HIGHLIGHTS

 The current account balance surplus widened to RM9.8b in the 3Q13 from RM2.6b in the preceding quarter. As a result, its share of Gross National Income (GNI) enlarged to 4.1% from 1.1% previously. This wider surplus is mainly due to a higher surplus in the good accounts, which widened to RM25.8b versus RM18.7b in the 2Q13. In detail, exports for goods increased to RM175.9b from RM163.2b in the 2Q13, mirroring the 1.7% rebound (2Q13: -5.2%) in the exports component of the GDP. This can be attributed to healthy intra-regional trade within Asian trading partners, of which China, Singapore and Japan accounted for the top three export destination in the 3Q13. Imports also improved in the 3Q13, increasing by RM150.0b from RM144.5b in the 2Q13, as a result of higher imports of intermediate goods, which can be indicative of further exports improvement come 4Q13.

 Under the current account, services in the 3Q13 however declined on higher deficit of RM4.3b from RM3.7b deficit in the 2Q13. This larger deficit is due to higher net payment as a result of an increase in imports’ services (RM35.6b from RM34.2b). However, exports of services also expanded in the 3Q13, to RM31.3b from RM30.5 in the previous quarter but not quite enough to narrow the deficit.

 The financial account for the 3Q13 experienced a large contraction, suffering a shortfall of RM11.5b after recording a net increase of RM5.2b in the 2Q13. There was a reversal in portfolio investment (-RM9.7b from +RM3.7b in 2Q13) and other investment (-RM4.4b from +RM10.8b). Most if not all emerging economies are suffering from outflows, before and following the US Fed chairman’s announcement of the possibility of QE (quantitative easing) tapering, despite the Fed’s decision (or lack of it) to retain the QE at its current level. Coupled with uncertainties on the timing of QE tapering (fuelling worries of credit tightening), alongside political stalemate about the US debt ceiling and the government budget, investors have been on the bearish side of things, leaving emerging economies and heading back to safer (though lesser yielding) territory. Though Malaysia is of no exception, we are quite confident with the strength of domestic institutional players being able to supply sufficient liquidity to keep the market stable.

 Direct investment on the other hand registered a net inflow of RM2.0b from an outflow of RM7.9b in the 2Q13. Foreign direct investment inflow in Malaysia increased to RM9.4b from RM9.1b in the 2Q13. This is mainly directed to the manufacturing, oil & gas and financial & insurance sectors and the top three sources of FDI were from the Netherlands, Japan and the USA. This proves to show that there is still attraction to investing in companies Malaysia, no doubt fuelled and encouraged by continuous expansion of bilateral trade relationships and initiatives under the ETP. There was a lower net outflow in direct investment on directional principal basis (-RM7.4b from -RM17.0b), attributed by the oil & gas and financial & insurance sectors of which the top three investing countries were Australia, Indonesia and the UK.

 The overall balance of payments recorded a wider surplus of RM11.8b in the 3Q13 compared to RM1.5b in the 2Q13.

OUTLOOK

 Though capital outflows in emerging economies have been gaining media highlight as of late, and we continue to see it into the 4Q13, we believe the capital market and the economy could still weather the continued trend reversal of capital flows. A strong financial market fueled by more than sufficient domestic liquidity along with strong domestic demand may cushion the adverse impact on the financial account. However, on the back of the steady recovery in exports we are rather optimistic that the current account surplus may expand in the 4Q13, in spite of the volatility in the financial markets.

 So far (between 1st of October until the 13 of November) the ringgit has registered a modest gain of 1.5% against the US dollar, which will help with imports of goods and services while still at a level that’s supportive of the exporting sectors. Amidst the expectation of an uneven recovery in advanced economies, volatility will persist to reflect a wider USDMYR trading range of 3.15 to 3.30 in the 4Q13. Backed by a stronger growth outlook in the 4Q13 we project the USDMYR to settle at 3.17 level by year-end.

Source: Kenanga