Malaysia’s foreign reserves reached a record US$130billion at the end of April but economists do not think that amount, lifted by continued inflows of short term capital into the economy, would pose a risk to the economy.
“If the economy is doing well, capital will naturally flow in,” said Thomas Lam, chief economist at OSK-DMG.
CIMB Research in a note yesterday said reserves were boosted by substantial inflows of short term money and that positive economic vibes had contributed to the fundamental reasons for such inflows.
“Large reserves act as a strong buffer against large capital reversals. Sound financial policies, developed domestic financial markets and macro-prudential surveillance also act as cushions against large shifts in funds,” it said.
CIMB Research said foreign investors were a net buyer of US$193.4million worth of equities in April.
“Foreign holdings of Malaysian debt securities also ballooned to RM146.8bil in April from RM137.9bil in March, constituting 22 percent of the total of Malaysia's outstanding bonds,” it said in a note.
CIMB pointed out that the bulk of the money had been invested in Malaysian Government Securities (55.1 percent of total foreign holdings), followed by Bank Negara bills (31.2 percent), and private debt securities and others (10.5 percent).
“The massive capital inflows also lifted the ringgit to a 13-year high of RM2.96/US$1 on April 29 before coming off to RM3.00/US$1 on May 6, marking an appreciation of 1.9 percent year to date,” it said.
Lam said the exchange rate appreciation of the ringgit, which was more pronounced against the dollar than the basket of currencies of the country's largest trading partners, would be beneficial in keeping prices in check.
“The more the exchange rate appreciates, the less likelihood of an asset price misalignment,” said Lam.
CIMB Research said emerging market economies, after the subprime crisis, had been seeing large capital inflows that were driving up their exchange rates and inflating asset prices.