OVERVIEW

• The current account surplus in 2Q15 was RM7.6b or 2.7% of GDP, smaller than the 1Q15 surplus of RM10.0b or 3.6% of GDP
• The 2Q15 goods account surplus, at RM23.3b, was smaller YoY and QoQ on a slump in exports  
• Capital outflows in portfolio investments increased to RM11.8b in 2Q15 from RM7.9b in 1Q15  
• The current account surplus is expected to narrow to 3.5% of GDP in 2015 from 4.3% of GDP (pre-revision: 4.6%) in 2014 on weaker external demand and investment income.  
• Volatility in USDMYR has not fully subsided. We maintain our forecast (dated August 13) for the ringgit to gradually appreciate against the US dollar to 3.87 by year-end and a 2015 average of 3.83.   

The current account (CA) surplus narrowed to RM7.6b in 2Q15 from RM10.0b in 1Q15 on a smaller surplus in the goods account and larger deficit in the services account.  

As a share of GDP, the current account surplus shrank to 2.7% of GDP from 3.6% of GDP in 1Q15. The 1H15 current account share of GDP is 3.1% of GDP, in line with our expectations for the current account surplus to narrow this year to a 2015 average of 3.5% of GDP  The main contributing factor to the narrower CA surplus is a much smaller surplus on the goods account due to weak export performance.

The merchandise trade balance as reported in the goods account was sharply lower in 2Q15 at RM23.3b compared to the corresponding quarter 2Q14 and consecutive quarter 1Q15. On a YoY basis, the merchandise account surplus fell 14.6% and on a QoQ basis it dropped 15.4%.  

Another contributing factor to the narrower CA surplus is the enlarged services trade deficit of RM4.6b in 2Q15 from RM3.8b in 1Q15 on service exports falling. The 2Q15 quarter has been weak for both exports and imports on weak external demand and low commodity prices. Of note, export prices for liquefied natural gas (LNG) fell during the quarter after a five-month lag to crude oil price benchmarks.

The financial account unexpectedly recorded a net inflow of RM2.3b in 2Q15 from a net outflow of RM29.7 billion in the previous quarter in large part due to a large inflow in the Other Investment category equivalent to RM39.0b.  According to directional basis, both Direct Investment Abroad (DIA) and Foreign Direct Investment (FDI) grew in 2Q15 compared to the previous month. After subtracting FDI of RM12.4b, net DIA stood at RM3.9b.  

OUTLOOK

The downside factors to a stronger current account remain the same as in the previous quarter; commodity prices that have stayed persistently low on oversupply and weak global demand. Other external factors that could present a risk to growth in 2H15 include volatility in financial markets as the US Fed makes its much-anticipated rate hike later this year, a prolonged slowdown in China spilling over to its closest trading partners, or more realistically, developed economies missing projections of a modest recovery going into 2016.  

At this stage, we expect merchandise export growth to pick up in 2H15 to make our 2015 forecast for 2.2% growth, a big challenge given that export growth was in negative territory in 1H15.  

A further deterioration in the balance of payments will invariably reflect on the ringgit. Volatility in USDMYR has not fully subsided. We maintain our forecast (dated August 13) for the ringgit to gradually appreciate against the US dollar to 3.87 by year-end and a 2015 average of 3.83.

Source: Kenanga Research - 14 Aug 2015