OVERVIEW

Malaysia’s current account surplus remained stable at RM3.0bn in 2Q24, predominantly driven by net exports in the Goods account. The Financial account saw a significant turnaround, registering a net inflow of RM17.1bn (1Q24: net outflows of RM18.7bn), largely attributable to robust inflows in the Other Investment category. As of the end of June, international reserves stood at RM537.2bn, marginally lower than the RM538.9bn recorded at the end of 1Q24. For 1H24, the current account balance (CAB) posted a surplus of RM19.2bn (1H23: RM19.1bn), while the Financial account recorded a reduced net outflow of RM1.6bn, a notable improvement from the RM13.2bn net outflow in 1H23.

CURRENT ACCOUNT

Malaysia's current account surplus narrowed to RM3bn, equivalent to 0.6% of GDP in 2Q24 (1Q24: RM16.2bn; 3.5% of GDP), supported by a sustained goods surplus amid improving exports and a narrower services deficit driven by higher receipts in travel, transportation, and other business services. However, this was partially offset by a wider primary income deficit.

By category, the goods account recorded a net export surplus of RM24.6bn in 2Q24, down from RM32.0bn in 1Q24, reflecting a moderation in trade dynamics. However, the services account showed a notable improvement, with the deficit narrowing to RM4.9bn from RM7.3bn in the previous quarter. This positive shift was driven by a higher surplus in travel and manufacturing services, coupled with a reduced deficit in telecommunications, computer, and information services.

The Primary Income account recorded a wider deficit of RM15.5bn in 2Q24, compared to RM8.8bn in the previous quarter, primarily due to a decline in receipts to RM24.1bn (1Q24: RM28.4bn) alongside an increase in payments to RM39.6bn (1Q24: RM37.2bn). This reflects higher outflows related to investment income, coupled with reduced inflows. Meanwhile, the Secondary Income account shifted to a deficit of RM1.1bn, from a surplus of RM0.3bn in 1Q24, as both receipts and payments decreased to RM9.9bn (1Q24: RM11.8bn) and RM11.1bn (1Q24: RM11.5bn), respectively.

FINANCIAL ACCOUNT

The Financial Account recorded net inflows of RM17.1bn in 2Q24, reversing from net outflows of RM18.7bn in 1Q24, driven by significant inflows in other investment due to interbank borrowings and maturing deposits placed abroad, as well as higher foreign direct investment inflows amid moderating outflows in direct investment abroad, partially offset by net outflows in portfolio investment, largely attributed to residents' investments in foreign debt and equity securities.

Foreign direct investment (FDI) surged to a net inflow of RM9.1bn in 2Q24, up from RM5.5bn in the preceding quarter, driven primarily by inflows into Debt instruments. The bulk of FDI was directed towards the Manufacturing sector, with significant contributions from the Services sector, particularly in Information & Communication and Wholesale & Retail Trade activities. Key sources of FDI included Japan, Singapore, and Hong Kong, reflecting strong regional investment ties. Conversely, direct investment abroad (DIA) saw a reduced net outflow of RM5.3bn, down from RM11.5bn in 1Q24, with the majority of outflows in Equity & Investment Fund Shares and Debt Instruments. Meanwhile, portfolio investments continued to experience net outflows, recording RM21.7bn in 2Q24 compared to RM23.7bn in the previous quarter.

INTERNATIONAL RESERVES

As of 31 July, Malaysia’s international reserves increased to USD114.7bn, up from USD113.8bn at end-1Q24, providing sufficient coverage to finance 5.3 months of imports of goods and services and equating to 1.0 times the short- term external debt. The Malaysian ringgit appreciated by 0.2% against the USD in 2Q24, a reversal from the 2.9% depreciation in 1Q24, supported by coordinated efforts from the Government and BNM to stabilize inflows into the foreign exchange market, despite overall USD strength. Additionally, the ringgit appreciated against the currencies of Malaysia's major trading partners, leading to a positive nominal effective exchange rate (NEER) of +1.6% in 2Q24, compared to -0.4% in the previous quarter.

BOP OUTLOOK

In 2024, despite external downside risks such as persistent geopolitical tensions and volatile commodity prices, Malaysia's trade dynamics are expected to benefit from the positive momentum in the semiconductor industry. While trade performance remains vulnerable to global uncertainties, including rising inflationary pressures and tightening financial conditions, medium-term prospects are poised for improvement. This outlook is supported by sustained inflows and the realization of foreign direct investment (FDI) commitments.

The current account surplus is projected to widen in 2024, building on the RM28.2bn surplus recorded in 2023 (1.5% of GDP), despite last year's challenges. This expansion is expected to be driven by robust domestic industrial activity and increased private investment, contributing to a stronger surplus in the goods account. Enhanced growth prospects among key trading partners will further bolster this trend. However, the primary income account is likely to see a larger deficit, reflecting higher payments to foreign investors involved in ongoing projects. The adoption of advanced technologies such as artificial intelligence, cloud computing, digitalization, and automation is also anticipated to increase compensation for foreign professionals, contributing to the projected widening of the primary income deficit.

Aligned with directives from the Ministry of Finance (MOF) and the anticipated persistence of a current account surplus, coupled with an improved fiscal deficit target and a stronger operating surplus, the Malaysian ringgit is expected to gain underlying support. These economic indicators point towards a trajectory where the ringgit is likely to stabilize and show resilience against external pressures. Consequently, we have revised our year-end forecast for the ringgit to 4.40-4.45 per USD, down from our previous estimate of RM4.55- 4.65. Should the ringgit continue to outperform, particularly in the wake of a dovish pivot by the Federal Reserve, we anticipate that BNM may opt for a strategic approach, potentially stepping back from encouraging GLCs to repatriate FX receipts or accumulating FX reserves.

Source: PublicInvest Research - 19 Aug 2024