● The current account (CA) of the balance of payments in 3Q19 registered a smaller surplus of RM11.5b (2Q19: RM14.3b) or 3.0% of total GDP (2Q19: 3.8%).

- Mainly due to a larger deficit recorded in the primary income at RM12.2b (2Q19: -RM5.5b) though it was partially offset by higher goods surplus of RM30.8b (2Q19: RM28.1b) on a bigger drop in imports.

- Overall, CA surplus expanded to RM42.1b in the first three quarters of this year (Jan-Sep 2018: RM19.8b), indicating a sizeable and healthy CA going forward.

● The primary and secondary income account recorded a larger deficit of RM12.2b and RM5.5b, respectively (2Q19: -RM5.5b and -RM4.9b respectively).

- Mainly attributed to the lower receipt of investment income earned by Malaysian firms investing abroad amid higher profits earned by foreign investor in Malaysia as well as sustained outward remittances by foreign workers.

● The goods account surplus expanded to RM30.8b in 3Q19 (2Q19: RM28.1b) amid a contraction in exports performance (-1.9% YoY; 2Q19: -0.4%).

- The wider surplus is mainly due to a far higher contraction of imports compared to exports.

- The merchandise trade balance registered a healthy surplus from January to September 2019, increasing by 7.3% YoY to RM92.7b (Jan-Sep: RM86.5b).

- While the trade war and the impact of a growth slowdown in the key exports market seemed inevitable, we expect trade balance to sustain, in view that exports performance continued to beat imports despite the slowdown in overall demand.

● Services account registered a lower deficit of RM1.6b (2Q19: -RM3.4b), thanks to an increase in the net travel account surplus of RM9.5b (2Q19: RM7.1b) as reflected in higher tourist arrivals and per capita spending.

- Going forward, we foresee the travel account surplus to continue to contribute positively to the CA in line with the Visit Malaysia 2020 campaign.

- Net payments to foreign providers in the transportation and insurance services remain in deficit albeit lesser, amounting to RM8.6b (2Q19: -RM8.8b) due to lower trade activity during the period.

● The financial account of the balance of payments registered a smaller deficit of RM1.3b (2Q19: -RM18.6b) amid continued global monetary easing and escalating trade tensions.

- Attributable to the higher net inflow in other investment (RM25.3b; 2Q19: RM0.3b), mainly due to the reversal of previous interbank placements abroad by resident banks that have matured, as well as a net inflow in financial derivatives (RM0.9b; 2Q19: - RM0.5b).

- Higher deficit was registered in portfolio investment (- RM26.8b; 2Q19: -RM10.2b) as investors pulled out from the local capital market and switching to safehaven assets, besides maturity in international debt securities added to the outflow.

- Direct investment account posted a smaller deficit of RM0.8b (2Q19: -RM8.2b) due to lower deficit of Direct Investment Abroad (DIA) (-RM3.7b; 2Q19: -RM12.6b) and smaller surplus of FDI (RM2.9b; 2Q19: +RM4.4b). Of note, FDI was channelled primarily into the wholesale and retail trade subsector, as well as the financial services sector.

- Going forward, the financial account would continue to register a deficit in the near term on the back of heightened risk in the trade war. Should there be any breakthrough in the trade deal between the US and China, we expect a reversal in the portfolio capital flow back into the domestic market.

● We revised our forecast for CA balance to widen to 3.5% of GDP in 2019 from the initial projection of 2.7% (2018: 2.1%), providing some support to the Ringgit. For 2020, we project CA balance to narrow to 2.2% of GDP.

- CA balance in the first three quarters of this year (RM42.1b) has so far double compared to the same period of last year (RM20.2b) buoyed by sustained goods account despite a prolonged global trade war.

- Year-end forecast of USDMYR maintained at 4.20 on the back of potential downside risk on the fiscal balance sheet due to lower crude oil price (average 2019: USD64.1/barrel vs 2018: USD71.6/barrel) as well as the prospect of a global growth slowdown brought about by the escalating trade war and global tech downcycle.

Source: Kenanga Research - 18 Nov 2019