● The current account (CA) surplus of the balance of payments shrunk significantly to RM3.0b (0.7% of GDP) in 1Q22 (4Q21: RM 15.3b, 3.6% of GDP), its lowest level since 2Q13 (RM1.0b)

- The notably lower CA surplus in 1Q22 was attributable to a moderation in the goods account surplus, and larger deficits in secondary and primary income; but was partially capped by a smaller services balance deficit.

• Goods (RM40.5b; 4Q21: RM51.8b): narrowed to a four-quarter low on higher imports
  • Mainly as imports expanded by 4.0% QoQ while exports contracted by -0.9% QoQ. This was attributable to higher domestic demand due to the easing of COVID-19 restrictions and improvement in the labour market. To note, the higher imports were led by intermediate and consumption goods imported primarily from China, Singapore and Taiwan.
• Secondary income (-RM2.4b; 4Q21: -RM1.4b): registered a larger deficit
  • Largely due to lower foreign receipts (RM5.3b; 4Q21: RM6.4b), while foreign workers’ remittances remained relatively unchanged (RM7.7b; 4Q21: RM7.7b).
• Primary income (-RM20.1b; 4Q21: -RM19.6b): record-high deficit
  • Primarily due to continued investment income accrued to foreign investors in Malaysia. Note that, foreign companies in Malaysia generated an income of RM35.5b in 1Q22 (4Q21: RM56.9b) while earnings of Malaysian companies from their foreign activities only amounted to RM15.3b (4Q21: RM37.3b).
• Services (-RM15.0b; 4Q21: -RM15.4b): deficit softened marginally
  • Underpinned by higher receipts in manufacturing services on physical inputs owned by others (RM4.0b; 4Q21: RM3.9b) and lower payments in insurance and pension services (-RM1.9b; 4Q21: -RM2.4b), as well as a small surplus in financial services (RM37.0m; 4Q21: -RM64.0m). Meanwhile, transport and travel services continued to register a higher deficit, mainly as Malaysia remains closed to tourists.

● The financial account of the balance of payments recorded an almost 11-year high surplus of RM30.4b (4Q21: +RM0.7b), propelled mainly by a sizeable direct and other investment net inflows

- Other investment (RM19.6b; 4Q21: -RM10.6b): registered a surplus for the first time in three quarters, chiefly due to interbank borrowing by the domestic banking system and the deposits placement domestically by non-resident (NR) entities.

- Direct investment (RM20.8b; 4Q21: RM10.5b): almost doubled, underscored by higher inflows of foreign direct investment (+RM24.4b; 4Q21: +RM18.5b) due to higher debt inflows (+RM10.0b; 4Q21: +RM0.8b) and equity injections (+RM5.4b; 4Q21: +RM3.5b). On top of that, the surplus was also supported by a narrowed outflow of direct investment abroad (-RM3.6b; 4Q21: -RM7.9b).

- Portfolio investment (-RM10.1b; 4Q21: +RM2.6b): declined significantly, amid higher resident portfolio investment abroad (-RM13.9b; 4Q21: -RM6.1b), driven by institutional investors’ equity investment. This masked an improvement in NR’s acquisition of domestic equity securities (+RM8.5b; 4Q21: +RM2.8b).

● 2022 CA balance forecast retained at 3.9% of GDP (2021: 3.8%)

- The reopening of the international borders and further relaxation of the COVID-19 restrictions both locally and abroad are expected to increase the goods surplus and soften the services deficit. On top of that, the resumption of mass foreign workers’ hiring may widen the deficit in the secondary income due to a potential higher outward remittance. However, China’s stringent pandemic-control measures may disrupt the recovery of trade activities.

- USDMYR: The ringgit may continue to experience a period of high volatility and trade under pressure against the strengthening USD, mainly due to the current Fed tightening cycle, increased geopolitical instability and weakening of the yuan near the psychological threshold of 6.80. Nevertheless, the optimism surrounding the prospects for Malaysia economic recovery and BNM’s earlier-than-expected rate hike may provide some support for the local note. Consequently, we have recently revised our USDMYR year-end target to 4.28 from 4.10 (2021: 4.17).

- BNM OPR: After unexpectedly lifting the overnight policy rate (OPR) by 25 basis points (bps) on May 11 for the first time since January 2018, the Bank Negara Malaysia (BNM) may continue to tighten its monetary policy and increase the OPR by another 50 to 75 bps in 2022. Nevertheless, a potential global economic slowdown due to the ongoing supply chain crisis amid China’s zero-COVID-19 policy and Russia-Ukraine war may prompt the BNM to take a pause as its priority is to ensure a sustainable economic recovery.

Source: Kenanga Research - 17 May 2022