Kenanga Research & Investment

Malaysia 1Q24 Balance of Payments - CA Surplus Hits Peak Since 4Q22; Financial Account Continues Outflows

Publish date: Mon, 20 May 2024, 10:48 AM
  • The current account (CA) surplus of the balance of payments saw a significant expansion to RM16.2b (3.5% of GDP) in 1Q24 (4Q23: RM0.9b or 0.2% of GDP), its biggest since 4Q22

    − Several factors are driving the surge in the current account surplus: a reduced primary account deficit, a marginal surplus in the secondary account, an increased goods surplus, and a reduced deficit in the services account. Despite a higher GDP growth rate of 4.2% YoY in 1Q24 (4Q23: 2.9%), the current accountsurplus has seen a notable increase.

    o Primary income (-RM8.8b; 4Q23: -RM20.3b): The deficit narrowed by more than half
  • This was primarily due to increased income from loans and deposits abroad (RM26.4b; 4Q23: 19.3b), as well as lower profits accrued to foreign investors in Malaysia (RM32.8b; 4Q23: 37.5b). Notably, this trend is particularly evident in the surplus of the other investment component (RM9.1b; 4Q23: RM1.0b).o Secondary income (RM0.3b; 4Q23: -RM2.2b): This marks the first surplus in 14 quarters
  • Mainly driven by a bounce in inward remittances (RM11.8b; 4Q23: RM8.3b), which outpaced the marginal increase in outward remittances (RM11.5b; 4Q23: RM10.5b).

    o Goods (RM32.0b; 4Q23: RM30.8b): The surplus increased to a two-quarter high due to a decrease in imports of consumption goods
  • Notably, imports of goods decreased by RM5.0b or -2.0% QoQ (4Q23: RM17.4b or 7.6%), surpassing the drop in exports of goods (- RM3.7b or -1.3% QoQ; 4Q23: 14.6b or 5.6% QoQ). Consequently, the goods surplus expanded by 3.9% QoQ (4Q23: -8.3%). The decline in imports was mainly driven by a decrease in consumption goods.

    o Services (-RM7.3b; 4Q23: -RM7.4b): Marking the smallest net deficit since 4Q19
  • The increase in the travel surplus (RM6.6b; 4Q23: RM6.4b), driven by the ongoing recovery in inbound tourism, has significantly narrowed the deficit, bringing it closer to pre-pandemic levels. Furthermore, this progress is supported by a reduction in the telecommunications account deficit and an expansion in the manufacturing services surplus.
  • The financial account recorded a slightly smaller deficit of RM18.7b in 1Q24 (4Q23: -RM20.1b)

Other investment (RM9.8b; 4Q23: -RM15.5b): reversed to a net inflow, driven by loan repayments and settlement of trade credits by resident corporates, resulting in a net inflows in both assets (RM9.6b) and liabilities (RM0.2b).

Portfolio investment (-RM23.7b; 4Q23: -RM6.0b): despite continued inflows of non-resident investment in the domestic equity market (RM5.3b; 4Q23: RM4.5b), outflows almost quadrupled, primarily due to resident investments in foreign equity (-RM11.8b; 4Q23:RM2.4b) and debt (-RM9.4b; 4Q23: -RM12.3b) securities.

Direct investment (-RM6.0b; 4Q23: RM5.2b): shifted to a net outflow as direct investment abroad (-RM26.0b; 4Q23: -RM5.5b) exceeded foreign direct investment inflows (RM20.0b; 4Q23: RM10.7b).

● 2024 CA forecast revised higher to 2.7% from 2.3% of GDP (2023: 1.2%), underpinned by a potential resurgence in exports, an upsurge in tourism and repatriation of foreign investment income

− The anticipated surge in exports, buoyed by the global technology boom in 2H24, along with the revitalisation of tourism, propelled by the government's initiatives and the nation's diverse attractions, is poised to significantly bolster the CA surplus in 2024. Furthermore, government policies aimed at attracting investment, coupled with the increasingly promising prospects of the domestic capital market, and efforts to encourage repatriation of foreign income by GLCs and GLICs, have the potential to significantly augment foreign inflows, further supporting the CA surplus.

USDMYR year-end forecast (4.42; 2023: 4.59): Signs of weakness in the US economy, including subdued labour demand, sluggish wage growth, and an increase in corporate bankruptcies, suggests that vulnerable sectors are struggling with elevated interest rates. We anticipate further economic softening and the potential easing of inflationary pressures in the coming months, maintaining our outlook for a Fed rate cut as early as September. Meanwhile, the government's commitment to fiscal discipline may boost investor confidence, stimulate capital inflows, and potentially strengthen the ringgit to around 4.42/USD by the end of 2024.

Bank Negara Malaysia (BNM) policy rate: Despite global economic uncertainty stemming from geopolitical risks and mixed central bank monetary policies, the Malaysian economy is anticipated to persistently thrive on resilient domestic expenditure and a favourable upswing in exports. This, combined with stable demand conditions and contained cost pressures, may likely allow the BNM to maintain its holding pattern throughout 2024, keeping the overnight policy rate steady at 3.00%.

Source: Kenanga Research - 20 May 2024

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