● The current account (CA) surplus of the balance of payments narrowed toRM11.6b (3.1% of GDP) in 3Q21 (2Q21: RM 14.4b, 3.9% of GDP)

- The lower CA surplus was attributable to larger deficits in both primary and secondary income, however, it was partially supported by a higher goods surplus and a marginally smaller services deficit.

• Primary income (-RM11.3b; 2Q21: -RM9.5b): deficit expanded to its highest level in seven-quarters
  • Largely due to foreign companies in Malaysia earning a higher income of RM26.3b (2Q21: RM25.5b), mostly involved in the manufacturing and financial sectors. Meanwhile, Malaysian companies abroad recorded a lower income of RM18.0b (2Q21: RM19.3b).
• Secondary income (-RM3.1b; 2Q21: -RM1.4b): registered a larger deficit
  • Attributable to lower receipts (RM4.3b; 2Q21: RM5.8b) due to lower settlements received from abroad, and as outward remittances increased slightly (RM7.4b; 2Q21: RM7.2b).
• Goods (RM41.2b;2Q21: RM40.7b):surplus increased to a three-quarter high
  • Mainly due to a slower RM7.4b decrease in exports (RM236.6b; 2Q21: RM244.0b), in electrical & electronics, and chemicals & petroleum-based products, primarily to China, Singapore and the US. Compared to a larger RM8.0b decline in imports (RM195.4b; 2Q21: RM203.4b), due to a downtrend in imports of capital, intermediate, and consumption goods, mainly from China and Japan.
• Services (-RM15.2b; 2Q21: -RM15.4b): recorded a marginally smaller deficit
  • Attributable to a softening deficit in the transportation account (-RM8.0b; 2Q21: -RM8.1b) and other business services (-RM1.1b; 2Q21: -RM1.2b), as well as a small surplus in the construction account (RM19.6m; 2Q21: -RM245.1m). Meanwhile, travel registered a slightly higher deficit (-RM3.7b; 2Q21: -RM3.6b), amid the continued closure of borders to international tourists

● The financial account of the balance of payments rebounded to a net inflow of RM22.8b (2Q21: -RM7.0b), amid greater direct investments and other investments

- Direct investment (RM17.6b; 2Q21: RM4.2b): driven by an expansion of foreign direct investment (FDI) to RM12.8b (2Q21: RM8.2b), primarily in the manufacturing sector, and mainly from Singapore, the Netherlands, and the US. Meanwhile, direct investment abroad (DIA) returned to a net inflow (RM4.7b; 2Q21: -RM4.0b), mainly from financial activities and the mining & quarrying sector.

- Other investment (RM8.8b; 2Q21: -RM30.5b): rebounded due to an additional allocation of Special Drawing Rights to Malaysia, of USD5.0b, by the IMF.

- Portfolio investment (-RM4.3b;2Q21: RM20.0b): declined considerably, amid plummeting non-resident portfolio investments (RM0.9b; 2Q21: RM30.5b), and despite a smaller net outflow of resident’s portfolio investments abroad (-RM5.2b; 2Q21: -RM10.6b).

● 2021 CA balance forecast retained at 3.5%ofGDP (2020: 4.2%). For 2022,we forecast the CA balance towiden to 3.9% of GDP.

- As COVID-19 restriction measures continue to ease in 4Q21, locally and abroad, we expect the goods surplus to continue widening amid the sustained recovery of trade activities and the release of global pent-up demand. Likewise, the services deficit may begin to soften as Malaysia sets up travel corridors with its immediate neighbours, and this should be further supported by plans to fully reopen borders to foreign tourists by January 2022.

- Given the US Fed’s decision to begin tapering its asset purchases and a broadly strong USD amid concerns on high inflation, the ringgit is expected to weaken from its current position, leading us to maintain our USDMYR year-end forecast at 4.18 (2020: 4.02). Nonetheless, the ringgit may find some support from an improving domestic economic outlook, following the full reopening of the economy, and persistently high global crude oil prices.

- On the monetary front, we expect Bank Negara Malaysia (BNM) to keep the overnight policy rate unchanged at 1.75% until at least 2H22, in order to provide sustained monetary support during Malaysia’s post-pandemic recovery phase. This is on the back of a positive economic outlook, following the reopening of most economic sectors, the improving local COVID-19 condition, and the high rate of vaccination. To keep pace with a global normalisation of monetary policy amid improving growth prospects and rising inflationary trend, we expect BNM may start raising the policy rate in 2H22.

Source: Kenanga Research - 15 Nov 2021