OVERVIEW

● The current account (CA) of the balance of payments in 1Q19 registered an enlarged surplus of RM16.4b

(4Q18: RM10.8b), highest since 1Q14 beating Bloomberg’s consensus of RM12.8b in spite of a challenging domestic and external economic environment. The larger CA surplus was associated with an enormous surplus in the goods account due to higher exports receipts over imports while lower deficit registered in primary income and services account. In terms of its ratio to GDP, the CA surplus rose sharply to 4.8% in 1Q19 from 3.0% in the preceding quarter.

● The goods account surplus increased by 3.4% QoQ to RM33.8b (4Q18: RM32.7b) in spite of a slowdown in trade activity. We expect the trade balance to be narrow further in 2019 in view that global trade to remain weak going forward impacted by the tit-for-tat trade dispute between the US and China as well as growth moderation in major economies including China, the EU, and the US. Meanwhile, the services account registered a smaller deficit of RM1.8b (4Q18: -RM3.8b), due to lower net payments to foreign providers in the transportation services in line with moderating trade activity. Additionally, lower outbound travel payments help extend higher surplus in the travel account (RM7.9b; 4Q18: RM7.7b).

● The financial account of the balance of payments registered a substantial outflow of RM13.8b (4Q18: -RM6.1b) attributable to the repayment of inter-bank borrowings by domestic financial institutions in the other investment account which recorded a net outflow of RM31.9b (4Q18: -RM1.8b). Additionally, the portfolio investment account registered a small rebound in the net inflow of RM2.1b (4Q18: -RM5.8b) thanks to US Fed decision to pause its rate normalisation mode, while positive progress in the US-China trade talks during the quarter lifted investor sentiments. Meanwhile, the net inflow of direct investment account surged RM16.3b (4Q18: RM2.1b) due to a higher inflow of Foreign Direct Investment (FDI) at RM21.7b (4Q18: RM12.9b) mainly into services and manufacturing sector. According to Bank Negara Malaysia (BNM), the higher inflow was contributed by the Japanese investment in healthcare sub-sector and a joint venture in the oil and gas sector. Going forward, we expect FDI inflow to continue partly due to possible trade diversion should foreign firms, especially from China, shift its operations to Malaysia as the US-China trade tension heightens. Additionally, a net outflow of Direct Investment Abroad (DIA) by Malaysian companies moderated to RM5.5b (4Q18: -RM10.8b) which mostly channeled into the financial services sub-sector and the mining sector.

● Although the CA surplus expanded sharply in 1Q19, the heightened volatility in the financial market arising from the Fed dovish stance, global growth slowdown, impact from the US-China trade spat, may result in the further depletion of the financial account and the international reserves. The recent announcement by FTSE Russell on potential exclusion of Malaysian debt from the FTSE World Government Bond Index also took the market by surprise. The risk is further heightened whenever there is a deadlock on the ongoing US-China trade negotiations or crude oil price starts to slide.

● Pre-emptive measures to improve market stability and stanch capital outflow. In light of the heightened risk of further outflow of capital, BNM yesterday has announced measures to enhance market liquidity and accessibility. The crux of the measures includes improving the repo market marking activity, enhancing the delivery for MGS futures settlements, expanding the dynamic hedging program to include trust banks and global custodians, providing flexibility for investors to enter forward contracts to buy Ringgit, introducing standard documentation for FX transactions, and enhancing provision of Ringgit liquidity beyond local trading hours.

Source: Kenanga Research - 17 May 2019