KUALA LUMPUR- On 8 October, On-resident investors remained net buyers of Malaysian debt securities albeit at a slower pace for the fifth month. Bond flows rose RM0.5bn to RM209.5bn in Sep (Aug: +RM3.0bn to RM209.0bn). Foreigners remained net sellers of RM2.0bn worth of Malaysian equities in Sep (Aug: -RM 1.5bn).
As such, overall foreign portfolio flows fell RM1.4bn in Sep (Aug: +RM1.5bn). For bonds, foreigners purchased mainly Malaysian Government Securities (MGS) totalling RM1.4bn (Aug: +RM3.2bn). This was offset by net selling of Government Investment Issues (GII) of RM0.4bn (Aug: -RM0.2bn), Malaysian Treasury Bills RM0.4bn (Aug: -MYR0.005bn), as well as Private Debt Securities including Private Sukuk of MYR0.1bn (Aug: -+RM0.08bn).
Foreign holdings of Malaysian government bonds (MGS & GII) rose by RM1.1bn to RM189.4bn (Aug: +RM3.1bn to RM188.3bn), which is equivalent to 23.1% of total outstanding (Aug: 23.3%). For MGS alone, foreign holdings increased by RM1.4bn to RM169.2bn or 38.8% of total MGS outstanding (Aug: 39.2%), while GII fell further to MYR20.2bn or 5.6% of total GII outstanding (Aug: 5.8%).
On a quarterly basis, overall foreign portfolio flows recorded a net inflow of RM4.6bn in 3Q20 as debt inflows (at +RM10.6bn) morethan offset equity outflows (at -RM6.0bn). This compares to overall net inflows of RM2.4bn in 2Q20 and net outflows of RM24.5bn in 1Q20. Despite the pick-up in foreign inflows between Jun-Aug, it was not sufficient to offset the larger declines particularly in Feb- Mar which leaves year-to-date foreign portfolio flows at –RM17.5bn in Jan-Sep (2019: +RM8.7bn).
Bank Negara Malaysia’s (BNM) foreign reserves increased by USD0.6bn (or USD1.4bn year-to-date) to a 28-month high of USD105.0bn as at end-Sep (from USD104.4bn as at end-Aug). This was mainly lifted by a continued debt inflows and foreign direct investment. The latest foreign reserves position is sufficient to finance 8.4 months of retained imports and is 1.1 times short-term external debt.
While BNM has yet to publish Sep 2020 FX swaps data, the central bank’s net short position in FX swaps narrowed for a fifth month and was lower by USD0.3bn to USD8.4bn as at end-Aug (end-Jul: -USD1.3bn to USD8.7bn), which is equivalent to 8.0% of total foreign reserves (Jul: 8.3%).
The divergence between debt and equity flows is expected to persist in the near term as uncertainties linger amid rising COVID-19 infections globally and in Malaysia. We expect a volatile period ahead of the US Presidential elections while US-China tensions remain elevated.
However, expectations of broad dollar weakness alongside a robust economic recovery in China should lift Asia FX including MYR over the next 6-12 months. We expect USD/RM to edge down to 4.05 by 1H21. Key to watch are the country’s fiscal stance, deficit and public debt projections for 2021 in its upcoming budget announcement on 6 Nov.
Written by: Julia Goh, Senior Economist, and Loke Siew Ting, Economist