KUALA LUMPUR: Malaysia saw foreign portfolio inflows of RM30.4 billion in 2021 compared to RM6.3 billion inflows in 2020.
This marked the highest foreign portfolio inflows since 2012, according to United Overseas Bank (Malaysia) Bhd (UOB Malaysia).
The country's foreign inflow rebounded to RM5.0 billion in December 2021 compared to an outflow of RM3.4 billion in the preceding month.
UOB Malaysia senior economist Julia Goh said this was mainly due to higher foreign flows into domestic debt securities at RM6.1 billion in December, which helped to fully offset a reversal in foreign flows into equities.
UOB Malaysia said foreign flows into domestic debt totalled RM33.6 billion, which offset the foreign outflows from equities that totalled RM3.2 billion.
"Foreign ownership of Malaysian equities edged down to 20.4 per net of market capitalisation at end-2021."
As of December 2021, foreign debt inflows were largely into Malaysian Government Securities (MGS) at RM2.4 billion and Government Investment Issues (GII) at RM3.9 billion.
"This led to higher foreign holdings of Malaysian government bonds at RM234 billion or equivalent to 25.4 per cent of total outstanding as at end-2021," Goh said.
For MGS, UOB Malaysia said foreign investors raised their holdings to RM189.5 billion or 39.4 per cent of total MGS outstanding in December 2021, or 39.3 per cent more than RM177.3 billion recorded in end of 2020.
"Foreign investors increased their holdings of GII to RM44.5 billion or 10.5 per cent of total GII outstanding as at end-December 2021 (RM40.6 billion), the highest foreign holdings of GII since October, 2016," she said.
Bank Negara Malaysia's foreign reserves jumped for the third month by US$0.2 billion month-on-month to close 2021 at US$116.9 billion, marking the highest level since November 2014.
"It is sufficient to finance 7.7 months of retained imports and is 1.2 times total short-term external debt," Goh said.
UOB Malaysia said foreign reserves leapt by US$9.3 billion in 2021, the most since 2011, primarily credited to sustained foreign investment inflows and robust current account surplus.
The latest reserves level took into account the quarterly foreign exchange revaluation changes.
The bank said overtly hawkish US Federal Reserve (Fed) and emerging new Covid-19 variants would likely be the top risk factors exacerbating volatility in emerging markets' (EMs) capital flows including Malaysia.
"Domestically, rising debt level and policy uncertainty could weigh on Malaysia's capital flows and currency outlook. We expect further US dollar strength with US dollar/ringgit projected at 4.30 by end-2022," Goh said.
The latest release of December by the US Fed Federal Open Market Committee (FOMC) meeting minutes revealed policymakers' thoughts of an earlier and faster timeline to raise interest rates this year.
It also extensively discussed about balance sheet reduction at a shorter time frame between the start of the balance sheet runoff and the policy rate liftoff this time (versus 2018 which was a gap of two years).
UOB Malaysia said headwinds from new variants of the coronavirus, global supply chain disruptions, and China's regulatory risks further clouds the growth and inflation outlook.
"With elevated price pressures amid tighter labour market conditions, central banks and policymakers that adopt inflation targeting or have dual mandates to manage inflation and growth, have started normalising monetary policy."
It said extended market volatility could prevail given the risk that the US Fed may accelerate monetary policy normalisation through accelerated tapering of bond purchases, faster rate hikes, or balance sheet reduction.
This will lend to a stronger US dollar and tighter global monetary conditions that in turn, will affect portfolio flows into EMs.