Malaysia's central bank spends $2.7 billion defending the ringgit

PETALING JAYA - Bank Negara's foreign exchange reserves fell by US$1.9 billion (S$2.69 billion) to US$96.4 billion from US$98.3 billion as the central bank used its reserves to stem the slide of the ringgit in recent weeks.

"The lower international reserves position reflected the liquidity support in the foreign exchange market," Bank Negara says in a statement.

The admission by Bank Negara that it used its reserves was a rare public admission of intervention. It has been reported that Bank Negara has been entering the forex market to smoothen the ringgit's volatility ever since it started its offensive against the non-deliverable forward market.

Dealers were caught by surprise by the level of foreign reserves as some had forecast the reserves to be lower than what was announced yesterday.

"We were waiting for a breakdown and expected it to be closer to US$90 billion," said a source. Some speculated the amount of dollars spent on defending the ringgit may have been understated by forward sales of the ringgit.

The ringgit has been under pressure ever since Donald Trump won the US presidential election in November, which saw the US dollar surge against currencies around the world in what has been called the Trump effect.

The dollar's strength is premised on the belief that higher spending in the US will be inflationary and hence interest rates will need to rise to combat any spike in inflation.

The flight to the dollar has been especially harsh on emerging markets which have felt the brunt of the dollar's strength. Sell-offs in equity and bond markets were seen across many emerging markets, including Malaysia where foreign investors have been liquidating their portfolio assets for months. Bond yields have risen in Malaysia and the stock market has seen a sell-down. The level of foreign shareholding of Malaysian shares is said to be at a multi-year low.

Maybank Investment Bank group chief economist Suhaimi Illias said the drop in reserves to US$96.4 billion at end-November 2016 from US$98.3billion at mid-November 2016 was consistent with the indication of net portfolio outflows from equity and bond market in view of the foreign sell-offs.

"(Reserves) should stabilise by end-December 2016 as repatriation of export earnings kick in," he said in an email response.

Optimism that Malaysia's foreign exchange reserves will improve stems from the latest Bank Negara ruling whereby 75 per cent of export proceeds by companies must be converted to ringgit. Compelling companies to do so should see a rise in foreign exchange reserves as Malaysian companies only converted 1 per cent of their dollar receipts between 2011 and 2015.

Helping with Malaysia's reserves is the trade balance which was RM7.6 billion (S$2.43 billion) in October this year. For the year-to-date, the trade surplus was almost RM70 billion. The conversions of 75 per cent of that amount will help with the ringgit against foreign currencies.

The Department of Statistics said total trade in October 2016 was valued at RM128.6 billion, which was a growth of 0.1 per cent or RM130.7 million from the previous month.

"However, on a year-on-year basis, it registered a decline of RM10.7 billion or 7.7 per cent. A trade surplus of RM9.8bil was registered in October 2016 as compared to the RM7.6bil recorded in the previous month. However, the trade surplus declined RM2.3 billion or 19.4 per cent when compared with the previous year," said the department in a statement yesterday.

The level of the foreign exchange reserves was anticipated by the market which expected reserves to fall by several billion dollars to defend the ringgit's decline against the US dollar,

Market watchers were waiting for yesterday's data which would have reflected the activity in defending the ringgit after the declines against the US dollar which was more pronounced after the US election results were known around the middle of November.

One indicator that will lend support to the ringgit is the fiscal deficit. There has been speculation that Malaysia will miss its fiscal deficit target of 3.1 per cent for 2016 but those concerns were laid to rest by Minister in the Prime Minister's Department Datuk Abdul Rahman Dahlan.

Rahman, who is in charge of the Economic Planning Unit, said "the fiscal deficit of the federal government looks set to meet its rationalisation target of 3.1 per cent to GDP this year."

"While the surplus in the current account of the balance of payments has narrowed to RM12.9 billion or 1.5 per cent to the gross national income for January to September, it was due to higher imports of capital and intermediate goods, which bodes well for future production," he said.