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[KUALA LUMPUR] Malaysia's international reserves have fallen significantly below the US$100 billion threshold as the central bank struggles to slow declines in Asia's worst-performing currency in the face of a protracted political crisis.
Currency reserves fell to US$96.7 billion as of July 31, Bank Negara Malaysia (BNM) said on Friday, from US$100.5 billion on July 15.
The reserves, now at their lowest since September 2010, have declined US$10 billion since the end of May and US$20 billion this year.
Bank Negara has been selling dollars and buying ringgit since June in an attempt to stem the currency's slide, traders said, but the ringgit has still lost about 11 per cent of its value against the US dollar this year.
It fell 0.5 per cent on Friday to 3.922 to the dollar as traders braced for the official reserve data.
In a statement, Bank Negara said the reserve position "is sufficient to finance 7.6 months of retained imports and is 1.1 times the short-term external debt." Corruption allegations swirling around Prime Minister Najib Razak and increasing budget strains caused by weaker commodity prices have pushed the ringgit to its lowest levels in nearly 17 years.
At the same time, the dollar has relentlessly firmed against many emerging market currencies on expectations the Federal Reserve could raise interest rates in September.
Julia Goh, economist at United Overseas Bank in Malaysia, said the reserves' decline to below $100 billion was largely expected due to BNM's efforts to "smoothen out extensive volatility".
She said that given the bearish outlook for commodities, "it looks like we're going to see further pressure on the ringgit in the near-term."
Jeff Ng, economist at Standard Chartered in Singapore, agreed the ringgit is likely to keep weakening, partly because of dollar strength, adding "All Southeast Asian currencies are doing badly."
Foreign investors hold nearly half of Malaysia's government bonds, and higher US interest rates could prompt them to shift funds back to US assets, putting further pressure on the ringgit.
A deteriorating trade balance as a result of the collapse in global oil prices, and therefore the price of the liquefied natural gas that Malaysia exports, have also contributed to the ringgit's decline.
Mr Najib recently sacked his deputy in a cabinet reshuffle, and replaced the attorney general, amid graft allegations over debt-laden state investment fund 1MDB.
The ringgit has sunk to its lowest levels since the 1997/1998 Asian financial crisis, when the government pegged the currency at a rate of 3.8 to the dollar. The peg remained in place until 2005.
The normally stable Malaysian bond markets have seen some sporadic selling, with 10-year yields up 25 basis points in two weeks.
"I won't say there is panic now but we are quite close," Amy Yuan Zhuang, a senior analyst at Nordea Markets in Singapore, said prior to announcement of end-July reserves. "The falling FX reserves could be a sign that BNM is trying to limit the ringgit's losses," she said, adding that meant investors could not exclude the possibility of some form of capital controls being imposed.
In a note prior to the release, Societe Generale said that if reserves fall toward US$90 billion, BNM is "likely to 'let it go'." Societe Generale revised its ringgit forecast for the third quarter to 4.1000 from 3.8000.