The lowest reserve adequacy in Asia is sapping demand for the securities just as they are recovering from the longest selloff by foreign investors in eight years. Relatively high foreign ownership and an acceleration in inflation from last year are adding to risks as major central banks sound increasingly hawkish on interest rates.

“There has been a rebound of flows into Malaysia bonds after huge redemptions late last year,” said Desmond Soon, head of investment management for Asia ex-Japan at Western Asset Management Co. in Singapore, which oversees $433 billion. “But considering Malaysia’s FX reserve coverage, the number remains vulnerable to a significant change in global risk appetite.”

Malaysia’s reserves are sufficient to finance 6.5 months of imports, according to data compiled by Commerzbank AG using a 12-month moving average. That compares with 9.9 months for Indonesia, 10.8 for Thailand, 11.2 months for the Philippines, and 21.6 for China.

Bank Negara Malaysia’s reserves amount to just 1.1 times the amount of short-term debt on issue, Commerzbank estimates. The corresponding ratio is 2.8 for Indonesia, 3.7 for the Philippines and 4.3 for India.

While a concern to investors, the ratios don’t faze Malaysian policy makers.

“Malaysia’s level of foreign-exchange reserves is adequate for our stage of economic development, domestic market structure and external position,” Bank Negara Governor Muhammad Ibrahim said in a speech last week in Kuala Lumpur. “Malaysia’s reserves are well within the adequacy range, placing us in a comfortable position relative to regional peers and fulfilling recognized global standards.”

Bank Negara’s international reserves are sufficient to finance 7.9 months of retained imports, according to the central bank’s calculations, higher than Commerzbank’s estimate.

Malaysia’s reserves have dropped for four straight years, declining to $93.3 billion in September 2015, from as high as $141.4 billion in May 2013. They climbed back to $99.1 billion as of July 14 as the ringgit strengthened, according to central bank data.

“Foreign-exchange reserves are still low relative to the near term risk of outflows,” said Julian Wee, a senior market strategist at National Australia Bank Ltd. in Singapore. “This weak foreign-exchange reserves position will play a greater role during strong dollar periods, wherein Bank Negara has to be far more cautious about intervening to slow a fall in the ringgit, thereby leading to underperformance.”

Global funds have started to return to Malaysian bonds after cutting holdings for five straight months through March, the longest streak since December 2008. They bought 15 billion ringgit ($3.5 billion) during April and May, after selling 59 billion ringgit in the five months through March.

Malaysia’s 10-year bond yields have dropped almost half a percentage point to 3.99 percent since reaching an eight-year high of 4.46 percent in November. The ringgit has strengthened to 4.2873 per dollar from as weak as 4.5002 in January and the median forecast in a Bloomberg survey of analysts is for it to end the year at 4.27.

Pioneer Investment Management Ltd. said in June it’s cautiously positive on ringgit bonds, while Schroder Investment Management Ltd. likes the ringgit due to Malaysia’s positive macroeconomic conditions.

Positive Picture

While Commerzbank points out the weakness in Malaysia’s reserves, it sees positives in the nation’s economic fundamentals.

“A stabilization in FX reserves, the currency, and volatility should all bode well for sentiment toward Malaysian government bonds,” said Charlie Lay, an analyst at Commerzbank in Singapore. “Healthy domestic demand and firm exports should also reinforce the positive macro picture.”

Sentiment toward Malaysian bonds may also be affected by the ongoing scandal over state investment company 1Malaysia Development Bhd. and the central bank’s forecast for inflation to accelerate this year.

1MDB failed to make payments totaling more than $628 million to Abu Dhabi’s sovereign wealth fund as part of a settlement over a debt dispute, according to a filing to the London Stock Exchange on Tuesday.

Inflation surged to an eight-year high in March amid a recovery in energy prices. The central bank said that month it expects consumer-price gains to average 3 percent to 4 percent this year, up from 2.1 percent in 2016.

Accelerating inflation, coupled with strengthening domestic demand, has prompted Natixis SA and United Overseas Bank Ltd. to flag that an interest-rate increase may be on the way. Bank Negara has kept its benchmark at 3 percent since July 2016 and said last month headline inflation is expected to moderate in the second half of the year.

“Reserve adequacy is toward the low end, which is one factor the market latches onto in periods of broader weakness,” said Wilfred Wee, a fund manager at Investec Asset Management Ltd. in Singapore, which oversaw $124 billion as at end-June. “If Bank Negara can stabilize the ringgit and inflation, and inflation expectations moderate further, the appeal of Malaysia government bonds can improve.”