Malaysia's reserves edge up on sign of scaled back intervention

[KUALA LUMPUR] Malaysia's foreign-exchange reserves picked up slightly in the last two weeks of August, signalling the central bank may have scaled back its intervention to slow losses in the ringgit, this year's worst-performing Asian currency.

The holdings rose 0.2 per cent to US$94.7 billion as of Aug 28 from the previous fortnight, Bank Negara Malaysia reported Friday. That's up from US$94.5 billion in the prior two weeks, the lowest since the aftermath of the global credit crunch in 2009. The reserves are enough to finance 7.4 months of retained imports and are 1 times the nation's short-term external debt, according to a central bank statement.

As the ringgit plunged 18 per cent this year, the foreign- exchange reserves have dropped by the same magnitude. While the decline is an area of concern, it doesn't pose an immediate threat to the country's A- credit, Kyran Curry, Standard & Poor's director of sovereign and international public finance ratings, said in an interview Thursday. Moody's Investors Service sovereign analyst Christian de Guzman said on Aug 27 that while they remain sufficient, their adequacy is the weakest in the Association of Southeast Asian Nations.

"With the government allowing continued free flow of capital, we just have to accept the fact that there's going to be further downward adjustment in external reserves," Suhaimi Ilias, chief economist at Maybank Investment Bank Bhd in Kuala Lumpur, said before the data.

"Our view is, that at the very least we should expect reserves to fall to around US$85 billion to US$87 billion," he said, without specifying a timeframe.

The ringgit is Asia's worst performer this year and in July breached the 3.8 a dollar level it was pegged at from 1998 to 2005. It tumbled to a 17-year low of 4.2990 a dollar on Aug 26 and closed at 4.2585 on Friday. The government reiterated this week that it will not impose capital controls as it did during the 1997-98 Asian financial crisis.

Malaysia's currency is being hit harder than those of its neighbours by the slide in commodity prices because it's Asia's only major net oil exporter. Brent crude has slumped by about half in the past year. A looming US interest-rate increase, an economic slowdown in China and a political scandal involving Prime Minister Najib Razak are also weighing on the ringgit.

Malaysia has held more reserves than it needed "precisely for reversals" and the ringgit will better reflect domestic fundamentals when there's more certainty of policies in major economies, central bank Governor Zeti Akhtar Aziz said on Aug 20. The monetary authority will set about rebuilding its holdings, Mr Zeti said on Aug 13.

BLOOMBERG