. 

Malaysia’s strong growth outlook, stable monetary policy, fiscal reforms, and relative political stability further bolstered the ringgit’s performance. 

Other ASEAN-5 currencies also benefited from the USD’s decline, with the THB (4.3%) leading the gains, followed by the IDR (3.2%), PHP (2.7%), and SGD (2.4%). 

Growing expectations of multiple Fed rate cuts pushed the USD index down to an average of 102.5 in August (Jul: 104.6), its lowest level in over a year. 

This, combined with a risk-on sentiment, fuelled demand for emerging market assets, supporting regional currencies.

No change to monetary policy settings expected amid stable inflation and growth prospects. With inflation subdued and economic growth steady, BNM is expected to maintain its current monetary policy for the next 12-15 months. 

However, upside risks to inflation, arising from changes in government policies and external risks, especially geopolitical tensions, remain. 

Undoubtedly, BNM will stay vigilant and ready to respond if necessary. 

Last Friday’s key US jobs data continues to keep the market guessing whether the Fed will cut rates by 25 or 50 basis points in September, with the probability of the latter dropping back to 30.0%. 

“We have been bullish on the ringgit since last year, forecasting it to reach 4.25/USD by end-2024, driven by expectations of US economic weakness and subsequent Fed rate cuts,” said Kenanga.

However, emerging signs of a potential soft landing in the US economy suggest the Fed may cut rates by only 50-75 basis points this year, rather than the 100-125 basis points currently expected by the market. 

This could lead to a USD rebound in quarter four 2024, pushing the ringgit to trade closer to 4.40/USD by year-end from around 4.33 currently. - Sept 9, 2024 

https://focusmalaysia.my/robust-foreign-capital-inflow-for-bnm-this-aug-highest-since-dec-2021/