OVERVIEW

● The current account (CA) surplus of the balance of payments in 4Q18 widened to RM10.8b (3Q18: RM3.8b), in spite of a challenging domestic and external economic environment especially the on-going trade tension between the US and China. The enlarged current account was associated with a larger surplus in the goods account due to higher exports receipts over imports in 4Q18. Overall, the CA shrank to RM33.5b in 2018 (2017: RM40.3b) partly due to weak export performance in the 2Q18 and 3Q18. As a ratio of GDP, it slipped to 2.3% from 3.0% in the preceding year beating house forecast of 2.0%.

● The merchandise trade balance surged by 24.2% QoQ to RM33.0b (3Q18: +RM26.6b) in line with our expectation of sustain trade balance on the back of weak Ringgit and a relatively robust manufacturing exports in the final quarter of 2018 despite uncertainties in global trade. Going forward, we expect the trade balance to narrow in line with moderating global demand. Meanwhile, the services account registered a higher deficit of RM4.3b (3Q18: -RM3.3b), due to higher net payments to foreign providers in the transportation services, and charges for the use of intellectual property at RM7.2b and RM2.0b respectively (3Q18: -RM7.1b and –RM1.8b respectively).

● The financial account of the balance of payments registered a deficit of RM6.1b (3Q18: +RM2.3b) as the portfolio, and other investment recorded a substantial net outflow of RM5.8b and RM1.8b respectively (3Q18: +RM0.8b and +RM1.0b respectively). Meanwhile, the net inflow of direct investment rose to RM2.1b (3Q18: RM0.5b) underpinned by a higher inflow of Foreign Direct Investment (FDI) at RM12.9b (3Q18: RM4.3b) into domestic services and manufacturing sectors mainly from Netherlands, Japan and Hong Kong. Additionally, Direct Investment Abroad (DIA) by Malaysian companies rose to RM10.8b (3Q18: -RM3.8b) the largest since 2Q17 mostly in the mining and non-financial services sectors.

● The current account surplus is projected to narrow further in 2019. Though the CA appears to moderate, it is unlikely to turn into a deficit largely because exports continue to grow albeit slower while domestic demand is expected to weaken bringing about lower imports. Hence, we forecast the CA surplus to continue to narrow this year and to settle at around 2.0% of GDP (2018: 2.3% of GDP). Meanwhile, the current dovish US Fed would weigh on the US dollar and provide some upside to the Ringgit in the near term with the USDMYR to break the psychological 4.00-level in the 1Q19 from the current level of 4.08. Nonetheless, we maintain our year-end USDMYR projection at 4.10 (2018: 4.13) on the backdrop of slower global and domestic economic growth.

Source: Kenanga Research - 15 Feb 2019