● The current account (CA) surplus of the balance of payments narrowed to RM7.6b (1.9% of GDP) in 4Q19 (3Q19: RM11.5b, 3.0% of GDP), a five-quarter low

- Increase in primary income and services deficits outweighed an expansion in goods surplus.

- 2019: CA surplus expanded to a seven-year high (RM49.7b; 2018: RM30.6b), coming in at 3.3% of GDP (2018: 2.1%), slightly below consensus and house forecast of 3.5%.

● Primary income (-RM15.7b; 3Q19: -RM12.2b): deficit widened for two successive quarters

- Reflecting higher investment income accrued by foreign investors in Malaysia and lower investment income earned by Malaysian firms investing abroad.

● Services (-RM4.0b; 3Q19: -RM1.6b): largest deficit in six quarters

- Attributable to a moderation in net travel account surplus (RM6.4b; 3Q19: RM9.5b) amid deceleration in tourist arrivals. The downtrend would likely persist in the near term as tourists cancelled their trips on worries over the coronavirus outbreak.

● Goods (RM32.8b; 3Q19: RM30.8b): surplus extended its uptrend for two straight quarters, bucking the overall downtrend in the CA balance

- Mirroring the faster QoQ growth in gross exports (4.4%) relative to gross imports (3.7%).

● Secondary income (-RM5.5b; 3Q19: -RM5.5b): broadly unchanged

- Sustained outward remittances by foreign workers.

● The financial account of the balance of payments recorded a five-quarter low deficit (-RM0.6b; 3Q19: - RM1.3b) on improved investor sentiments

- Portfolio investment (-RM2.8b; 3Q19: -RM26.8b): underpinned by lower outflows from resident investors and a net inflow in foreign funds as investors shifted to a risk-on mode amid favourable developments regarding the US-China phase-1 trade deal.

- Direct investment (RM2.2b; 3Q19:-RM0.8b): charted a positive turnaround on higher net inflow of foreign direct investment (FDI) (RM3.7b; 3Q19: RM2.9b) and lower net outflow of Direct Investment Abroad (DIA) (-RM1.5b; 3Q19: -RM3.7b). Of note, FDI was channelled primarily into the construction and wholesale & retail trade sectors.

● We retain our expectation for CA balance to narrow to 2.2% of GDP in 2020 (2019: 3.3%)

- Balance of goods to taper: while exports are forecasted to recover on a tech cyclical upturn spurred by the 5G rollout, imports are also expected to pick up on heightened demand for capital and intermediate goods in anticipation of an increase in E&E orders and in relation with the expected commencement of the revived infrastructure projects towards the end of the year. However, a further downside risk is the concern that the impact of the coronavirus epidemic may further disrupt the global supply chain along with the manufacturing sector, delaying the recovery in the global tech cycle.

- Services deficit to widen: travel and transport balances to be affected by the coronavirus outbreak, with Malaysia to likely struggle to achieve the 30m tourist arrivals and RM100b tourist receipts envisioned by the Visit Malaysia 2020 campaign.

- Elevated downside risks to weigh on USDMYR: we are revising our USDMYR year-end forecast to 4.20 from 4.10 (2019: 4.09) given risks of prolonged coronavirus outbreak, causing disruption to global supply chains, reescalation of trade war, rising global geopolitical unrest and lower crude oil price (Feb-20 avg.: USD54.44/barrel; 2020 budget assumption: USD62/barrel), weighing on fiscal balance. Additionally, Bank Negara Malaysia’s indication of ample room for further easing and the market expectation of another 25 basis points rate cut in the near term may also weigh on the MYR going forward.

Source: Kenanga Research - 13 Feb 2020