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Kenanga Research & Investment

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Malaysia 1Q21 Balance of Payments - Current account surplus narrowed in 1Q21 on lower goods surplus

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● The current account (CA) surplus of thebalance of payments narrowed for the second consecutive quarter in 1Q21, to RM12.3b (3.3% of GDP; 4Q20: RM18.6b, 4.9% of GDP)

- Lower CA surplus was attributable to a moderation in the goods account surplus, and larger deficits in secondary income and the services account; but was partially supported by a smaller primary income deficit. o

  • Goods (RM36.6b; 4Q20: RM42.6b): surplus narrowed on higher imports
    • Mainly driven by a surge in imports (RM188.9b; 4Q20: RM174.6b), with an increase in intermediate and capital goods from China, Japan and Singapore, which outweighed rising exports (RM225.5b; 4Q20: RM217.2b).
  • Services (-RM15.0b; 4Q20: -RM14.0b): deficit continued to expand, setting a new record-high
    • Mostly due to an enlarged deficit in the construction account (-RM0.7b; 4Q20: -RM0.4b) owing to new projects, a record rise in the deficit of transportation account (RM-7.7b; 4Q20: - RM7.5b), and a persistent deficit in the travel account (-RM3.4b; 4Q20 -RM3.3b) as international borders remained closed.
  • Primary income (-RM5.7b; 4Q20: -RM7.2b): deficit lowered to its smallest since 2Q20
    • Attributable to Malaysian companies abroad earning higher income (RM17.3b; 4Q20: 14.5b) mostly located in the US, Indonesia, andSingapore. This outweighed a concurrent rise in income earned by foreign companies in Malaysia (RM23.0b; 4Q20: RM21.7b).
  • Secondary income (-RM3.6b; 4Q20:-RM2.7b):deficit deepened to its lowest in a year
    • Attributable to higher foreign workers’ remittances (RM7.6b; 4Q20: RM6.9b), as well aslower receipts of RM4.0b (4Q20: RM4.3b).

● The financial account of the balance of paymentsreturned to surplus for the first time in 11 quarters, registering RM16.0b (4Q20: -RM10.2b), its highest level since 2011

- Other investment(RM13.9b; 4Q20:-RM3.7b):surged to a 1-year high, mainly as a result of increased interbank borrowing from abroad. The main contributor to the financial account rebound.

- Portfolio investment (RM0.4b; 4Q20: -RM7.1b): registered a net inflow, due to higher inflow of portfolio liabilities (RM14.6b; 4Q20: RM12.8b), mostly into the debt market.

- Direct investment (RM1.4b; 4Q20: RM1.6b): decreased marginally on the back of a higher net outflow of Direct Investment Abroad (RM7.8b; 4Q20: 5.2b) mainly for the financial, mining, and manufacturing sectors. This outweighed an increase in net inflows of FDI (RM9.1b; 4Q20: RM6.8b), with the lion's share allocated into the manufacturing, financial, and wholesale & retail trade sectors.

● 2021 CA balance forecast retained at 3.5% of GDP (2020: 4.2%)

- Despite the goods surplus narrowing this quarter, we still expect it to remain robust over 2021, driven by higher trade growth. External demand will continue to recover amid a wider rollout of COVID-19 vaccines globally, and a continued expansion in the local manufacturing sector is expected given the technology upcycle. However, the services deficit will likely persist as international borders stay closed until COVID-19 vaccinations progress locally and abroad, whichmay cause the travelaccount to remain in deficit until at least the end of the year.

- We maintain ouryear-endforecastof USDMYR at 3.95 (2020: 4.02), with the expectation that the ringgit will regain strength as Malaysia’s vaccine programmes continues, average Brent crude oil prices remain high, and as domestic recovery outlook improves for the rest of the year.

- On monetary policy,we expect BNM tomaintain the overnight policy rate at 1.75% for the rest of the year.The reinstatement of a nationwide Movement Control Order (MCO 3.0) may affect domestic demand in the short-term but should not significantly weigh on growth recovery as most economic sectors are still allowed to operate.

Source: Kenanga Research - 12 May 2021

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