OVERVIEW

• The 3Q16 current account surplus widened to RM6.0b or 2.0% of GNI, its widest current account surplus in 2016 largely due to bigger goods surplus. It was higher than our estimate of 0.6% of GNI.
• Meanwhile, the 3Q16 financial account turned a deficit of RM6.3b, a reversal from a surplus of RM9.5b in 2Q16 on the back of a surge in portfolio capital outflow and smaller net direct investment.
• We forecast the CA to narrow further to 1.6% of GNI in the 4Q16, bringing the average for the whole of 2016 to 1.5% of GNI from 3.1% in 2015.
• As the uncertainty on the prospect of the global economy is likely to persist in the next six to twelve months, we expect Malaysia’s CA surplus to be in the range of 1.0% to 2.0% of GNI in 2017.

CA surplus widens in 3Q16. Malaysia’s current account (CA) surplus widened sharply to RM6.0b or 2.0% of GNI (1.9% of GDP) in 3Q16 from RM1.9b or 0.6% of GNI (0.6% of GDP) in the previous 2Q16 quarter. The 3Q16 CA surplus surpassed our estimate of RM4.8b or 0.6% of GNI and the median consensus estimate of RM2.0b.

Bigger goods surplus. Wider current account surplus in 3Q16 was largely attributed to higher surplus in the merchandise trade which rose to RM26.5b from RM19.8b in the preceding quarter, outweighing wider deficits from services and investment income account.

Deterioration in financial accounts. The financial accounts (FA) meanwhile showed a net deficit of RM6.3b in the 3Q16 from a net surplus of RM9.5b in the preceding quarter. This is due to outflows of portfolio account far exceeding the net inflows of direct and other investment accounts.

Flight of capital surged. Net outflows in FA were attributed to a large reversal of portfolio investments, which resulted in net outflow of capital to surge to RM10.6b from an RM0.1b inflow in the 2Q16. Meanwhile, direct investments continued to register a surplus, albeit smaller, of RM3.0b in 3Q16 from RM5.3b in the previous quarter. This is largely because foreign direct investments moderated to RM6.5b from RM8.8b in the 2Q16. This was largely offset by net investment by Malaysian companies abroad amounting to RM3.6b in the 3Q16.

External reserves expands. As a result, the overall balance registered a bigger surplus of RM14.6b (3Q16: RM8.8b), this is largely reflected in the RM14.4b expansion in gold and foreign exchange reserves. Gross international reserves stood at RM405.0b as at end of September 2016 (RM405.5b as at October 2016). Meanwhile, errors and omission stood at RM14.9b or 4.0% of total trade, the highest in a year, mainly due to the revaluation of the external reserves reflecting the strengthening of major currencies against the ringgit in the 3Q16.

OUTLOOK

External uncertainties limits upside to CA surplus. While the CA was never under a credible threat of falling into a deficit, the wider CA surplus during 3Q16 is a welcome relief, especially narrowing since 1Q16. However, notwithstanding wider 3Q16 CA surplus, domestic demand will continue to carry growth well into 2017. Despite signs of budding growth in the US and sporadic positive data in Western Europe, we continue to believe that high and rising uncertainties in the external environment – “Brexit”, the presidential victory of Donald Trump, the rise of anti-trade sentiments, slower growth in East Asia especially China – will severely limit the upside to growth. This is further compounded by renewed concerns of further depreciation of the Ringgit weighing against growth. As such, we forecast the CA to narrow further to 1.6% of GNI in the 4Q16, bringing the average for the whole of 2016 to 1.5% of GNI from 3.1% in 2015. As the uncertainty on the prospect of the global economy likely to persist in the next six to twelve months, we expect Malaysia’s CA surplus to be in the range of 1.0% to 2.0% of GNI in 2017.

Source: Kenanga Research - 14 Nov 2016