OVERVIEW

● Malaysia’s current account (CA) surplus in 3Q18 narrowed slightly to RM3.8b or 1.0% of GDP (2Q18: RM3.9b or 1.1% of GDP), its lowest surplus since 2Q16. The smaller surplus was attributable to enlarged deficits in the primary account of RM15.0b (2Q18: - RM11.2b) due to higher payments to foreign investment which outpace Malaysian firms investing abroad. Similarly, secondary income or transfers recorded a deficit of RM4.5b (2Q18: -RM4.7b) due to sustained outward remittances by foreign workers.

● The merchandise trade balance inched higher by 2.1% QoQ to RM26.6b (2Q18: +RM26.1b) despite of concerns over the US-China trade tension which started in July 2018. Exports rose sharply by 4.7% QoQ (2Q18: +0.1%) versus imports which moderated to 5.0% QoQ (2Q18: +6.0%). We expect 4Q18 trade balance to sustains on the back of the weak Ringgit and solid manufacturing exports which has so far grew by 11.3% YoY (Jan-Sept) despite a higher base effect in the preceding year.

● The services account deficit narrows to RM3.3b (2Q18: -RM6.2b), due to higher net payments to foreign providers in the transportation services, and insurance and pension services at RM7.1b and RM2.3b respectively (2Q18: - RM6.8b and -RM2.2b respectively). The net payments in services account were offset by net inflows in manufacturing services on physical inputs owned by other and travel at RM2.9b and RM8.0b respectively (2Q18: +RM2.6b and +RM6.6b respectively).

● The financial account of the balance of payments recorded a small net inflow of RM0.2b (2Q18: +RM9.2b) as other investment recorded a net outflow but offset by net inflows in direct investment account (DIA), portfolio investment and derivatives. Net portfolio investments rebounded and registered a net inflow of RM0.6b after it fell sharply in 2Q18 by RM38.3b amid turbulence in the global financial market as the US Fed continues its hawkish tone to raise interest rate as well as fears of an EM currency contagion triggered by a sharp devaluation of the Turkish Lira in the 3Q18. Meanwhile, DIA registered a marginal net outflow of RM0.06b (2Q18: +RM0.7b). According to Bank Negara Malaysia (BNM), foreign direct investment (FDI) registered a larger net inflow of RM3.9b (2Q18: +RM2.8b) with manufacturing and mining sectors the biggest recipients.

● Twin deficit unlikely but a concern nonetheless. Though the CA appears to narrow further, it is unlikely to turn into a deficit anytime soon, joining the expanding fiscal deficit, primarily because exports continue to grow albeit slower, but imports are also moderating as growth momentum is expected to cool off. Meanwhile, we expect the Ringgit to remain volatile with USDMYR projected to trade around 4.15-4.20 by year-end, and subsequently, help the CA to remain in a surplus but reduced to a projected 2.0% of GDP for 2018 (2017: 3.0% of GDP). Additionally, we remain cautious of the growing uncertainties in the global economy, which would likely weigh on the GDP growth. Hence, we maintain our 2018 GDP growth projection of 4.8% (2017: 5.9%) and forecast it to moderate further to 4.7% in 2019.

Source: Kenanga Research - 19 Nov 2018