Malaysia continued to garner foreign portfolio inflows for a sixth straight month in Jun (at MYR3.9bn vs May: +MYR2.3bn) and for a second consecutive quarter (2Q23: +MYR7.4bn vs 1Q23: +MYR9.5bn). This was purely driven by higher foreign purchases of Malaysian debt securities (Jun: +MYR5.2bn vs May: +MYR3.0bn; 2Q23: +MYR9.8bn vs 1Q23: +MYR11.4bn), which fully offset the persistent foreign selling of Malaysian equities (Jun: -MYR1.3bn vs May: MYR0.7bn; 2Q23: -MYR2.3bn vs 1Q23: -MYR1.9bn). 

Bank Negara Malaysia (BNM)’s foreign reserves dropped for the third straight month by USD1.3bn m/m to USD111.4bn as at end-Jun (end-May: -USD1.8bn m/m to USD112.7bn) after taking into account the quarterly foreign exchange revaluation changes amid a weaker MYR against the USD. The latest reserve position is sufficient to finance 5.0 months of imports of goods & services and is 1.0 time of total short-term external debt. BNM’s net short position in FX swaps widened by USD0.1bn m/m to USD23.7bn as at end-May (end-Apr: USD3.1bn m/m to USD23.6bn). 

Lingering global economic and financial challenges as well as ongoing geopolitical tensions continue to point to volatile capital flows into emerging markets (EMs) including Malaysia in the near term. Domestically, political uncertainty linger ahead of the six state elections on 12 Aug. Bank Negara Malaysia (BNM) kept a cautious view on the economic outlook as the policy rate was kept unchanged at 3.00% last week. We expect BNM to keep rates unchanged for the rest of the year. We reiterate our house view of a weakening bias for MYR this quarter (3Q23) before gradually regaining momentum from 4Q23 onwards.