Overview

Malaysia's current account balance recorded a surplus of RM2.2bn in 3Q24, supported by a sustained goods account surplus, reflecting resilient export performance. In contrast, the financial account recorded a net outflow of RM7.5bn, reversing from a net inflow of RM17.1bn in 2Q24, primarily due to increased outflows in other investment and direct investment segments. International reserves moderated to RM491.5bn by the end of 3Q24 (end-2Q24: RM537.2bn). Notably, foreign direct investment (FDI) inflows rose to RM14.5bn, driven by reinvestment of earnings and larger equity injections, while direct investment abroad (DIA) outflows increased to RM18.9bn, reflecting heightened overseas investment activity by Malaysian firms.

CURRENT ACCOUNT

In 3Q24, Malaysia's current account surplus narrowed to RM2.2bn (0.4% of GDP) from RM3.0bn (0.6% of GDP) in 2Q24, reflecting mixed sectoral performance. The goods account surplus moderated slightly to RM23.1bn in 3Q24, from RM24.6bn in the previous quarter, amid improving export levels.

The services account deficit narrowed to RM1.6bn in 3Q24 from a deficit of RM4.9bn in 2Q24, driven by higher tourism receipts amidst robust travel activity. Meanwhile, the primary income deficit widened marginally to RM17.0bn, attributed to increased income accrued to foreign investors amid improving export performance. The secondary income deficit also deepened to RM2.4bn in 3Q24 from a deficit of RM1.1bn in 2Q24.

FINANCIAL ACCOUNT

In 3Q24, the financial account posted a net outflow of RM7.5bn, reversing from a net inflow of RM17.1bn in 2Q24. This outflow was driven by substantial outflows in other investment and direct investment accounts, which outweighed inflows from portfolio investments. Portfolio investments, however, recorded a turnaround with net inflows of RM3.6bn in 3Q24, compared to a significant net outflow of RM21.7bn in the previous quarter. The recovery in portfolio inflows was largely driven by increased non-resident investments, reflecting improved investor confidence in Malaysian assets.

Direct investment trends diverged significantly in 3Q24, recording a net outflow of RM4.3bn compared to a net inflow of RM3.8bn in 2Q24. This shift was primarily driven by a sharp increase in outflows from direct investment abroad (DIA), which widened to RM18.9bn from RM5.3bn in the previous quarter. Meanwhile, foreign direct investment (FDI) inflows rose markedly to RM14.5bn in 3Q24, up from RM9.1bn in 2Q24, reflecting strengthened investor sentiment. The rise in FDI inflows was underpinned by a turnaround in reinvestment of earnings, which recorded an inflow of RM5.7bn in 3Q24, reversing the RM3.7bn outflow in 2Q24. Equity injections also increased to RM5.6bn from RM4.2bn, highlighting greater confidence among investors. However, debt instruments experienced a decline, with inflows moderating to RM3.2bn in 3Q24, down from RM8.5bn inflows in the previous quarter. Sectorally, FDI was primarily channelled into the information and communications technology (ICT) sector, alongside the wholesale and retail trade sub-sectors.

Meanwhile, other investments posted a net outflow of RM6.3bn in 3Q24, compared to a net inflow of RM35.6bn in 2Q24, driven by higher deposit placements abroad by resident investors. Financial derivatives maintained a marginal outflow of RM0.4bn, narrowing slightly from an outflow of RM0.6bn in 2Q24.

RINGGIT APRRECIATED AGAINST THE USD AND ON NEER BASIS

In 3Q24, the Ringgit appreciated by 14.9% against the USD, with the nominal effective exchange rate (NEER) rising by 9.9%. This was largely supported by the US Federal Reserve's (US Fed) pivot towards a more accommodative monetary policy stance, easing pressures on regional currencies, including the Ringgit. However, between 1 October and 13 November 2024, the Ringgit depreciated by 7.8% against the USD, driven by a firmer greenback amidst expectations of a slower pace of US policy rate cuts, following robust US economic data. On a year-to-date basis (as of 13 November 2024), the Ringgit has gained 3.1% against the US dollar, with the NEER up by 6.6%. Looking ahead, external factors will remain pivotal in shaping the ringgit's trajectory. That said, Malaysia's solid macroeconomic fundamentals and structural reform agenda are expected to lend medium-term support to the currency.

BOP OUTLOOK

In 2024, notwithstanding external challenges stemming from prolonged geopolitical frictions, Malaysia's trade outlook stands to gain traction from the recovering momentum in the global semiconductor sector. While short-term trade flows remain susceptible to external volatility, medium-term prospects signal a gradual recovery. This is underpinned by consistent capital inflows and the materialisation of foreign direct investments (FDI) commitments.

The current account surplus is forecasted to rise further to 2.3% of GNI in 2024, up from the RM28.2bn (1.6% of GNI) recorded in 2023, reflecting a notable improvement despite last year's headwinds. This growth is expected to be supported by resilient domestic manufacturing activity and a steady increase in private sector investment, driving a stronger surplus in the goods account. Additionally, improving economic conditions among major trading partners are anticipated to provide further tailwinds. The primary income account is set to record a narrower deficit, driven by a reduction in the investment income deficit, which is projected to improve to RM38.9bn on the back of higher investment earnings from abroad. However, this will be partially offset by a wider RM9.9bn deficit in the compensation of employees, attributed to increased outward remittances. These trends align with projections outlined in the Ministry of Finance's (MOF) 2025 Economic Outlook.

Aligned with the MOF's fiscal consolidation efforts, the sustained current account surplus, narrower fiscal deficit target, and consistent operating surplus are expected to underpin the Malaysian Ringgit. These factors suggest a stabilisation trajectory for the currency, bolstered by improving domestic fundamentals amidst external challenges. Accordingly, we maintain our 2024 year-end forecast for the ringgit at 4.40 per USD, reflecting its resilience and underlying support from macroeconomic indicators.

Nonetheless, the Ringgit's outlook for 2025 remains subdued, with potential depreciation risks stemming from elevated UST yields, weaker global trade, and China's sluggish recovery. Despite Malaysia's GDP growth forecast of 4.5%-5.5% YoY for 2025, external headwinds such as trade diversion dynamics and heightened USD demand may weigh on the currency. A persistent US inflationary environment, tied to Trump's fiscal policies, could exacerbate yield differentials, pressuring the MYR further. However, supportive domestic factors, including robust private consumption and increasing FDI inflows, particularly in tech and green sectors, may provide some buffer against external vulnerabilities.

In 2025, Malaysia's current account surplus is projected to expand to RM49.1bn (2.4% of GNI), underpinned by broad-based improvements across key sectors, as outlined by the MOF. The goods account is expected to post a higher surplus of RM125.6bn, supported by stronger trade momentum with major trading partners. The services account is anticipated to see a reduced net outflow of RM16.8bn, buoyed by increased earnings in the travel, transport, and other services segments. Travel receipts are forecast to climb to RM101.9bn, driven by robust tourism activities linked to Malaysia's 2025 ASEAN Chairmanship and preparatory events for Visit Malaysia 2026 (VM 2026). Nonetheless, travel payments are projected to rise to RM65.2bn, reflecting a higher volume of outbound business, education, and pilgrimage travel by Malaysian residents.

Source: PublicInvest Research - 18 Nov 2024