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PP 7767/09/2011(028730)

Malaysia
Economic Highlights
• MARKET DATELINE

25 October 2010

Foreign Exchange Reserves Rose To US$104.6bn As


At 15 October

◆ The foreign exchange reserves rose by US$3.9bn in 1H October to US$104.6bn as at 15 October, albeit by
a smaller magnitude compared with an increase of US$4.8bn in 2H September. This was due to the repatriation of
export proceeds and inflow of foreign portfolio funds, which were offset partially by the payment of import bills. Also,
the increase in foreign exchange reserves suggests that Bank Negara continued to intervene in the foreign exchange
market to prevent the ringgit from rising too rapidly given the inflow of foreign capital. As it stands, foreign portfolio
investment in fixed income papers rose by RM3.4bn in August, albeit by a smaller magnitude compared with an
increase of RM5.9bn in July. As a result, their holdings in fixed income instruments rose to RM105.5bn at end-August,
the highest in more than two years and from RM102.0bn at end-July (Chart 1). Year-to-date, the foreign exchange
reserves rose by US$7.9bn, compared with an increase of US$4.5bn in the corresponding period of 2009. In ringgit
terms, the reserves rebounded to increase by RM11.9bn in 1H October to RM322.7bn as at 15 October, from -RM2.6bn
in 2H September. The drop in the foreign exchange reserves in 2H September was attributed to the revaluation loss,
following the strengthening of the ringgit against most major currencies in the 3Q. As a result, the foreign exchange
reserves fell by RM8.6bn year-to-date, compared with +RM17.4bn in the corresponding period of 2009. At the current
level, the foreign exchange reserves are sufficient to finance 8.7 months of retained imports and cover 4.5 times
the short-term external debt of the nation, compared with a high of 10.0 months of retained imports and 4.3x of short-
term external debt cover as at end-February.

Chart 1
Foreign Holdings Of Debt Securities

R M bn

14 0

12 0

10 0

80

60

40

20

0
2007 J 2008 J 2009 J 2010

◆ In line with the increase in the foreign exchange reserves, the ringgit strengthened against the US dollar in recent
months. The ringgit appreciated by 5.4% against the US dollar between 18 June and 30 September, after depreciating
by 2.0% between 1 May and 18 June. Year-to-date, the ringgit has appreciated by 10.6% against the US dollar, the
third strongest gain after the Japanese yen and Thai baht. This was on account of a weakness in the US dollar as
investors expect the US Fed will announce its own big plan to buy government debt after its 3 November meeting.
The improving sentiment over regional currencies, after China said that it would adopt a more flexible exchange rate
on 18 June and the liberalisation of administrative rules on foreign exchange transactions by the Central Bank on

Peck Boon Soon


(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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25 October 2010

18 August further boosted the ringgit. A widening interest rate differential in favour of Malaysia versus the US, after
Bank Negara Malaysia raised its key policy rate for three times and by a total of 75 basis points this year, also helped.
This has attracted a sizeable amount of inflow of “hot money”, which has risen to a more than 2-year high in August.
As the “hot money” could come and go at anytime, we expect the ringgit to remain volatile and will likely
fluctuate at around RM3.10-3.20/US$ for the rest of 2010. Already, the ringgit has weakened slightly lately
against the US dollar and it depreciated by 1.1% against the US dollar between 30 September and 20 October.
Further out, we expect the ringgit to trade at RM3.00-3.10/US$ in 2011.

◆ Meanwhile, the amount of excess liquidity (including repos) mopped up by the Central Bank rose to an estimate
of RM231.0bn in mid-October, from RM225.3bn at end-September 2010 and RM223.3bn at end-2009 (see Chart 2).
This was due to a pick-up in liquidity mopped up by the Central Bank through the issuance of BNM bills, which
increased to RM97.5bn in mid-October, from RM83.6bn at end-September 2010 and compared with RM33.4bn at end-
2009. Similarly, the repurchase agreements (repos) rose to an estimate of RM20.4bn in mid-October, from RM17.9bn
at end-September 2010 and compared with RM21.6bn at end-2009. These were, however, offset partially by a drop
in liquidity mopped up by the Central Bank through interbank borrowings, which fell to RM113.1bn in mid-October,
from RMRM123.8bn at end-September 2010 and RM168.3bn at end-2009. Excluding the repos, the amount of
excess liquidity mopped up by the Central Bank rose to an estimate of RM210.6bn in mid-October, from RM207.4bn
at end-September 2010 and compared with RM201.7bn at end-2009.

Chart 2
Excess Liquidity Mopped Up By BNM

RMbn

352

302

252

202

152

102

52

2
00 01 02 03 04 05 06 07 08 09 10

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