Investor sentiment towards Malaysia’s fundamentals has improved as reflected in the turnaround in portfolio investment, from a net outflow of RM24.4 billion in third quarter 2015 (3Q15) to a net inflow of RM14.9 billion in 4Q15.

In a research note, Affin Hwang Capital said this was the first positive quarterly increase since 2Q14 due to the net buying activity on bonds, in particular Malaysian Government Securities (MSG).

It said direct investment also recorded a net inflow of RM5.7 billion in 4Q15 after four consecutive quarters of net outflows also supporting the reserve position.

However, it said with slower global growth momentum, the International Monetary Fund, World Bank and Organisation for Economic Co-operation and Development have revised downwards their global growth forecasts for 2016.

“We believe the emerging market economies are likely to experience slower economic growth momentum this year which could lead to the possibility of further monetary policy easing among regional central banks,” it said.

It said Bank indonesia recently cut its policy rate twice to seven percent as well as lowered its reserve requirement to 6.5 percent to spur domestic growth amid weak trade performance.

“We believe Malaysia, being an open economy where total real trade in goods and services accounted for 137.4 percent of Gross Domestic Product, will also be impacted by external challenges through the trade channel,” said Affin Hwang.

The international reserves of Bank Negara Malaysia (BNM) rose by another US$0.1 billion to US$95.6 billion in the first half of the month ended Feb 15, 2016 compared with US$95.5 billion as at Jan 29, 2016.

“At the current level, Malaysia's reserves are sufficient to finance 8.2 months of retained imports, slightly lower than 8.4 months as compared to end-January attributed partly to higher import values caused by the weakening ringgit.

“However, the short-term reserve coverage has improved to 1.2 times, compared to 1.1 times previously,” it said.

Malaysia’s reserves have stabilised since 4Q15 partly supported by an ample trade surplus which rose from RM22.2 billion in 3Q15 to RM30.4 billion in 4Q15 and resulting in a higher current account surplus at RM11.4 billion in 4Q15 (RM5.1 billion in 3Q15).

The research house expects BNM to maintain its accommodative monetary policy and leave its overnight policy rate unchanged at 3.25 percent throughout 2016.

Going forward, it said the country’s reserves will be supported by inflows from export earnings as Malaysia will continue to benefit from trade and current account surplus.

“We anticipate the current account surplus which narrowed by 28.1 percent from RM47.3 billion in 2014 to RM34 billion (three percent of Gross National Income) to remain substantial at around RM20 billion to RM25 billion (two per cent of GNI) projected for 2016,” it said.

- Bernama