Friday, October 8, 2010

“Soaring” International Reserves

One of the reasons I’ve always had my charts showing several years worth of data is that I’ve always thought a historical perspective was useful, and in fact necessary, when looking at economic data.

A picture can mislead, but it won’t lie outright.

Case in point is The Star’s otherwise unremarkable article on BNM’s September international reserves position:

Malaysia's foreign reserves soars to RM310.8b

Rreserves [sic] position is sufficient to finance 8.5 months of retained imports and is 4.3 times the short-term external debt

KUALA LUMPUR: Bank Negara’s international reserves amounted to RM310.8bil as at Sept 30.

“The reserves level as at Sept 30, 2010 had taken into account the quarterly adjustment for foreign exchange revaluation loss, following the strengthening of the ringgit against most major currencies during the quarter.

“The reserves position is sufficient to finance 8.5 months of retained imports and is 4.3 times the short-term external debt,” the central bank said in a statement yesterday.

The gross international reserves comprised gold and foreign exchange and other reserves including special drawing rights (SDRs) of RM310.76bil.

Other assets included Malaysian government papers (RM2.38bil), deposits with financial institutions (RM31.36bil), loans and advances (RM11.80bil) and other assets (RM6.49bil).

That's the first time that I've seen data that was showing a drop described as "soaring":


BNM’s international reserves has barely budged since February…when it dropped by RM20 billion. In fact, at the mid-point of September, international reserves stood at RM313 billion, which means BNM took a revaluation loss of RM3 billion for the 3Q2010.

Turning to more serious matters, I’ve been watching the reserves position rather closely for the last few weeks for signs that BNM is intervening to hold down the Ringgit’s appreciation. If they are in the market, it’s in relatively small amounts (<RM1 billion), or they’re working through proxies (which would be signalled by a rise in banking system net foreign asset position). But the latter’s forex resources is just a fraction of BNM’s, which on the whole suggests that there’s no systematic effort to influence the Ringgit’s in any way.

As yesterday’s post points out, leaning against the market can’t be done over any long period – the volumes are too large for any central bank to cope with. If in fact capital inflows become too large to manage, the next best option is to change the rules of the game – institute some form of capital controls. But I’d expect intervention to happen first, as BNM needs to test investors’ resolve to keep driving up the MYR’s value, before taking the next, investor-unfriendly step.

There’s still a lot of ambivalence regarding capital controls, as this article shows, but there’s some slow recognition that unfettered short term capital flows are highly destabilising.

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