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PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 18 Jun 2021, 10:10 AM

 

PublicInvest Research Economic Update - Bright Prospects Ahead

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Overview

Malaysia’s balance of payment (BOP) position was resilient in 1Q21 powered by a bigger surplus in the current account and a sharp turnaround in the financial account. Current account surplus-to-GNI of 3.6% in 1Q21, though 1.8-pps lower than 4Q20 is still 1.0-pps higher than 1Q20, and respectable by all measures given the still unfolding COVID-19 challenges. The steady current account position was driven by double-digit increases in trade surplus and sustained inflows in capital markets, specifically the debt market. Widening of the current account surplus was primarily driven by a bigger surplus in the goods sub account (1Q21: RM36.6bn; 1Q20: RM28.8bn) thanks to the strong rebound in electronics and electrical – E&E (1Q21: +13.2% YoY), natural rubber (1Q21: +26.1% YoY) and palm oil and palm-based products (1Q21: +51.5% YoY) exports. The steady surplus in the goods account was offset however by higher deficit in the services account (1Q21: -RM14.9bn; 1Q20: -RM7.6bn) no thanks to a deterioration in the travel sub-account (1Q21: -RM3.4bn, 1Q20: RM2.2bn) amid a global pandemic condition that pushed borders to remain closed, preventing any inbound travel. This was further added by sustained outflows in the transport (1Q21: -RM7.6bn; 1Q20: -RM6.5bn) and telecommunications, computer and information services (1Q21: -RM1.0bn; 1Q20: -RM623mn) sub accounts.

Financial account position rebounded sharply in 1Q21 (RM15.9bn; 1Q20: - RM13.1bn), a multi-year high, driven by a solid turnaround in the portfolio investment sub-account (1Q21: RM396mn, 1Q20: -RM41.4bn) amid a decrease in investments abroad (e.g.; securities) by residents, indicating portfolio rebalancing towards the domestic capital markets. This was further added by sustained inflows in other investment sub-account (1Q21: RM13.9bn, 1Q20: RM21.8bn) which include, among others, bank loans, other equity, currency and deposits or Special Drawing Rights (SDR). The Ringgit rebounded by 4.08% YoY in 1Q21 to RM4.1450 per Dollar, driven by sharp inflows into the bond market (1Q21: +RM16.7bn; 1Q20: -RM16.8bn), double digits rise in the trade surplus (1Q21: +58.6% YoY; RM59.6bn) and smaller outflows in the equity market (1Q21: -RM1.7bn; 1Q20: -RM7.6bn).

CURRENT ACCOUNT

Current account delivered another resilient performance this quarter (1Q21: RM12.2bn; 1Q20: RM8.8bn) driven by bigger surplus in the goods account (1Q21: RM36.6bn; 1Q20: RM28.8bn) thanks to the turnaround in exports following full economic openings across the region and major economies (North America). Bigger deficit in the services account (1Q21: -RM14.9bn; 1Q20: - RM7.6bn), on the other hand, was driven by a deterioration in the travel sub account account (1Q21: -RM3.4bn; 1Q20: RM2.2bn) amid a massive drop in international travel due to pandemic-induced restrictions.

Primary income deficit improved further (1Q21: -RM5.7bn, 1Q20: -RM7.1bn) driven by a bigger surplus in other investment (1Q21: RM5.2bn; 1Q20: RM4.8bn) and a smaller outflow in compensation of employees’ sub-accounts (1Q21: -RM1.9bn, 1Q20: -RM2.3bn). Portfolio investment recorded a slightly bigger dent this quarter (1Q21: -RM3.4bn; 1Q20: -RM3.0bn), driven by a sustained outflow in the equity market (1Q21: -RM1.7bn; 1Q20: -RM7.6bn) though offset by solid inflows into the bond market (1Q21: RM16.7bn, 1Q20: - RM16.8bn).

Secondary income improved further (1Q21: -RM3.6bn; 1Q20: -RM5.1bn) driven, among others, by a drop in the value of remittance and a jump in miscellaneous transfers. This is a favourable trend as it will put less pressure on the Ringgitthough it may reverse once the economy recovers.

FINANCIAL ACCOUNT

Financial account improved markedly for the quarter (RM15.9bn; 1Q20: - RM13.1bn), its multi-year best, thanks to the solid rebound in portfolio investment sub-account (1Q21: RM396mn; 1Q20: -RM41.4bn) consistent with impressive foreign inflows especially in bond market (1Q21: RM16.7bn). This was further added by sustained inflows in direct investment (1Q21: RM1.3bn; 1Q20: RM3.9bn) and other investment sub-accounts (1Q21: RM13.9bn; 1Q20: RM15.8bn), indicating an investment rebalancing towards the domestic capital markets. Financial derivatives deficit narrowed for the quarter (1Q21: -RM265m, 1Q20: -RM2.5bn) consistent with foreign investors steady outflows since more than a year ago.

Foreign Direct Investment (FDI)

Malaysia’s Foreign Direct Investment (FDI) rebounded encouragingly this quarter (RM9.1bn; 4Q20: RM6.8bn) driven by improving sentiment which underpinned a higher injection in equity and debt instruments. Malaysia’s direct investment abroad (DIA) also accelerated (1Q21: RM7.8bn; 4Q20: RM5.2bn) resulting in higher investment in equity.

The inflows of FDI in 1Q21 came mainly from Singapore (RM2.9bn), UK (RM1.9bn) and Netherlands (RM1.3bn) and were directed into services – financial activities and wholesale & trade (43% share), manufacturing (38%) & mining and quarrying (15%) sectors. 1Q21 DIA, on the other hand, was channeled into Canada (RM1.4bn), Indonesia (RM1.1bn) and Singapore (RM1.1bn) into sectors like services – financial activities (45% share), mining & quarrying (29%) and manufacturing (15%) sectors.

This is the second quarter in a row where Asia dominated the FDI into Malaysia (1Q21: RM6.2bn; 68% share) thanks to their favourable economic conditions following an effective handling of the COVID-19 pandemic. This is a positive development as FDI may rebound further once our traditional investors from major economies (Netherlands, UK) return in big numbers, most likely after the COVID-19 situation in their country improves.

INTERNATIONAL RESERVES

Forex reserves jumped by USD6.9bn to end at USD108.6bn in 1Q21 (1Q20: USD101.7b) driven, among others, by strong foreign interest in the bond market and double-digits rise in trade surplus. The strong inflows from these channels pushed the Ringgit higher (1Q21: RM4.0203 per Dollar; 1Q20: RM4.0910 per Dollar) though this was offset by sustained selling pressure in the equity market (1Q21: -RM1.7bn; 1Q20: -RM7.6bn).

BOP OUTLOOK

Our improving economic prospects may push the BOP to remain steady in the next few quarters. The expected turnaround in trade, portfolio rebalancing prospects towards ASEAN capital markets and the competitive currencies of the region will be the major driving factors that will be supportive of the BOP in the near term. Sentiment will also be driven by the rapid COVID-19 inoculation in the region apart from a prospective policy normalization that is expected to be ahead of major economies.

Downside risks may however come from successive wave of COVID-19 infections in the region, a slower-than-expected COVID-19 inoculation, vaccine shortages or a low take-up for the vaccination programme where all these may push the borders to remain closed and by extension, delaying the recovery of contact-sensitive industries. The impending start US-China 2nd trade talks is also a going concern as that could negatively impact demand for manufacturing products and therefore, the exports momentum.

Source: PublicInvest Research - 12 May 2021

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