Malaysia reserves slide below $1.38 billion amid Ringgit's plunge

The holdings fell 3.8 per cent to US$96.7 billion as of July 31 from two weeks earlier, Bank Negara Malaysia reported Friday.
The holdings fell 3.8 per cent to US$96.7 billion as of July 31 from two weeks earlier, Bank Negara Malaysia reported Friday. PHOTO: BLOOMBERG

KUALA LUMPUR (BLOOMBERG) - Malaysia's foreign-exchange reserves dropped below US$100 billion (S$1.38 billion) for the first time since 2010 after the ringgit slid 18 per cent in the past 12 months.

BNP Paribas SA, Societe Generale SA and Australia & New Zealand Banking Group Ltd. all cut their forecasts this week for Asia's worst-performing currency, which has weakened due to a slump in oil, a political scandal involving Prime Minister Najib Razak and odds for a U.S. interest-rate increase.

As speculation mounts that the central bank is buying the ringgit to stem the losses, Societe Generale said the defense of the exchange rate may stop at about the US$90 billion reserves mark.

The holdings fell 3.8 per cent to US$96.7 billion as of July 31 from two weeks earlier, Bank Negara Malaysia reported Friday. The reserves are sufficient to finance 7.6 months of retained imports and are 1.1 times short-term external debt, according to the central bank. That compares with 7.9 months and 1.1 per cent, respectively for the mid-July figure of US$100.5 billion.

"If the pressure is too strong, then the dollar reserves that you use become less effective," said Sean Yokota, the Singapore-based head of Asian strategy at Skandinaviska Enskilda Banken AB. The intervention is probably limited to preventing excessive volatility rather than defending a certain level for the ringgit, he said.

Global funds have pulled $3 billion from Malaysian equities in 2015, the biggest outflow since 2008. Foreign investors also pared holdings of government and corporate bonds by 2.4 per cent to 206.8 billion ringgit (S$72.9 billion) in July, the lowest level in three years, central bank data showed on Friday.

The currency dropped 2.5 per cent this week to close at 3.9235 per dollar in Kuala Lumpur, according to prices from local banks compiled by Bloomberg. That's the biggest five-day loss of 2015. It fell to 3.9305 earlier on Friday, the lowest level since September 1998.

BNP lowered its year-end ringgit forecast to 4 per dollar from 3.8, citing Malaysia's declining reserves, the impact of falling oil prices on the trade balance and the political climate. Societe Generale cut its prediction to 3.9 from 3.7, and ANZ revised its estimate to 3.95 from 3.82.

Bank Negara is unlikely to try and protect the ringgit at 4 to the U.S. currency as the foreign-exchange holdings fell, and after it failed to defend the 1998 peg level of 3.8, Societe Generale strategists Jason Daw and Frances Cheung wrote in a report on Thursday.

The central bank is discouraging local and global financial institutions from entering into transactions that would result in selling the ringgit, according to a July 31 report in the Star newspaper, which cited unidentified dealers. It has spent US$25 billion on defending the currency since July 2014, after adjusting for valuation effects, BNP Paribas Singapore-based economist Philip McNicholas wrote in a July 24 report. That's equivalent to 8 percent of gross domestic product, he said.

The ringgit's depreciation isn't sustainable and doesn't reflect Malaysia's underlying fundamentals, central bank Governor Zeti Akhtar Aziz said in Switzerland on June 29.