Bank Muamalat's Mohd Afzanizam said Bank Negara’s higher reserves mean that there are more inflows into the country’s balance of payment.
PETALING JAYA: Bank Negara’s international reserves are now at the strongest level in nearly a decade as investors keep pumping money into the country and more Malaysian businesses repatriate their profits.
As of Sept 13, the central bank’s international reserves stood at US$117.6bil, the highest since December 2014 based on data compiled by StarBiz.
Economists forecast the reserves to likely grow further in the coming months. One possible factor is the further interest rate cut in the United States that could drive more fund flows into Malaysia.
Federal Reserve (Fed) chair Jerome Powell indicated there are likely two more rate cuts coming in 2024, if the economic data remains consistent.
The Fed had on Sept 18 announced a 50-basis-point interest rate cut, marking the first cut in four years.
Lee Heng Guie, executive director of the Socio-Economic Research Centre (SERC), said Bank Negara’s international reserves currently are neither “too high nor too low”.
“As we see increased financial flows into the country, this is a good opportunity for Bank Negara to build its reserves.
“Reserves can act as a buffer against future shocks in the system and ensure liquidity in the domestic market.
“They can also be used in the future to ease pressure on the ringgit if the local currency weakens,” according to Lee.
Economist Geoffrey Williams explained that changes in reserves, especially in foreign currencies, varies seasonally due to market conditions and policies.
“Recently, there has been an intervention by Bank Negara to repatriate foreign profits to support the ringgit.
“So if government-linked investment companies (GLICs) buy ringgit using foreign currency, then the reserves will rise,” he said.
Williams was referring to the Finance Ministry’s appeal earlier this year to government-linked entities as well as exporters to repatriate their earnings from abroad.
This was largely intended to stem the depreciation of the ringgit against the US dollar at that time.
Finance Minister II Datuk Seri Amir Hamzah Azizan, however, clarified in Parliament that the GLICs are not forced to repatriate their funds or profits made.
“They will only be asked to do so when there is a benefit to the investment,” he said in March.
Bank Muamalat (M) Bhd chief economist Mohd Afzanizam Abdul Rashid said Bank Negara’s higher reserves mean that there are more inflows into the country’s balance of payment, be it from the current account or the financial account.
“When reserves are higher, Bank Negara has the financial resources to intervene in the foreign exchange market especially when dealing with risks of currency depreciation.
“In light of Malaysia as a developing country and we are trade dependent economies, it would be good to have larger reserve assets, again, as the central bank would have the financial resources to manage the currency fluctuation more effectively.”Of the US$117.6bil reserves that Bank Negara holds, about 90% or US$105.4bil is made up of foreign currencies. Gold reserves represent 2.5% or US$2.9bil.
Bank Negara can utilise its foreign currency reserves to stabilise the ringgit in the event the local note comes under pressure in the future.
In simple terms, the central bank would be able to sell its US dollars and instead, buy the ringgit to prop up the demand for the local note.
This would at least ease the depreciation pressure on the ringgit.
Bank Negara has been busy accumulating reserves in the past several months, particularly by about US$4.3bil since mid-July.
The current reserves position of US$117.6bil is sufficient to finance 5.5 months of imports of goods and services, and is one-time the total short-term external debt.
Williams said higher reserves are useful for policy intervention.
Under the current circumstances with continued geopolitical uncertainty, the United States election and the need to manage the ringgit through normal market activities, he said it is “helpful” to have healthy foreign reserves.
“The reserves can be used to stabilise the ringgit, but if this is not necessary then the reserves can be used to balance debt transactions.”
In a statement issued last year, former Prime Minister Tun Dr Mahathir Mohamad had questioned the need for Bank Negara to maintain huge reserves.
“Why must we hold so much money as reserves in the US dollar? Why must we have so much money as reserves?” he asked.
SERC’s Lee said Bank Negara’s reserves have been rising in the past months not only due to profit repatriation, but also because of the foreign fund flows into the debt and equities markets.
Year-to-date till Sept 27, foreign investors were net buyers of local equities, with a net value fo RM3.8bil.
In the debt market, foreign holdings of Malaysian Government Securities grew to RM215.6bil, while Government Investment Issues increased to RM54bil.
Notably, foreign holdings of corporate sukuk surged to RM8.2bil in August, marking a 14% increase from July.
This is the highest level of foreign corporate sukuk holdings recorded this year.
To ensure steady accumulation of Bank Negara’s reserves, Lee said there must be more long-term financial flows such as foreign direct investments.
“At the moment, we can see the inflow of short-term funds such as those into speculative assets as well as long-term funds.”
Both Lee and Williams warned against the idea of using central bank reserves to pay the federal government’s debts.
“The reserves of Bank Negara do not belong to the government. You can’t use it to pay debt or to finance your deficit,” said Lee.
Meanwhile, Williams noted that the reserves are worth a third of the government debt currently.
“But they are not there to pay the debt, they are there to manage monetary policy.
“If you paid the debt with reserves, you have lower reserves monetary policy intervention.
“This would raise systemic risk on the repayment of the remaining debt, so the debt finance costs might rise,” he said.
