● Despite a lower services deficit, the current account (CA) surplus of the balance of payments narrowed sharply to RM0.3b (0.1% of GDP; 3Q23: 2.0% of GDP). Overall, CA surplus settled at 1.2% of GDP in 2023 (2022: 3.2%).

− A larger deficit in the primary income account, coupled with a marginal decrease in the goods surplus, outweighed the reduction in the services account deficit. As a percentage of GDP, the current account surplus experienced a sharp decrease, despite the lower GDP growth in 4Q23 (3.0% YoY; 3Q23: 3.3%).

o Primary income (-RM20.9b; 3Q23: -RM11.0b): for two quarter in a row, deficit nearly doubled

▪ Mainly driven by increased investment income accrued by foreign companies in Malaysia (4Q23: RM37.1b; 3Q23: RM31.0b) and a decrease in investment income recorded by Malaysian companies abroad (RM18.4b; 3Q23: RM21.9b).

o Goods (RM30.8b; 3Q23: RM32.7b): surplus decreased to a two-quarter low due to higher imports of intermediate goods

▪ Despite exports continuing to show improvement, with a notable increase of RM15.5b or 6.0% QoQ (3Q23: RM5.5b or 2.2%), imports have outpaced the rise in exports, experiencing a significant increase of RM17.4b or 7.6% QoQ (3Q23: RM2.3b or 1.0%). Consequently, there was a reduction in the goods surplus during the quarter, decreasing by 5.6% QoQ (3Q23: 10.9%). The surge in imports was mainly driven by a higher effective price of imported intermediate goods, particularly from Singapore and the USA, as on average, the ringgit weakened by more than 1.5% QoQ against both SGD and USD.

o Services (-RM7.4b; 3Q23: -RM10.3b): smallest net deficit before the pandemic began

▪ The higher travel surplus (RM6.5b; 3Q23: RM5.4b) resulting from the ongoing recovery in inbound tourism has narrowed the deficit to its lowest level since 4Q19 (-RM4.0b). Additionally, this improvement is bolstered by a higher surplus in the construction account (RM1.2b; 3Q23: RM0.5b).

o Secondary income (-RM2.3b; 3Q23: -RM2.2b): recorded a sustained deficit

▪ This can be attributed to the continued outward remittances by foreign workers (RM10.4b; 3Q23: RM9.2b).

● The financial account reverted to a deficit of RM19.9b in 4Q23 (3Q23: RM14.9b)

− Other investment (-RM14.4b; 3Q23: RM34.6b): shifted to a net outflow, propelled by increased repayment for interbank borrowing by onshore banks, resulting in a net outflow in both assets (-RM5.6b) and liabilities (-RM8.8b).

− Portfolio investment (-RM6.4b; 3Q23: -RM14.1b): despite a nearly doubled acquisition of debt securities abroad by resident investors (-RM12.4b; 3Q23: - RM6.9b), the inflow of non-resident portfolio investments (RM3.9b; 3Q23: RM1.3b) into both the domestic debt market and equity securities has mitigated the overall outflows.

− Direct investment (RM4.7b; 3Q23: -RM6.1b): returned to a net inflow due to higher foreign direct investment (RM12.1b; 3Q23: RM7.2b), particularly in the ICT and manufacturing sectors.

● 2024 CA forecast remains at 2.3% of GDP (2023: 1.2%), bolstered by a rebound in exports and a boost in tourism

− The recovery in exports, propelled by the global technology upcycle, along with the boost in tourism activity, supported by the government’s charter flight matching grant incentive and Visa Liberalisation program, are expected to contribute to a higher CA surplus in 2024. Additionally, government policies aimed at attracting investment, coupled with improving domestic capital market prospects, may further increase foreign inflows and bolster the CA surplus.

− USDMYR year-end forecast (4.42; 2022: 4.59): Even though inflation continues to run hot, and the job market continues to remain tight in the US, signs of a slowdown in economic growth are already emerging, attributed to soaring borrowing costs and the depleting pandemic accrued savings. To highlight, January witnessed a notable pullback in US consumer spending, evident in the below-consensus retail sales figures of -0.8% MoM (Dec: 0.4%). As such, we maintain our projection that June will herald the Fed's much-anticipated pivot towards easing. The Fed’s series of rate cuts, coupled with growing investors’ confidence in Malaysia, fuelled by the government expendituredriven fiscal consolidation, is expected to boost the ringgit in 2H24. While we maintain our outlook for the ringgit to appreciate from its current position, the extent of this ascent is likely to be tempered by several factors. These include the absence of substantial domestic catalysts, China's tepid economic momentum, and geopolitical uncertainty.

− Bank Negara Malaysia (BNM) policy rate: To keep monetary policy settings on autopilot in 2024, due to the relative price stability. Although headline inflation is expected to see a marginal increase, averaging around 2.7% in 2024 (2023: 2.5%), attributable to domestic policy shifts and geopolitical factors, core prices may cool further and align with its long-term average of 1.8%. This, coupled with a robust GDP growth outlook, suggest that the current policy stance remains conducive to sustainable economic growth amid price stability and does not warrant intervention.

Source: Kenanga Research - 19 Feb 2024