● The current account (CA) surplus of the balance of payments widened sharply to RM25.7b (5.5% of GDP) in 4Q22 (3Q22: RM14.1b or 3.1% of GDP). Overall, CA surplus narrowed to 2.6% of GDP in 2022 (2021: 3.8%)

- The significantly higher CA surplus in 4Q22 was mainly attributable by a larger goods surplus amid resilient external demand and lower deficits in both the primary and services accounts.

• Goods (RM51.7b; 3Q22: RM43.0b): rose to the second highest on record due to continued demand in electrical & electronics (E&E) products and a decline in imports
  • The higher goods surplus was mainly supported by a deceleration in merchandise imports (RM248.6b; 3Q22: 265.2b) due to a decline in imports of capital and intermediate goods. On the other hand, merchandise exports remained strong at RM299.8b, albeit down from previous quarter record high of 309.7b, underpinned by a much weaker ringgit in 4Q22 (average: 4.57/USD; 3Q22: 4.48) and solid external demand for E&E, petroleum and palm oil-based products, especially from Singapore, China and the US.
• Primary income (-RM11.5b; 3Q22: -RM17.2b): deficit narrowed
  • Mainly attributable by a much lower deficit in direct investment income (-RM9.0b; 3Q22: - RM17.5b) due to higher investment receipts of RM15.1b (3Q22: 12.2b) and lower payments of RM24.1b (3Q22: RM29.7b).
• Services (-RM8.6b; 3Q22: -RM9.6b): lower deficit recorded due to higher travel and construction receipts 
  • The reopening of most global economies coupled with year-end holiday season has helped to boost travel receipts to near pre-pandemic of RM1.9b (3Q22: RM0.8b). To add, construction recorded a higher surplus of RM1.1b (3Q22: 0.2b) while transport logged a lower deficit of RM7.4b (3Q22: 7.9b) due to lower payments for sea freight activities.
• Secondary income (-RM6.0b; 3Q22: -RM2.1b): logged a much higher deficit 
  • Attributable to higher outward remittance (RM12.2b; 3Q22: RM9.1b) and lower foreign receipts (RM6.2b; 3Q22: RM7.0b).

● The financial account of the balance of payments recorded a significantly lower deficit of RM1.0b in 4Q22 (3Q22: -RM14.9b), partly due to a return of risk appetite to the domestic market amid an improvement of political stability post-general election

- Other investment (RM36.8b; 3Q22: -RM16.6b): rebounded to record a large net inflow, mainly due to higher receipts of interbank lending by resident banks.

- Direct investment (-RM9.4b; 3Q22: RM2.0b): first net outflows since 3Q20 (-RM2.5b), mainly attributable to higher outflows of direct investment abroad (-RM28.7b; 3Q22: -RM10.3b) which counteracted higher inflows of FDI (RM19.3b; 3Q22: RM12.3b) that largely benefitted the manufacturing sector and non-financial services subsector.

- Portfolio investment (-RM26.7b; 3Q22: RM0.1b): largest outflows in in almost three years (11 quarters) due to the higher redemption of domestic debt securities upon maturity held by non-resident investors (-RM15.1b; 3Q22: - RM4.1b).

● 2023 CA balance is expected to remain in surplus at the same level of 2.6% of GDP (2022: 2.6%) due to the expectation of a slower external demand and strong domestic consumption

- Despite an expected slowdown in external activities due to weaker global demand amid rising recession risk, higher tourism activity and solid demand from China may help keep CA surplus above 2.0% for 2023.

- USDMYR: The ongoing ringgit weakening momentum is expected to continue in the next few months as the Fed may continue to hike interest rate until at least 5.00% while the BNM may stop short at 2.75%. Notably, this will further narrow the 10-year MY-US bond yield differential and support the USD index to trade around the 103.0 – 105.0 zone. However, the local note may gain ground against the greenback in 2H23 due to a potential Fed pivot amid rising recession risk and further appreciation of the yuan amid its safe-haven appeal. Against this backdrop, we reiterate our forecast that the ringgit may end the year stronger at around 4.11 (2022: 4.40).

- Bank Negara Malaysia (BNM) policy rate: Barring any unforeseen shocks or major policy shifts, especially on the fiscal side, the BNM is expected to keep the overnight policy rate (OPR) unchanged at 2.75% for the rest of 2023. However, moving forward, the possibility of a rate change depends mainly on the inflation trend and growth outlook.

Source: Kenanga Research - 13 Feb 2023