OVERVIEW

The 4Q16 current account surplus widened to RM12.2b or 3.8% of GNI, more than double that of the RM6.0b observed in 3Q16. This was mainly due to the bigger merchandise trade surplus. This brings full year CA surplus to 2.1% of GNI (2.0% of GDP), narrowing from 3.1% of GNI (3.0% of GDP) in 2015.

Financial accounts records a higher deficit. The financial account outflow saw an outflow of RM13.2b, more than twice the RM6.3b deficit recorded during the 3Q16 as portfolio capital outflow continued to surge.

Mixed short-term outlook. On firming external demand and upward bias on trade competitiveness from the weak Ringgit, we are revising our current account surplus projection for 2017 to 1.5% of GNI (1.4% of GDP) from 1.3% (1.2% of GDP). However, this projection is contingent on the absence of significant policy risks, particularly anti-trade sentiments stemming from the new US President Trump.

Current account surplus widens further. Malaysia’s current account (CA) surplus widened to RM12.2b or 3.8% of GNI (3.7% of GDP) during 4Q16, more than doubled the RM6.0b or 2.0% of GNI (1.9% of GDP) in 3Q16. The CA surplus surpassed our forecast of RM6.4b or 2.0% of GNI and the consensus estimate of RM11.4b. The figures brings the 2016 full year current account balance to 2.1% of GNI (2.0% of GDP) beating our forecast of 1.7% of GNI (1.6% of GDP).

Trade balance advances further. The unexpectedly large current account surplus was due to higher merchandise trade surplus in 4Q16, rising to RM31.4b from RM26.5b during the previous quarter. With the exception of the services balanced (which continued to see wider deficits), the other current account components – primary and secondary income – saw their respecitive deficits narrowing during the quarter.

Financial accounts deteriorates on capital flight. The financial account deficit more than doubled, with a net shortfall of RM13.2b compared to RM6.3b in 3Q16 as portfolio investments saw a large outflow. Portfolio investment outflow more than doubled to RM22.3b from RM10.6b during 3Q16. This was largely due to foreign selloff in the bond market, especially the Malaysian Government Securities and Government Investment Issues, along with stock market shares. This was, in turn, a result of higher volatility in the global financial markets after the

election of Donald Trump as the US President, along with the Federal Reserves renewed commitment to policy normalisation.

FDI increased. Outflows arising from portfolio investments was, by far, the largest factor of the deterioration in financial account as direct investments net inflows actually increased to RM5.9b from RM3.0b in 3Q16 while other investments inflows likewise increased to RM4.4b in 4Q16 from RM1.4b in 3Q16. On a directional basis, foreign direct investment amounted to RM10.8b, compared to RM6.5b in 3Q16.

Higher external reserves. In spite of the net financial account outflow exceeding the current account surplus, the overall balance registered a larger surplus of RM19.2b in 4Q16 on account of a large error and omission of RM20.1b. As in the previous quarter, the high error and omission (amounting to 4.9% of total trade) is consistent with the sharp revaluation changes from the depreciation of the ringgit against major currencies during 4Q16.

OUTLOOK

Firmer external demand supportive of CA surplus. Based on the concurrently released GDP statistics along with recent external trade data flowing from the region and globally, we are somewhat bullish on the prospects of firming external demand in the coming quarters. Furthermore, continued weaknesses in the ringgit will likely be supportive of further gains in trade competitiveness, hence sustaining the current account surplus, at least in the first half of 2017. To reflect this more sanguine outlook, for the whole of 2017, we are revising our current account surplus projection to 1.5% of GNI from 1.1%. However, we are cautious on the rising levels of external uncertainties, stemming from the highly volatile policies under US President Trump and other anti-trade sentiments.

External uncertainties further weighs against financial flows. On further policy risks from President Trump, we believe that these uncertainties will continue to weigh against financial flows, potentially resulting in further financial account outflow, particularly from portfolio investments. We do, however, believe that the Bank Negara’s initiatives to soothe ringgit volatility will result in some long-term upsides, likely to stem the ringgit volatility by the 2Q17. This, in turn, will help assuage some of the worst fears on the forex-adjusted returns of Malaysia, potentially reversing some of the portfolio outflows seen during 4Q16.

Source: Kenanga Research - 17 Feb 2017