● The current account (CA)surplusof the balance of payments shrunk to RM7.6b (2.5% of GDP) in 2Q20 (1Q20: RM9.5b, 2.6% of GDP), a two-quarter low

- Spike in services deficit and moderation in goods surplus outweighed the decrease in secondary and primary income deficits.

● Services (-RM12.5b; 1Q20: -RM8.0b): jumped further to a fresh record-high deficit

- Attributable to an expected plunge in net travel account balance, whereby it swung into deficit for the first time since 1Q93 (-RM3.1b; 1Q20: RM2.1b), amid closure of border under the implementation of the Movement Control Order (MCO).

● Goods (RM25.9b; 1Q20: RM28.9b): surplusnarrowed to a seven-quarter low

- Reflecting the steeper contraction in the level of exports (- RM25.5b) relative to imports (-RM22.5b), as the COVID-19 containment measures implemented across the globe have disrupted global supply chains and weighed on external demand.

● Secondary income (-RM1.9b;1Q20:-RM5.4b):smallest deficit in almost 20 years

- Outward remittances fell sharply as more foreign workers were laid off and faced pay cuts due to the ongoing economic downturn, hence affecting their ability to send money home.

● Primary income (-RM4.0b;1Q20: -RM6.0b): deficitdropped to a near nine-year low

- Underpinned by a rise in direct investment income earned by Malaysian firms investing abroad (+RM1.7b) and lower direct investment income accrued by foreign investors in Malaysia (-RM1.2b).

● The financial account of the balance of paymentsregistered its widest deficit in nearly 5 years (-RM19.8b; 1Q20: - RM13.3b) as investment plans were put on hold while waiting for further clarity on the pandemic development

- Other investment (-RM41.3b; 1Q20: RM22.1b): declined substantially on higher interbank lending abroad by the domestic financial sector.

- Direct investment (-RM1.2b; 1Q20: RM3.4b): shifted to a net outflow, driven by smaller inflows of foreign direct investment (FDI) (RM2.2b; 1Q20: RM6.4b) and higher outflows of Direct Investment Abroad (DIA) (-RM3.5b; 1Q20: -RM3.0b). Of note, the FDI flow mainly originated from the Netherlands, British Virgin Islands and Singapore, channelled primarily into the mining and financial services sectors.

- Portfolio investment (RM22.2b; 1Q20: -RM41.3b): partially offsetting the above, portfolio investment balance marked its largest surplus since 3Q12, attributable to a net inflow of foreign funds and smaller outflows from resident investors, buoyed by favourable yield divergence and recovery optimism following the gradual relaxation of lockdown measures starting in May.

● 2020 CA balanceforecast revised upto2.8% from 1.2%of GDP (2019: 3.4%), after taking into account 1H20 CAbalanceof 2.5% of GDP and on expectation of a larger surplus in the 2H20

- Barring a global second wave of COVID-19 infections, goods surplus is expected to gradually widen in line with the progressive reopening of the global economy and rising oil prices. This would offset the slight increase in secondary income deficit, as the government recently allowed businesses to rehire foreign workers who were previously retrenched, hence supporting their income flow and potentially resulting in higher outward remittances. Travel balance is also expected to extend the deficit into the 2H20, on limited recovery in tourist arrivals as international borders will likely remain shut to foreign tourists throughout the year on continued concern over a potential re-spike in positive COVID-19 cases.

- USDMYR year-end forecast retained at 4.30 ( 2019: 4.09) on fears over a resurgence in COVID-19 cases, elevated domestic political tussle and rising geopolitical risks (US-CN). On the monetary front, although we still see room for BNM to cut the overnight policy rate (OPR), we now expect the central bank to keep rates steady at 1.75% in September, as signalled in its Quarterly Bulletin. In the report, it highlighted that economic recovery has already taken place since the relaxation of MCO in early May and sees gradual improvement to extend into 2021.

Source: Kenanga Research - 17 Aug 2020