• Current account (CA) surplus widens on improved merchandise and services balance. The 2Q17 current account surplus widened to RM9.6b (1Q17: RM5.3b), representing 2.9% of GDP (1Q17: 1.6%). This was largely due to a larger merchandise balance, along with improvements in the services balance and primary income.
• Financial account turns positive. The financial accounts saw a modest inflow of RM7.3b (1Q17: outflow of RM8.8) after three consecutive quarters of outflows. This was mainly due to the reversal of capital flows attributed to the large portfolio investments inflow of RM16.0b in the 2Q17 (1Q17: outflow of RM31.9b).
• Positive overall balance. Malaysia recorded a modest net overall balance of RM2.7b. Despite wider current account surplus and a net inflow in the financial account, overall balance surplus was moderate due to exceptionally large errors and omission totalling RM14.3 (1Q17: +RM1.7b) likely resulting from revaluation changes on reserve.
• CA surplus to widen further in 2017. We are revising up slightly our CA balance of payment forecast to 1.9% of GNI and GDP from 1.6% earlier. This is to take into account the stronger 1H17 trade growth and improving fundamentals.

Current account surplus widens again. After seeing its current account surplus more than halved in 1Q17, Malaysia’s CA surplus rose sharply to RM9.6b (1Q17: RM5.3b), representing 3.0% of GNI (1Q17: 1.7%) or 2.9% of GDP (1Q17: 1.6%). 2Q17’s CA surplus beat the Bloomberg’s median consensus estimate of RM6.2b (ranging from RM1.5b-RM10.0b) and the house estimate calling for a RM5.6b surplus).

Improved trade balance. The wider current account surplus was largely attributed to the bigger merchandise trade balance which has enlarged to RM27.0b (1Q17: RM25.3b) along with a slimmer services deficit of RM5.0b (1Q17: deficit of RM6.2b). This is largely attributed to export growth maintaining a relatively robust pace of 9.6% (1Q17: 9.8%) even as imports moderated somewhat to 10.7% (1Q17: 12.9%) largely from slower growth in intermediate and capital imports in 2Q17. At the same time, the services deficit fell from higher surpluses from travel services and lower construction services deficit (arising from receipts from civil engineering projects from Cambodia, India, Qatar and Vietnam).

Wider primary income; narrower transfers. The primary account deficit shrunk somewhat to RM8.2b (1Q17: deficit of RM9.9b), largely from higher income generated from Malaysian direct investments abroad. The secondary income deficit, meanwhile, edged just slightly higher to RM4.2b (1Q17: deficit of RM3.9b) as outward remittances expanded while inward remittances slowed during the quarter.

Financial account returns to inflow. As stated in our previous Balance of Payment report, financial flows returned to an inflow on renewed foreign interest in Malaysian assets. This, in particular, was reflected by a reversal of non-resident portfolio flows to an inflow of RM18.8b (1Q17: outflow of RM22.9b), largely from large purchases of Malaysian Government Securities (MGS) and a more active participation in the equity market. Improved investors’ confidence was also reflected by a lower resident portfolio outflow of RM2.7b (1Q17: outflow of RM9.0b) largely from liquidation of debt securities overseas. Overall, portfolio investment saw a net inflow of RM16.0 (1Q17: outflow of RM 31.9b). The direct investment accounts, however, reversed its net inflow position for the first time in seven quarters with a net outflow of RM7.1b (1Q17: inflow of RM8.3b). This came as foreign direct investment into Malaysia eased to RM8.3b (1Q17: RM17.0b) on weaker reinvestments of earning and injection of capital while direct investment abroad nearly doubled to RM15.4b (1Q17: RM8.7b). The “other investment” component likewise reversed its net inflow position for the first time in five quarters with a small net outflow of RM1.3b (1Q17: net inflow of RM14.2b) from maturity of currency and deposits placed in foreign financial institutions and net extension of trade credit by Malaysian exporters.

Modest overall surplus. Despite the wider current account surplus and the net inflow in the financial account, the overall balance surplus was relatively small at RM2.7b (1Q17: deficit of RM1.8b). This was due to a large error and omission term of -RM14.3b, likely arising from revaluation changes of the forex reserves.

OUTLOOK

Trade balance to remain steady. As we anticipated in our previous report, the general appreciation in the ringgit has helped alleviate some cost pressures off imports, in the context of cheaper imported inputs, which may explain some of the moderation observed in intermediate and capital imports. With ringgit expected to stabilise somewhat – likely to trade rangebound between USDMYR4.20-4.30 in the immediate future – we expect the balance of exports to imports to remain somewhat stable. Indeed, we are cautiously optimistic on exports given synchronous global growth and believe that this may translate into some upside to the current account surplus.

CA surplus to improve. Although we expect the surplus of merchandise balance to narrow in the 2H17, for the whole year we expect it to improve further on sustained strength of global demand for manufactured goods and to a certain extend commodities. Hence, we are revising up slightly our CA balance of payment forecast to 1.9% of GNI and GDP from 1.6% earlier though smaller compared to 2.4% of GDP and GNI in 2016.

Financial flows supportive of growth but risks abound. With Malaysian assets turning attractive to foreign investors once again, we expect continued portfolio inflows to Malaysia to continue, with focus on equities, government as well as corporate bonds. Furthermore, we see some potential upside for direct investment flows with China’s Belt and Road Initiative particularly on infrastructures. However, our upside may be somewhat bounded by regional tensions, particularly from North Korea, which may in turn spook investors or worse, resulting in a reversal of portfolio inflows. In the shorter term, the introduction of Ringgit futures in the Singapore Exchange (SGX) may risk further restrictions on ringgit trade, possibly resulting in short-ringgit volatilities. Nonetheless, we maintain our year-end forecast for the USDMYR to 4.15 on improving fundamentals and investor confidence.

Source: Kenanga Research - 21 Aug 2017