● The current account (CA) surplus of the balance of payments widened to a 9-year high of RM26.1b (7.1% of GDP) in 3Q20 (2Q20: RM7.6b, 2.5% of GDP)

- A substantial increase in the surplus of goods and secondary income outpaced the increase in primary income and services deficits.

● Goods (RM41.5b; 2Q20: RM25.9b): surplus spiked to a 12-year high

- Reflecting the faster QoQ expansion in exports (24.1%) relative to imports (17.3%), following a rebound in external demand as the economic reopening gained traction amid further relaxation of lockdown measures across the globe.

● Secondary income (RM7.1b; 2Q20: -RM1.9b): registered the first surplus on record

- Underpinned by a bounce in inward remittances (+RM9.6b) attributed to the transfers received as part of the Goldman Sach’s USD3.9b 1MDB settlement.

● Primary income (-RM9.2b; 2Q20: -RM4.0b): deficit expanded to a three-quarter high

- Mainly due to an enlarged deficit of direct investment income (-RM9.0b; 2Q20: -RM-2.4b).

● Services (-RM13.3b; 2Q20: -RM12.5b): widened slightly to a fresh record-high deficit

- Underscored by higher payment for transportation services amid improved trade activities and sustained deficit in net travel account balance as border remained closed to tourists during the Recovery Movement Control Order (RMCO) period.

● The financial account of the balance of payments posted its largest deficit in over 6 years (-RM35.2b; 2Q20: -RM19.8b) partly due to a risk-off sentiment triggered by worries over reinstatement of COVID-19 restriction in major economies and domestic political jitters.

- Portfolio investment (-RM23.1b; 2Q20: RM22.2b): shifted to a deficit, attributable to a net outflow of foreign funds, specifically from the equity market (- RM6.0b; -RM9.2b), and larger outflow from resident investors.

- Direct investment (-RM3.1b; 2Q20: -RM1.2b): net outflow increased on the first foreign direct investment (FDI) outflow (-RM0.8b; 2Q20: RM2.2b) registered since 4Q09, due to intercompany loan extensions and trade credits provided by manufacturing firms. This masked a narrowed outflow of Direct Investment Abroad (-RM2.2b; 2Q20: -RM3.5b). Of note, the FDI outflow was mainly to the Netherlands, UK and Cayman Island, primarily in the manufacturing and mining sectors.

● 2020 CA balance forecast revised up to 3.5% from 2.8% of GDP (2019: 3.4%), incorporating the impact from an extraordinary secondary income surplus in the 3Q20. For 2021, the CA balance is forecasted to narrow to 1.9% of GDP.

- Amidst a resurgence of COVID-19 cases in the 4Q20, globally and locally, goods surplus is expected to narrow modestly as recovery in trade activities could soften on tightened lockdown measures, lower commodity prices and easing pent-up demand. Secondary income balance would likely switch back into a deficit on the absence of the temporary settlement factor. Travel deficit is also projected to persist at least until early 2021, as international borders will remain shut to foreign tourists until a COVID-19 vaccine becomes available.

- USDMYR year-end forecast retained at 4.30 (2019: 4.09) on the back of worsening COVID-19 situation, elevated domestic political tussle and weak global oil prices. On the monetary front, despite the optimism displayed by the BNM, we maintain a 50% probability of a 25 bps rate cut at the next Monetary Policy Committee meeting in January, contingent on the course of COVID-19 cases locally and the degree of tightening of the MCO in the immediate term.

Source: Kenanga Research - 16 Nov 2020