Published November 11, 2008

Bank Negara's reserves fall a further US$7.4b

Analysts upbeat, see flight of hot money, retention of long term investments

By S JAYASANKARAN
IN KUALA LUMPUR
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MALAYSIA'S international reserve position shows a further US$7.4 billion decline to US$100.2 billion as at Oct 31, according to latest figures released by Bank Negara.

The amount, said the central bank, was 'enough to finance 8.1 months of retained imports and is 3.7 times the short-term external debt position.'

For the whole of October, the central bank's reserves fell by US$9.5 billion compared with US$12.8 billion the previous month. In fact, Malaysia's reserves have fallen by US$25.5 billion since it peaked at US$125.7 billion in June this year. The sharp falls illustrate the growing risk- aversion of foreign investors as they flee emerging markets before the fallout from the global financial turmoil begins to seriously affect countries like Malaysia. It also mirrors the central bank's bid to maintain the stability of the ringgit.

Most analysts attributed the fall in reserves to the outflow of short-term capital because the exit of capital coincided with a contraction in the capitalisation of the local bourse which declined to RM655.3 billion (S$274.7 billion) at end-October from over RM719 billion on Oct 15. The ringgit fell from RM2.51 against the greenback to RM2.55.



Even so, some analysts drew comfort from the figures. Arab-Malaysian's research house, for instance, said the steep reserve drop from June suggested that 'almost all the hot money that came in the first half of 2008 had left, leaving behind the long term investment in the system.'

The securities house said this was reflected in the 'narrowing' of short- term debt which was reduced to 3.7 times the short-term external debt position. Meanwhile, it said that the 8.1 level of retained imports that the reserves covered was well over the international norm of three months and that was enough to maintain ample liquidity estimated at RM254 billion at end-September.

Going forward, these sentiments would seem to vindicate fund manager Tan Teng Boo's assertion two weeks ago that the Malaysian market had bottomed out. Arab-Malaysian agreed saying that there would be 'positive capital inflow going forward.' It pointed out that the stock market capitalisation had edged upwards to nearly RM680 billion while the ringgit remained steady at RM2.55 to the US dollar.