KUALA LUMPUR: The positive uptrend in Bank Negara Malaysia (BNM) foreign reserves is attributed to higher foreign buying into the local equity market and higher exports repatriation following higher trade surplus.
Kenanga Investment Bank Bhd Research in a note said the higher reserves level also suggests the possibility of foreign direct investments streaming into the economy.
In addition, higher global oil prices could have also renewed investors’ confidence in the fundamentals of the local economy, diminishing the effect of ongoing uncertainties on global trade and monetary policies, Kenanga noted.
BNM's foreign reserves rose by US$1.7 billion or 1.6 per cent to US$109.5 billion expanding for the 16th consecutive month in April.
The month’s reserves position remains sufficient to finance 7.5 months of retained imports and is 1.1 times the short-term external debt.
Further, contrary to the higher reserves level during the month, Kenanga said foreign equity inflows surged to the highest in three months to RM1.3 billion.
The local equity market sustained its strength in April.
The FBMKLCI index surged to a record high of 1,895.18 points on April 19 even as higher US bond yields and solid US employment data raised expectations for a faster pace of US Federal Reserve’s rate hike.
Focusing on the local note, Kenanga said ringgit value of reserves rose by the highest in 11 months, as it edged up by RM6.7 billion to RM423.1 billion.
This could be partially due to a weaker ringgit during the month which depreciated by 1.5 per cent against the US dollar in April after appreciating by 4.9 per cent in the first three months of the year.
On the local bond market, Kenanga opined that it may not be spared from rising global uncertainties.
The average local benchmark 10-year Malaysian Government Securities (MGS) bond yields surged higher to 4.04 per cent in April (March: 3.95 per cent), suggesting limited inflow into the local bond market.
This is in line with rising US bond yields which touched the three per cent psychological level during the month, averaging 2.88 per cent in April (March: 2.83 per cent).
While the reserves level remains at a healthy level, Kenanga is convinced that foreign interest could be capped in the coming months.
“We see many uncertainties namely the much-awaited outcome of the 14th General Election, rising US bond yields and trade war risk tempering market sentiments. Recent exports figures and manufacturing indicators further point to a moderating growth trend ahead.
“Hence, we expect the interplay of these various dampeners to cap the level of foreign inflows in spite of the expectation that the reserves level would remain on a marginal uptrend backed by the fundamentals of the economy,” it said.