CIMB Research expects BNM to hike SRR to 4% in July

KUALA LUMPUR: CIMB Economics Research expects Bank Negara Malaysia (BNM) to raise the statutory reserve requirement (SRR) by another 100 basis points to 4% in July to absorb excess liquidity in the banking system as foreign exchange reserves increased to US$132.7 billion (RM401.4 billion) as at end-May.
It said on Wednesday, June 8 the managed float regime gives the ringgit the flexibility to adjust to two-way capital flows, lifting the ringgit by 1.9% year-to-date (YTD), to RM3.01/US$1 on June 7. In morning trade on Wednesday, the ringgit rose to as high as 2.9994 to the greenback.
“We think that BNM’s primary focus now is on managing the capital inflows as well as warding off the risk of a build-up in domestic liquidity,” it said.
Malaysia’s  foreign exchange reserves increased to US$132.7 billion (RM401.4 billion) as at end-May, up US$2.7 billion from end-April (US$130.0 billion or RM393.2 billion) and US$26.2 billion YTD.
CIMB Research said May’s international reserves marked a new high for the second straight month, with a cumulative US$18.9 billion increase (72.1% of total YTD hike) between end-March and end-May. The reserves position is sufficient to finance 9.3 months of retained imports and is 4.4 times the short-term external debt.
It also noted that to avoid excessive expansionary monetary conditions, the central bank had used a wide range of monetary instruments including direct borrowing, issuance of BNM securities and higher SRR to sterilise capital inflows.
“We continue to expect the SRR ratio to be raised by another 100bp to 4.0% in July to absorb excess liquidity in the banking system,” it said.
CIMB Research said besides the sustained trade surplus, capital inflows also helped to push foreign reserves to new highs in recent months.
“Capital and financial transactions are still expected to book a surplus in line with strong inflows of capital including direct investments. In 1Q11, net foreign direct investment was sustained at RM11.1 billlion while portfolio investment surged to RM8.4 billion for the seventh consecutive quarter.
“As at end-April, foreign investors have pumped RM173.1 billion into the debt market, with RM83.1 billion or 48.0% piled into Malaysian Government Securities (MGS), pushing foreigners' share of Malaysia’s outstanding MGS to 31.6% from 28.1% as at end-December 2010.
“In addition, foreign investors were net buyers of equities for the second straight month in May (US$29.8 million vs. US$201.3 million in April),” it said.
The research house also said Malaysia was in a far stronger position to manage capital flows including coping with a sudden capital reversal without affecting domestic liquidity.
It pointed out the strong reserves position will help accommodate the large capital outflows without causing a liquidity crunch. The amount of excess liquidity (RM292.1 billion as at end-May) absorbed by the central bank can be recycled back to the banking system should liquidity conditions tighten.
“The depth and width of the domestic financial markets, including the debt market, will lead to better absorption of capital flows. Sound financial policies and a strong banking system backed by a huge capital base and low exposure to foreign debt will provide flexibility for the financial system to intermediate volatile capital flows,” it pointed out.

Written by Joseph Chin of theedgemalaysia.com