OVERVIEW

Malaysia’s balance of payment (BOP) position remained resilient in 2Q21 driven by a solid surplus in the current account and smaller deficit in the financial account. Current account surplus-to-GNI of 4.3% in 2Q21, 0.7-pps and 1.8-pps higher than 1Q21 and 2Q20, is a respectable achievement given the still strong COVID-19 challenges.

The steady current account position was driven by triple-digit increase in trade surplus and sustained inflows in capital markets, specifically the debt market. Widening of the current account surplus (2Q21: RM14.4bn; 2Q20: RM7.6bn) was primarily driven by a bigger surplus in the goods sub-account (2Q21: RM40.6bn; 2Q20: RM25.8bn) thanks to strong export momentum by key products such as electronics and electrical – E&E (2Q21: +30.5% YoY), natural rubber (2Q21: +63.4% YoY), palm oil and palm-based products (2Q21: +61.2% YoY), crude petroleum (2Q21: +95.8% YoY) and natural gas (2Q21: +50.7% YoY).

The steady surplus in the goods account was offset however by higher deficit in the services account (2Q21: -RM15.4bn; 2Q20: -RM12.3bn) no thanks to the deterioration in the travel sub-account (2Q21: -RM3.6bn, 2Q20: -RM3.0bn) following our borders that remained shut due to the COVID-19 pandemic. This was aggravated by sustained outflows in the transport (2Q21: -RM8.1bn; 2Q20: - RM6.2bn) and other business services (2Q21: -RM1.2bn; 2Q20: -RM925mn) sub-accounts.

Financial account deficit narrowed sharply (2Q21: -RM6.9bn; 2Q20: - RM21.6bn), driven by sustained rebound in the portfolio investment sub-account (2Q21: RM19.9bn; 2Q20: RM20.6bn) following steady non-resident inflows (e.g.; securities), indicating continued portfolio rebalancing towards the domestic capital markets. This was further added by the sharp turnaround in direct investment sub-account (2Q21: RM4.2bn, 2Q20: -RM584mn) though offset by sustained outflows in other investment sub-account (2Q21: -RM30.4bn; 2Q20: - RM41.1bn). Steady capital inflows pushed the Ringgit to end higher (2Q21: RM4.1490 per Dollar (average); +3.2% YoY) driven among others by sustained inflows in the bond market (2Q21: +RM7.7bn; 2Q20: +RM11.0bn), triple digits rise in trade surplus (2Q21: RM56.3bn; 122.7% YoY) and smaller outflows in the equity market (2Q21: -RM2.5bn; 2Q20: -RM8.5bn).

CURRENT ACCOUNT

Current account delivered another respectable performance (2Q21: RM14.4bn), almost 1-fold higher than a year ago (2Q20: RM7.6bn), driven by bigger surplus in the goods account (2Q21: RM40.6bn; 2Q20: RM25.8bn) thanks to solid rebound in exports momentum (2Q21: +45.6%; 2Q20: -14.2%) following full economic openings across the region and major economies (North America, Eurozone, China). Sustained deficit in the services account (2Q21: -RM15.4bn; 2Q20: -RM12.3bn), on the other hand, was driven by a less-than-inspiring travel sub-account account form (2Q21: -RM3.6bn; 2Q20: -RM3.0bn) consistent with our borders that remained closed.

Primary income deficit widened (2Q21: -RM9.4bn, 2Q20: -RM3.8bn) driven by bigger deficit in direct investment (2Q21: -RM11.1bn; 2Q20: -RM3.0bn) though offset by a smaller outflow in compensation of employees’ sub-accounts (2Q21: -RM1.6bn, 2Q20: -RM1.9bn). Portfolio investment recorded a smaller dent this quarter (2Q21: -RM1.6bn; 2Q20: -RM2.8bn) driven by solid non-resident inflows into the bond market (2Q21: +RM7.7bn, 2Q20: +RM11.0bn) though offset by sustained resident outflows in the equity market (2Q21: -RM2.5bn; 2Q20: - RM8.5bn).

