Response to Bloomberg article entitled “Malaysia reserve buffer seen by Moody’s as among the weakest in Asia”No Ruj : 20 Sep 2017 Embargo : Untuk Siaran Segera
This is with reference to an article published by Bloomberg entitled “Malaysia Reserve Buffer Seen by Moody’s as Among Weakest in Asia” on 18 September 2017. The article presents an unbalanced and simplistic assessment of Malaysia’s international reserves adequacy, by focusing only on a rigid interpretation of two economic indicators.
The reporting by Bloomberg reflects 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.
Bank Negara Malaysia would like to contextualise these indicators and to emphasise that an assessment of the adequacy of reserves should be undertaken with a broader review of Malaysia’s economic and financial developments.
Moody’s External Vulnerability Indicator (EVI, which measures short-term external debt by remaining maturity over reserves):
These short-term external debt are 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. 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 reflect 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.
International Monetary Fund (IMF)’s Reserve Adequacy Metric (ARA EM):
Moody’s also refers to the IMF’s ARA EM results for Malaysia. They however fail to acknowledge the IMF’s overall assessment that Malaysia’s reserves are 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 had concluded that Malaysia’s international reserves is adequate, at 115 percent of the IMF’s ARA metric, under a floating exchange rate regime.
International reserves not the only means to meet external obligations
It should be emphasised that international reserves is not the only means to meet external obligations. Since 2015, Malaysia’s external assets exceeded our external liabilities. Malaysia’s net international investment position of 3.3% of GNI strengthens 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 is reflected in the increasing acquisition of assets abroad by resident banks and corporates. In particular, banks and corporates hold three-quarters of Malaysia’s external assets (as at end-2Q 2017: RM1.3 trillion), which can also be drawn upon to meet their external debt obligations (as at end-2Q 2017: RM673.8 billion), without creating a claim on Bank Negara Malaysia’s reserves.
Moody’s had also pointed out that Malaysia’s “currency flexibility, prudent monetary policy and a large domestic institutional investor base buffer 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”.
Bank Negara Malaysia
20 Sep 2017
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