KUALA LUMPUR (Jan 10): Malaysia saw full-year foreign portfolio inflows of RM30.4 billion in 2021, marking the highest inflow the nation has seen since 2012, according to UOB Malaysia.

In a note on Monday (Jan 10), UOB Malaysia senior economist Julia Goh and economist Loke Siew Ting said Malaysia’s foreign portfolio flows rebounded with an inflow of RM5 billion in December 2021, from an outflow of RM3.4 billion in the preceding month.

They attributed the movement to higher foreign flows into domestic debt securities of RM33.6 billion, which had fully offset the RM3.2 billion foreign outflows from equities.

“December’s foreign debt inflows were largely into Malaysian Government Securities (MGS) (RM2.4 billion) and Government Investment Issues (GII) (RM3.9 billion). This led to higher foreign holdings of Malaysian government bonds at RM234 billion or equivalent to 25.4% of total outstanding as at end-2021,”  Goh and Loke said.

Foreign holdings in MGS for the month increased to RM189.5 billion or 39.4% of total MGS outstanding versus 39.3% in November, while their holdings of GII rose to RM44.5 billion or 10.5% of total GII outstanding — the highest foreign holdings of GII since Oct 2016.

Meanwhile, the economists noted that Bank Negara Malaysia’s (BNM) foreign reserves rose for the third consecutive month, rising to US$116.9 billion as at end-2021, from US$116.7 billion as at end-November.

“For the entire year of 2021, foreign reserves leapt by US$9.3 billion, the most since 2011. This was primarily credited to sustained foreign investment inflows and robust current account surplus. The latest reserves level has taken into account the quarterly foreign exchange revaluation changes,” they said.

Looking ahead, the research house expects the hawkish US Federal Reserve and emerging Covid-19 variants to be the top risk factors exacerbating volatility in emerging markets capital flows, including Malaysia.

Goh and Loke said the December Federal Open Market Committee (FOMC) meeting minutes indicate hints of an earlier and faster timeline to raise interest rates in 2022, and had discussed balance sheet reduction at a shorter time frame.

They added that headwinds from new Covid-19 variants, global supply chain disruptions, and China’s regulatory risks further cloud the growth and inflation outlook ahead, and that extended market volatility could prevail, given the risk that the US Fed may accelerate policy normalisation.

“This would lend to a stronger USD and tighter global monetary conditions that in turn would affect portfolio flows into emerging markets,” they said.

The research house expects the US dollar to see further strength, expecting the ringgit to trade at RM4.30 against the greenback by end-2022 amid higher public debt, policy and political uncertainty, which could weigh on Malaysia’s capital flows and currency outlook.