Emerging-market capital flows to remain volatile, says UOB
KUALA LUMPUR: Capital flows into emerging markets, including Malaysia, are expected to remain volatile and uneven, UOB Global Economics & Markets Research said.
KUALA LUMPUR: UOB Global Economics & Markets Research has warned that capital flows into emerging markets, encompassing Malaysia, are set to stay volatile and uneven. The firm attributes this volatility to several key factors, such as energy supply risks, global technology advancements, and fluctuations in the US dollar, which are influenced by evolving expectations surrounding US Federal Reserve policy.
In July, Malaysia experienced a shift in its foreign portfolio position, experiencing a net outflow of RM5.4 billion, marking a stark contrast to the net inflow of RM2.5 billion seen in June. According to UOB, the switch was primarily driven by Malaysian debt securities sales, amounting to RM5.6 billion in July, which far outweighed net purchases of RM4.9 billion in June.
This reversal significantly outweighed net foreign purchases of equities, totaling RM300 million in July, compared to net selling of RM2.4 billion in June.
Investor sentiment has been further dampened by anticipations of increased US interest rates and domestic political uncertainty, as noted by UOB. Reflecting these foreign portfolio outflows, Bank Negara Malaysia reported a decline in international reserves by US$500 million month-on-month to US$132.1 billion at the end of July, representing a first decrease in four months.
Despite this, UOB maintains that reserves remain adequate, covering 4.7 months of imports of goods and services and amounting to 0.9 times total short-term external debt.
Furthermore, Bank Negara's net short foreign exchange swap position widened for an unprecedented fifth consecutive month to a 16-month high of US$27.2 billion at the end of June, representing 20.5% of total foreign reserves. The report emphasizes that domestically, factors such as policy credibility, fiscal discipline, reform progress, and political stability will be crucial for maintaining investor confidence and portfolio inflows.
Looking ahead, UOB anticipates the ringgit to remain range-bound between 4.00 and 4.10 against the US dollar in the near term.
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