UOB Research said the positive shift was purely driven by inflows into local debt instruments.
PETALING JAYA: Malaysia’s foreign-portfolio flows turned positive in 2023 with a whopping inflow of RM21.3bil, overturning the RM5.5bil outflow in 2022.
In a research note, UOB Research said the positive shift was purely driven by inflows into local debt instruments, which offset foreign fund outflows from the Malaysian equity market.
In 2023, Malaysia recorded a RM23.6bil inflow in the debt market compared with an outflow of RM9.8bil in 2022. Meanwhile, the equity market saw foreign outflows of RM2.3bil in 2023, contrasting with the inflow of RM4.3bil recorded in 2022.
However, UOB Research noted that Malaysia’s foreign-portfolio flows lost traction in December 2023, reversing to a net outflow of RM1.9bil from a large inflow of RM6.9bil in November 2023.
“This came as foreign investors turned net sellers of Malaysian debt securities last month, selling RM2.1bil against the buying of RM5.4bil in November,” it said, adding that this activity fully offset the ongoing inflows in Malaysian equities, where December recorded RM0.3bil and November registered RM1.6bil.
Additionally, the research firm said Bank Negara’s foreign reserves recovered further by US$1.2bil month-on-month (m-o-m) to US$113.5bil as of end-December 2023, after taking into account the quarterly foreign exchange revaluation changes.
“The latest reserves position is sufficient to finance 5.4 months of imports of goods and services and is one time the total short-term external debt.
“Meanwhile, the central bank’s net short position in foreign-exchange swaps narrowed by US$1.1bil m-o-m to US$24bil as of end-November,” the research house added.
Looking ahead, UOB Research expects capital flows to be continuously subjected to volatility in the near term, particularly due to the market pricing of US Federal Reserves (Fed) rate cuts following key data releases and Fed official comments as the year progresses.
Geopolitical events such as the Middle East tensions and elections in several major economies will further add volatility in the global and regional capital markets this year, it added.
Having said that, UOB Research said favourable economic fundamentals, disinflationary momentum and the prospect of a weaker US dollar owing to less restrictive US monetary policy will spare emerging markets including Malaysia from hefty capital outflows.
The research firm said the factors might contribute to a modest improvement in capital flows for the region in 2024.
“Domestically, the implementation of bold policy reforms and blueprints in Malaysia will also be key to sustain the nation’s capital inflows this year,” UOB Research said.
