OVERVIEW

Malaysia’s current account surplus narrowed significantly to RM0.3bn in 4Q23 from RM9.1bn in 3Q23. The services account registered a deficit of RM7.4bn in 4Q23 (-RM10.3bn in 3Q23). Similarly, the financial account turned around from a net inflow of RM14.9bn in 3Q23 to a net outflow of RM19.9bn in 4Q23. The overall balance of payments recorded a deficit of RM10.2bn in 4Q23 from a deficit of RM7.7bn in 3Q23.

CURRENT ACCOUNT

In 4Q23, Malaysia's current account surplus remained steady at RM0.3bn, equivalent to 0.1% of GDP, compared to RM9.1bn, or 2.0% of GDP, in the preceding quarter. The decline in the current account surplus was primarily attributed to a notable increase in the primary income deficit, resulting from higher investment income accrued to foreign investors in Malaysia. However, this was partially mitigated by a sustained goods surplus, buoyed by improved exports driven by heightened demand from key trade partners. Additionally, a narrower services deficit, reflecting increased travel receipts amid the ongoing recovery in inbound tourism, contributed to offsetting the weaker current account surplus.

By category – the goods account recorded a net export of RM30.8bn in 4Q23 compared to RM32.7bn in 3Q23. The current account surplus was supported by to narrower deficit in the services account, which registered a deficit of RM7.4bn in 4Q23 (-RM10.3bn in 3Q23), reflecting mainly higher travel receipts.

Primary income account recorded a higher deficit of RM20.9bn in 4Q23 (a deficit of RM11.0bn in 3Q23), mainly owing to higher investment income accrued to foreign investors in Malaysia. Similarly, deficit in the secondary income account widened to RM2.3bn in 4Q23 (-RM2.2bn in 3Q23) as both receipts and payments of this account increased to RM8.1bn (3Q23: RM7.0bn) and RM10.4bn (3Q23: RM9.2bn), respectively.

FINANCIAL ACCOUNT

In 4Q23, Malaysia witnessed a notable increase in its financial account outflow, rising by RM19.9bn from a net inflow of RM14.9bn in 3Q23. This uptick was primarily attributed to net outflows in other investments, primarily driven by heightened repayment for interbank borrowing by onshore banks. Additionally, the outflows in the portfolio investment account were influenced by resident investors' acquisition of debt securities abroad. These developments collectively contributed to the expansion of the financial account deficit during the period.

A higher foreign direct investment (FDI) inflow of RM17.1bn in 4Q23 (RM7.2bn in 3Q23), driven by higher inflows in equity and debt instruments. Services remained the dominant sector of FDI, mainly in health and information & communication sub-sectors, followed by manufacturing. Meanwhile, the direct investment abroad (DIA) recorded a lower net outflow of RM12.4bn in 4Q23 (outflows of RM13.4bn in 3Q23). Similarly, portfolio investments recorded a net outflow of RM6.4bn in 4Q23 from a net outflow of RM14.1bn in 3Q23.

Despite uncertainties surrounding external demand, Malaysia remains an attractive destination for substantial foreign investments, driven by increased commitments in both the manufacturing and services sectors. This influx encompasses both new projects and expansions of existing ones, highlighting the nation's enduring appeal to foreign investors. Contributing to this attractiveness are government-backed initiatives aimed at fostering a conducive business environment, such as the Ekonomi MADANI framework. Additionally, policies like the National Energy Transition Roadmap (NETR), New Industrial Master Plan 2030 (NIMP 2030), and Budget 2024 further bolster Malaysia's appeal as an investment hub, solidifying its position on the global stage.

INTERNATIONAL RESERVES

Malaysia’s international reserves rose to USD113.5bn as at end-4Q23 from USD110.1bn as at end-3Q23. As of 31 January, international reserves stood at USD114.8bn, sufficient to finance 5.4 months of imports of goods and services and is 1.0 time the short-term external debt. We opine that the recent appreciation of the Malaysian ringgit against the US dollar, paralleling trends observed in regional currencies, likely stems from broad-based weakness in the US dollar. Notably, the ringgit demonstrated a 2.1% appreciation against the US dollar in 4Q23, contrasting with a marginal decline of 0.2% in the preceding quarter. However, the ringgit experienced depreciation against major trading partners during this period, resulting in a decrease in the nominal effective exchange rate (NEER) to -0.9% in 4Q23, compared to a positive growth of 1.4% in 3Q23.

BOP OUTLOOK

In 2024, amidst sluggish global economic growth, persistent geopolitical tensions, and volatile commodity prices, trade dynamics are anticipated to align with the positive outlook observed in the semiconductor industry. Although Malaysia's trade performance faces susceptibility to potential downsides due to global uncertainties, rising inflationary pressures, and tightening financial conditions, medium-term prospects suggest significant improvement with sustained inflows and the fulfilment of foreign direct investment (FDI) commitments.

In 2024, it is expected that the current account surplus of the country will continue to broaden, notwithstanding the setbacks experienced in 2023, which recorded a surplus of RM22.8bn (1.3% of GNI). The anticipated expansion in 2024 is forecasted to correspond with heightened domestic industrial and investment endeavours, primarily propelled by private investments. The projected augmentation of the current account surplus is predominantly attributable to an amplified surplus in the goods account, buoyed by enhanced growth outlooks in key trading partners. However, an enlarged deficit in the primary account is anticipated for 2024, driven by increased payments by foreign investors engaged in ongoing investment ventures. Moreover, the ongoing integration of advanced technologies such as artificial intelligence, cloud computing, digitalization, and automation is expected to elevate compensation for foreign professionals, thereby contributing to the envisaged escalation in the deficit.

In alignment with the directives from the Ministry of Finance (MOF) and considering the anticipated persistence of a current account surplus alongside an enhanced fiscal deficit target and a heightened operating surplus, the Malaysian ringgit is poised to receive some underlying reinforcement. These economic indicators suggest a trajectory wherein the ringgit is likely to stabilise and exhibit resilience against external fluctuations. With these factors in mind, our forecast positions the ringgit to maintain an average exchange rate of approximately RM4.35-4.40 per USD by the conclusion of 2024.

Source: PublicInvest Research - 19 Feb 2024