OVERVIEW

• Malaysia’s current account (CA) surplus expanded for the fourth consecutive quarter to RM15.0b (4Q17: RM13.9b), or 4.4% of GDP. The CA surplus also marked the highest surplus observed since 2Q14 and was contributed by higher expansion of the goods account and lower deficit on the services account. However, on a QoQ basis, the CA moderated to 7.6% (4Q17: 8.7%).
• The merchandise trade balance widened to RM35.7b (RM34.1b) as the 2017’s export growth trajectory spilled over into the start of 2018. However, in line with our expectations for moderation in exports growth, the goods account moderated to 4.8% QoQ (4Q17: 7.5%). Meanwhile, the services account deficit narrowed to RM5.8b (4Q17: -RM7.0b). The improvement in the services account was mainly due to lower deficits recorded in the Government Goods & Services, Transportation, Financial Services and Construction accounts.
• The financial account of the balance of payments surged to RM15.2b (4Q17: +RM6.0b) backed by higher flow of direct investments. The direct investments account doubled to RM10.7b (4Q17: 5.3b), tracking the recovery of oil prices and the kick-off of major infrastructure projects. According to the Department of Statistics, foreign direct investments (FDI) surged to RM12.0b in 1Q18 (4Q17: +RM3.4b) backed by funds channelled into the manufacturing, mining, quarrying and services sectors. However, portfolio investments fell during the quarter by RM2.6b (4Q17: +RM11.6b). This could be due to higher domestic institutional investments overseas, which outweighed the solid capital flows into the domestic debt and capital markets during the quarter of RM2.2b and RM3.1b respectively.
• Meanwhile, the primary and secondary income accounts remained in deficits. In particular, lower income receipts and higher income payments of the direct investment and portfolio investment accounts widened the primary income deficit to -RM10.2b (4Q17: -RM8.4b). This might have been due to the Ringgit appreciatory trend, which expanded by 4.9% during the quarter.
• We see the recent moderation in global trade figures and deteriorating PMI performance to trimming the merchandise trade account for the year. However, we expect imports growth to be capped as the government tightens its spending to improve its fiscal position. Therefore, we expect the current account to remain in a surplus, at 2.0-2.5% of GDP for 2018 (2017: 3.0% of GDP). Meanwhile, on the back of heightened volatility from the trade war risks, expectations of US Federal Reserve’s rate hike and uncertainties from the domestic political reforms, we expect limited fund flows to weigh in on the financial account

Source: Kenanga Research - 18 May 2018