Secondary income improved further (2Q21: -RM1.3bn; 2Q20: -RM1.9bn) driven, among others, by a drop in the value of remittance and a jump in miscellaneous transfers. The trend is conducive for the Ringgit though it may reverse once the economy recovers.

FINANCIAL ACCOUNT

Financial account deficit narrowed sharply (2Q21: -RM6.9bn; 2Q20: -RM21.6bn) thanks to sustained rebound in the portfolio investment sub-account (2Q21: RM19.9bn; 2Q20: RM20.6bn) consistent with the steady non-resident inflows in the bond market (2Q21: RM7.7bn). This was further pushed by the sharp turnaround in direct investment (2Q21: RM4.2bn; 2Q20: -RM584mn) in addition to narrowing deficit in other investment sub-accounts form (2Q21: -RM30.4bn; 2Q20: -RM41.1bn). Financial derivatives deficit was almost unchanged (2Q21: - RM635m, 2Q20: -RM616mn) consistent with resident outflows since more than a year ago.

Foreign Direct Investment (FDI)

Malaysia’s Foreign Direct Investment (FDI) delivered another steady form this quarter (RM8.2bn; 1Q21: RM9.1bn) driven by full economic openings in the region which underpinned a higher injection in equity and investment funds shares. Malaysia’s direct investment abroad (DIA) slowed down materially however (2Q21: RM4.0bn; 1Q21: RM7.6bn) hampered by economic uncertainty and balance sheet constraints by investors in line with challenging economic conditions.

The inflows of FDI in 2Q21 came mainly from Japan (RM2.1bn), Indonesia (RM1.5bn) and US (RM1.4bn) - directed into manufacturing (84% share), mining and quarrying (11%) and services (5.0%) sectors. 2Q21 DIA, on the other hand, was channeled into the UK (RM1.2bn), Indonesia (RM0.9bn) and Canada (RM0.9bn) into sectors like manufacturing (44% share), services (44%) and mining & quarrying (12%) sectors.

This is the third quarter in a row where Asia dominated the FDI into Malaysia (2Q21: RM6.0bn; 76% share) thanks to their solid economic fundamentals especially Japan. This is a positive development as our FDI may rebound once our traditional investors from major economies (Netherlands, UK) return, a trend that may resume after the COVID-19 situation improves.

INTERNATIONAL RESERVES

Forex reserves jumped by USD7.7bn to end at USD111.1bn in 2Q21 (2Q20: USD103.4b) driven, among others, by non-resident inflows in the bond market and triple-digits rise in trade surplus. The strong inflows from these channels pushed the Ringgit higher (2Q21: RM4.1490 per Dollar; +3.2% YoY) though this was offset by sustained selling pressure in the equity market (2Q21: -RM2.5bn; 2Q20: -RM8.5bn).

BOP OUTLOOK

The balance of risks for the BOP is skewed to the downside no thanks to the still-strong COVID-19 challenges. The strong headwinds from the pandemic given the emergence of stronger variants (Delta, Lambda) could push our borders to remain closed in the foreseeable future. Even if our borders are allowed to be opened, the tourism sector may not recover so soon given the strict Standard Operating Procedures (SOPs) which will lead to higher operating expenditure for hoteliers (i.e.; regular sanitization, social distancing), dampening full openings in that sense. The small pool of tourist that can afford to travel on the other hand may be deterred by the stronger and deadlier COVID-19 variant.

Our less-than-inspiring management of the COVID-19 pandemic and unsettled political conditions may also hurt non-resident interest to invest in domestic capital markets especially when advanced economies may embark on interest rate moves far ahead of ASEAN members. The bright spot may come from steady exports performance thanks to sustained global demand for manufacturing and natural resources. The downside risks may be amplified by successive wave of COVID-19 infections in the region, further delaying the recovery of contact-sensitive industries. All these could also hurt the Ringgit and our FDI though the impact will only be seen in the long-term due to the long digestion period involving fixed investment.

Source: PublicInvest Research - 16 Aug 2021