Higher foreign buying of domestic bonds in February
Malaysia recorded higher foreign portfolio inflows of RM6.3 billion in February (January: +RM2.8 billion). This was mainly due to higher bond inflows (+RM7.2 billion) which offset further net selling of equities (-RM0.9 billion). Foreigners bought Malaysian Government Securities (MGS) (February: +RM3.5 billion, January: +RM2.3 billion), Government Investment Issues (GII) (February: +RM2.1 billion, January: +RM0.9 billion), Treasury Bills (February: +RM1.2 billion, January: +RM0.4 billion), and Private Debt Securities including private sukuk (February: +RM0.3 billion, January: +RM0.2 billion).
Foreign holdings of Malaysian government bonds (MGS & GII) rose by RM5.6 billion to RM211 billion (or 24.7% of total outstanding). For MGS alone, foreign investor holdings rose to RM183 billion, which is equivalent to 41.2% of total MGS outstanding. For GII, overseas investors owned RM27.8 billion, which is equivalent to 7.2% of the total GII outstanding in February.
Foreign investors continue to pare down their holdings of Malaysian equities by RM0.9 billion in February (January: -RM0.8 billion). It marked the 20th month of selling with a cumulative reduction of RM32.8 billion since July 2019. Foreign ownership of Malaysian equities scaled down to a new low of 20.4% of total market capitalisation in February (January: 20.7%).
Foreign reserves near 3-year high
Bank Negara Malaysia’s foreign reserves increased for the fourth consecutive month by USD0.4 billion m/m to USD109.0 billion as of end-February (end-January: +USD1.0 billion m/m to USD108.6 billion). It marked the highest level in 34 months, supported by persistent foreign portfolio inflows into bond markets and sustained current account surplus.
The latest reserves position is sufficient to finance 8.6 months of retained imports and is 1.2 times total short-term external debt.
While BNM has yet to publish its February FX swaps data, the central bank’s net short position in FX swaps widened for the first time in 10 months by USD0.8 billion m/m to USD6.6 billion as of end-January (end-December 2020: -USD0.6 billion m/m to USD5.8 billion). It is equivalent to 6.1% of total foreign reserves (December: 5.4%).
Reflation narrative intensifies
Looking ahead, higher inflation expectations and steepening of US Treasury yields may somewhat cap the pace of capital inflows to emerging markets (EM) in the near term. Meanwhile, the Fed sees an inflation overshoot to be transitory and more importantly unlikely to sway the Fed away from its ultra-accommodative monetary policies.
We expect the Fed to only start discussions of tapering its bond purchases in late-2021 or early-2022.
Fundamentally, considering that major central banks continue to conduct bond purchases and the prospect of balance sheet reduction lies far in the future, there are potential headwinds to significantly higher yields.
Meanwhile, EM assets should be supported by ongoing quantitative easing (QE), and improving recovery across Asia. Progress of vaccination programs, containment of infections, and resumption of economic activity should also lend support to EMs.
Barring some near-term volatility, we continue to expect moderate USD weakness to resume in the coming months. We are currently projecting USD/RM at 4.00 by mid-2021. These forecasts will be reviewed in our upcoming quarterly (tentative release 18-19 March).
Key events to watch this month include the release of BNM Annual Report 2020 and Financial Stability Report 2020 (end-March) and FTSE Russell’s WGBI upcoming review (29 March).