● The current account (CA) surplus of the balance of payments widened to RM14.4b (3.9% of GDP) in 2Q21 (1Q21: RM12.3b, 3.3% of GDP)

• The CA surplus jumped 17.2% in 2Q21, on higher net exports of goods and the lower deficit in the secondary account. In the 1H21, the CA surplus recorded a surplus of RM26.7b (1H20: RM16.5b).
  • Goods (RM40.7b; 1Q21: RM36.6b): higher surplus, backed by a robust external demand
    • Mainly propelled by an increase of RM18.5b in exports (RM244.0b; 1Q21: RM225.5b) due to higher global demand for electrical & electronics, petroleum and rubber-based products, mainly from China, Singapore and United States of America (USA), which outweighed an increase of RM14.5b in imports.
  • Services (-RM15.4b; 1Q21: -RM14.9b): spiked to a fresh record-high deficit
    • Attributable to the continuing deficit in the transport (-RM8.1b; 1Q21: -RM7.6b), travel (- RM3.6b; 1Q21: -RM3.4b) and other business services (-RM1.2b; 1Q21: -RM0.8b) accounts, notably due to the extended COVID-19 restriction measures. 
  • Primary income (-RM9.5b; 1Q21: -RM5.7b): deficit expanded to a three-quarter high
    • As foreign companies in Malaysia earned a higher income (RM28.7b) than Malaysian companies abroad (RM19.3b), especially in direct investment (-RM11.2b; 1Q21: -5.6b).
  • oecondary income (-RM1.4b; 1Q21: -RM3.6b): lower deficit recorded
    • Outward remittances fell (RM7.2b; 1Q21: RM7.6b), while higher receipts of RM5.8b (1Q21: 4.0b) were recorded, partly due to funds received related to a wholly-owned subsidiary of the Minister of Finance (Incorporated) in 2Q21.

● The financial account of the balance of payments returned to a deficit, registering a net outflow of RM7.0b (1Q21: RM16.0b), mainly due to a substantial net outflow in other investment

- Other investment (-RM30.5b; 1Q21: RM13.9b): declined substantially due to the repayment of interbank borrowings by the banking system and the withdrawal of non-resident deposits.

- Portfolio investment (RM20.0b; 1Q21: RM0.4b): increased considerably, driven by higher non-resident portfolio investments (RM30.5b; 1Q21: RM14.6b) and lower resident’s portfolio investments abroad (- RM10.6b; 1Q21: -RM14.2b).

- Direct investment (RM4.2b; 1Q21: RM1.4b): net inflow increased on the back of larger reinvestment in earnings (RM7.0b; 1Q21: RM4.1b), primarily in the manufacturing sector, and higher equity injections into Malaysia (RM4.9b; 1Q21: RM4.4b). Of note, the inflow of foreign direct investment was mainly from Japan (RM2.1b), followed by Indonesia (RM1.5b) and USA (RM1.4b), primarily in the manufacturing sector (79.9% of the total flow).

● 2021 CA balance forecast maintained at 3.5% of GDP (2020: 4.2%)

- Even though the expected reopening of the domestic economy would help to prop up the recovery in trade activities, we still retained our CA balance forecast for now, as the current surge in global COVID-19 infections, coupled with China's decision to partly shut the world's third-busiest container port, may reverse the current trade dynamics, potentially narrowing the goods surplus in 2H21. In addition, transport and travel balance is expected to extend their deficit into the 2H21, on the expectation that international border will remain closed for the rest of the year amid the sweeping spread of the delta variant cases across the globe.

- With heightened uncertainties surrounding the COVID-19 variants, the Fed leaning towards the tapering of asset purchases and Malaysia’s political turmoil, the downside risk for the ringgit remains elevated. For now, we are maintaining our USDMYR year-end forecast at 4.03 (2020: 4.02) on the expectation that the ringgit would gain ground against the USD in the 4Q21 on the back of a full domestic economic reopening in October. Nevertheless, in a scenario whereby the pandemic situation continues to remain challenging, our preliminary USDMYR year-end revised projection could range anywhere between 4.10 to 4.25.

- On the monetary front, despite the current surge in domestic COVID-19 infections, the BNM will likely keep the overnight policy rate (OPR) unchanged at 1.75% for the rest of 2021 as Malaysia’s prospects for economic recovery remain intact amid the country's swift vaccine rollout. However, should the COVID-19 situation take a turn for the worse, we reckon that BNM does have ample space to adjust the OPR accordingly to support the economy.

Source: Kenanga Research - 16 Aug 2021