BNM: Bloomberg report on reserves unbalanced, rigid interpretation

 |Sep 20, 2017

KUALA LUMPUR: Bank Negara Malaysia says the article published by Bloomberg entitled “Malaysia Reserve Buffer Seen by Moody’s as Among Weakest in Asia” on Sept 18, 2017 focuses only on a rigid interpretation of two economic indicators and therefore presents an unbalanced and simplistic assessment of Malaysia’s international reserves adequacy.

Responding to the article, it said the reporting by Bloomberg reflected a lack of understanding of the Malaysian economy, external position, financial system and its economic policies.

“This, together with a penchant for misplaced country comparison, without taking into account country specificities, has led to an erroneous judgment of the Malaysian economy and its external resilience,” it said in a statement.

Explaining in detail, the central bank contextualised the indicators and emphasised that an assessment of the adequacy of reserves should be undertaken with a broader review of Malaysia’s economic and financial developments.

As for Moody’s External Vulnerability Indicator (EVI), which measured short-term external debt by remaining maturity over reserves, BNM said they were not a material risk.

“Most of it is accounted by the banking sector, reflecting banks’ operations. This includes centralised liquidity management practices and deposit placement and interbank funding,” it added.

Correspondingly, banks have placements abroad to mitigate currency and maturity mismatches. Also included as part of short-term external debt are inter company loans and trade credits.

Inter-company loans reflected transactions between foreign direct investment companies and their parent companies. This is subject to flexible and concessionary terms.

In addition, trade credits are usually backed by export earnings which do not entail a claim on international reserves, BNM explained.

As for International Monetary Fund (IMF)’s Reserve Adequacy Metric (ARA EM), Moody’s failed to acknowledge the IMF’s overall assessment that Malaysia’s reserves were deemed adequate, given the flexible ringgit exchange rate and availability of external assets for borrowers to meet external obligations.

In fact, the IMF’s July 2017 External Sector Report concluded that Malaysia’s international reserves was adequate, at 115 per cent of the IMF’s ARA metric, under a floating exchange rate regime.

Besides, it should be emphasised that international reserves was not the only means to meet external obligations.

Since 2015, Malaysia’s external assets exceeded external liabilities, said BNM.

Malaysia’s net international investment position of 3.3 per cent of Gross National Income strengthened Malaysia’s resilience to a variety of shocks, including potential outflows.

The progressive liberalisation of foreign exchange administration rules has also resulted in greater decentralisation of reserves. This was reflected in the increasing acquisition of assets abroad by resident banks and corporates, it added.

In particular, banks and corporates hold three-quarters of Malaysia’s external assets, which was RM1.3 trillion, as at end-second quarter of 2017, that can also be drawn upon to meet their external debt obligations (as at end-second quarter 2017: RM673.8 billion), without creating a claim on BNM’s reserves.

Moody’s had also pointed out that Malaysia’s “currency flexibility, prudent monetary policy and a large domestic institutional investor base buffered the impact of capital flow volatility, with large export proceeds and external assets acting as a further cushion.”

On balance, Malaysia’s credit profile is deemed as “relatively resilient to periods when such external volatility heightens,” added BNM. – Bernama

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