OVERVIEW

● Malaysia’s current account (CA) surplus narrowed sharply to RM3.9b (1Q18: RM15.0b or 4.4% of GDP), or 1.1% of GDP, its lowest since 2Q16. The smaller surplus was attributable to lower merchandise trade balance as well as higher deficits in the services and primary accounts.

● The merchandise trade balance was sharply reduced to RM26.1b (1Q18: +RM35.7b) as imports rebounded sharply amid weak exports. Imports expanded by 6.0% QoQ (1Q18: -6.1%) while exports edged up by just 0.1% QoQ (1Q18: -4.4%). The slower exports are reflective of a slower global trade trend due to the slowing tech growth cycle and the escalating trade tension between US and China.

● The services account deficit widened to RM6.2b (1Q18: -RM5.8b), mainly on higher net payments to foreign providers in the transportation services and construction segments.

● The financial account recorded a lower deficit of RM9.2b (1Q18: +RM15.2b) as higher placements of currency and deposits with domestic financial institutions partly offset the enlarged outflows of non-resident portfolio investment. Net portfolio investments fell sharply during the quarter by RM38.3b (1Q18: -RM2.6b), largely driven by external factors, particularly the US Fed planned rate hikes and further escalation of US-China trade war, as well as some concerns over uncertainties of policy and reforms in the new government. Meanwhile, direct investments registered marginal net surplus of RM0.7b (1Q18: +RM10.7b), primarily due to lower net inflow of foreign direct investment (FDI) at RM2.8b (1Q18: +RM12.0b) compared to a higher net outflow of direct investment abroad (DIA) by Malaysian companies at RM3.6b (1Q: RM1.3b). According to Bank Negara Malaysia (BNM), the lower net FDI was mainly because of lower retained earnings and some liquidation of foreign equity holdings in firms in the manufacturing sector, following acquisition by residents.

● Meanwhile, the primary and secondary income accounts remained in deficits. Higher dividends payment to foreign portfolio investors contributed to a larger primary income deficit of RM11.2b (1Q18: -RM10.2b). Likewise, outward remittances by foreign workers continued to put the secondary income account in sustained deficit of RM4.7b (1Q18: -RM4.7b)

● Ringgit downside on rising global risk. As geopolitical tension further escalates particularly with regards to the USChina trade war, Brexit and the Turkish Lira contagion, we see elevation to the risk of Malaysia’s capital account balance. Consequently, it also exerts a downward pressure on the ringgit. We expect the USDMYR to remain volatile and trade between 4.05 and 4.15 till end of the year. Our USDMYR projection remains at 4.05 by year end. This is premise on the CA to remain in a surplus at a projected 2.0-2.5% of GDP for 2018 (2017: 3.0% of GDP).

Source: Kenanga Research - 20 Aug 2018