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What are currency reserves?

Currency reserves are large amounts of currencies held by governments as part of their foreign exchange reserves. They are used to meet a country’s external obligations, for example paying for imports and paying off foreign currency debts. They also act as the pricing currencies for globally traded products such as oil, gold and silver.

Countries will keep different reserve currencies, depending on their main trading partners. The U.S dollar is a dominant reserve currency, as well as the euro and Japanese yen. China’s yuan is also slowly emerging as a potential reserve currency.

Why are Malaysia’s reserves falling right now?

Malaysia’s reserves are falling because Bank Negara Malaysia has been intervening to help slow down the rate at which the ringgit is falling. By buying and selling foreign reserve currency, Bank Negara can affect the exchange rate.

The ringgit is currently falling as a result of various incidents occurring at once, for example a slump in oil prices and a possibility of an increase in US interest rate, both of which could affect worldwide economy. On top of that, political uncertainty and instability as well as the 1MDB scandal are also affecting investors’ confidence. Read more about that here.

How low have Malaysia’s foreign reserves fallen?

As of 31 July 2015, the reserves stood at USD96.7 billion. This has become a news issue because USD100 billion is seen as a psychological benchmark. However, Societe Generale stated that Bank Negara Malaysia’s defense of the weakening Ringgit may stop at about the USD90 billion reserves mark.

Should we be worried about this?

“A fall below the psychological $100 billion level may roil fragile sentiment further,” says one economic forecaster interviewed by Bloomberg. Loss of investor confidence often leads to further loss of confidence.

However, Business Circle (published by Malaysia’s Economic Transformation Programme), has stated that the falling currency reserves should not necessarily worry people because reserves are really held as “insurance”, to be used during rainy days such as these.

How much foreign reserve currency is held by other countries?

According to RHB Research, as of end July 2015, the country’s foreign exchange reserves were still sufficient to finance 7.6 months of retained imports. By comparison, many developed countries only keep reserves to finance about 1-2 months of retained imports. The international benchmark is 3 months.

Dhabitah Zainal

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