● The current account (CA) surplus of the balance of payments expanded to RM9.1b (2.1% of GDP) in 2Q23 (1Q23: RM4.3b or 1.0% of GDP)

- The increase in the CA surplus was primarily attributed to a smaller deficit in services and primary account, while the goods account remained in surplus albeit lower. This was also due to the lower denominator, as nominal GDP fell 1.2% YoY, its first contraction since 4Q20 (-1.1% QoQ; 1Q23: -5.0%).

o Goods (RM29.5b; 1Q23: RM39.9b): surplus narrowed to the lowest level since 2Q20 amid weaker exports and higher imports 
▪ The lower goods surplus was mainly attributable to a sharp slowdown in merchandise exports (RM254.9b; 1Q23: RM261.5b) amid the impact of the global economic slowdown and slower than expected China recovery. Nonetheless, merchandise imports expanded slightly (RM225.4b; 1Q23: RM221.6b), partly as domestic demand remained resilient.

o Services (-RM11.3b; 1Q23: -RM12.8b): lower net deficit recorded due to higher travel surplus 
▪ Travel remained the primary driver of services receipts at RM16.3b (1Q23: RM12.3b), but this was also followed by higher travel services payments of RM12.5b which subsequently contributed a RM3.8b surplus during the quarter (1Q23: RM1.3b).

o Primary income (-RM6.3b; 1Q23: -RM16.9b): lowest deficit recorded since 3Q21 
▪ Mainly due to higher receipts of RM24.8b (1Q23: RM16.7b), thanks to higher investment income (RM22.8b; 1Q23: RM14.8b). Meanwhile, payments fell slightly (RM31.1b; 1Q23: RM33.6b).

o Secondary income (-RM2.8b; 1Q23: -RM5.9b): recorded a lower deficit
▪ Attributable to lower outward remittances (RM9.5b; 1Q23: RM16.0b), which mitigated the lower foreign receipts (RM6.7b; 1Q23: RM10.2b).

● The financial account posted a higher deficit in 2Q23 (-RM11.6b; 1Q23: -RM2.4b), mostly due to greater outflows in other investment and direct investment, which outweighed a rebound in portfolio investment

- Portfolio investment (RM8.1b; 1Q23: -RM33.3b): returned to inflow and registered the largest inflow in two years amid positive investment liabilities (RM18.3b; 1Q23: -RM17.0b) as residents purchased more domestic debt securities (RM19.5b; 1Q23: - RM1.3b) as reflected by first inflow since 4Q21.

- Direct investment (-RM4.9b; 1Q23: RM10.9b): registered a negative turnaround as direct investment abroad by residents posted a larger net outflow of RM8.0b (1Q23: -RM1.1b), coupled with a lower inflow of FDI (RM3.1b; 1Q23: RM12.0b).

- Other investment (-RM15.1b; 1Q23: RM20.9b): returned to a net outflow, as liabilities turned a larger net outflow (- RM26.1b; 1Q23: RM28.9b), which outpaced inflow in asset (RM11.0b; 1Q23: -RM4.9b).

● 2023 CA forecast retained at 2.6% of GDP (2022: 3.1%) despite weaker external trade performance and moderate GDP growth outlook

- Continued weakness in external trade amid a slowdown in the global economy led by the advanced economies as a result of a higher interest rate environment and slower-than-expected recovery in China will likely lead to a narrower CA surplus in 2023. However, we expect the current account surplus to remain supported by a sustained recovery in the tourism sector due to a gradual increase in tourist arrivals and the expected return of foreign capital inflows.

- USDMYR: Despite the current weakness of ringgit, which is weighed mainly by external factors, we continue to expect an appreciation for the local note towards the end of the year. This is expected to be supported by a positive domestic growth outlook, albeit moderating, and the projected return of risk-on sentiment, in tandem with expectations that the US Fed would shift to a dovish stance by end of the year. Against this backdrop, we maintain our year-end USDMYR forecast at 4.29 (2022: 4.40).

- Bank Negara Malaysia (BNM) policy rate: Although domestic demand remains resilient, backed by favourable policy support and steady labour market conditions, the impact of the global economic slowdown, particularly on the manufacturing and export-oriented subsectors, would likely limit the growth potential. This will be the key consideration for the BNM as we believe the central bank will strike a balance between supporting the growth outlook and maintaining price stability. Therefore, we believe BNM has reached its monetary policy normalisation cycle and we expect the central bank to keep the overnight policy rate (OPR) steady at 3.00% for the remainder of the year and 2024.

Source: Kenanga Research - 21 Aug 2023