● The current account (CA) surplus of the balance of payments narrowed to RM19.0b (5.0% of GDP) in 4Q20 (3Q20: RM26.1b, 7.1% of GDP)

• The lower surplus was attributable to a deficit in secondary income, and larger deficit in services account but partially supported by higher goods surplus.
• Overall, CA surplusexpandedto 4.4%in 2020 (KIBB: 3.5%; 2019: 3.4%).
• Goods (RM42.9b; 3Q20: RM41.5b): surplus rose to a 12-year high despite slower QoQ growth (3.3%; 3Q20: 60.2%)
  • Sustained external demand contributed by Electrical & Electronic (E&E), rubber gloves and Personal Protective Equipment (PPE) amid a resurgence of COVID-19 cases.
• Secondary income (-RM2.5b; 3Q20: +RM7.1b): turned deficit and lowest since 1Q20
  • Largely due to the absence of the transfer received in the previous quarter related to 1MDB settlement.
• Primary income (-RM7.1b; 3Q20: -RM9.2b): lower deficit recorded
  • Mainly due to lower deficit in investment income (- RM5.1b; 3Q20: -RM7.3b) reflecting higher investment income for Malaysians investing abroad which partially offset the higher deficit in employee’s compensation (-RM2.0b; 3Q20: - RM1.8b).
• Services (-RM14.2b; 3Q20: -RM13.3b): deficit expanded to a fresh record-high
  • Attributable to higher payment for transportation services (-RM7.5b) and sustained deficit in travel account (-RM3.3b; 3Q20: -RM3.5b) albeit marginally lower as international border remained closed.

● The financial account of the balance of payments posted a smaller deficit(-RM10.8b; 3Q20: -RM35.2b) partlyassociated to risk-on sentiment following the US election result despite heightened domestic political tussle and the third wave of COVID-19 infections

• Portfolio investment (-RM6.9b; 3Q20: -RM23.1b):smaller net outflow, mainly due to a higher net inflow of nonresident (RM12.8b; 3Q20: -RM2.4b). The inflows were largely into the debt market, particularly the government bonds.
• Direct investment (RM0.8b; 3Q20: -RM3.1b):turned net inflow albeit marginally as FDI posted a net inflow (RM6.1b; 3Q20: - RM0.8b) and highest in three quarters. The net inflow of FDI was associated with higher equity injections and debt instruments primarily channelled into the services and manufacturing sectors. This offset a higher net outflow of Direct Investment Abroad (-RM5.4b; 3Q20: -RM2.2b) which mainly channelled into the services sector.

● 2021 CA balance forecast revised up to 3.5% from 2.5% of GDP but likely lower than the preceding year (2020: 4.4%)

• Goods surplus is expected to remain resilient in the near term, supported by higher exports of E&E, rubber gloves and rising commodity prices. Wider vaccine rollout among advanced countries would also boost demand for exports.
• However, the services deficit is likely to persist mainly due to sustaining travel deficit as international borders will remain closed to foreign tourists until a COVID-19 vaccine becomes widely available. In addition, a gradual pick up intheglobal trade activities in line with global economic recovery may increase transportation deficit.
• In light of sustaining current account surplus projection, we maintain our forecast of USDMYR year-end to strengthen to 3.95 (2020: 4.02). This is also on the expectation of broad dollar weakness, optimism over wider vaccine rollout and higher average Brent crude oil prices (USD50.0/barrel; 2020: USD43.2/barrel) in tandem with global economic recovery.
• On the monetary front, we expect BNM to stand pat on policy rate (1.75%) at the next Monetary Policy Committee meeting in March and for the rest of the year given that growth is expected to be supported by sizeable government expenditure and ongoing stimulus measures as well as recovery in the external front. Nonetheless, we still believe there is a room for BNM to cut the policy rate by another 25-50 basis points as the adverse effect of COVID-19 resurgence in 1Q21 and domestic political uncertainty may undermine the economic growth trajectory (2021F: 4.5%; 2020: 5.6%).

Source: Kenanga Research - 15 Feb 2021