• The current account (CA) surplus of the balance of payments narrowed significantly in 2Q24 (RM3.0b or 0.6% of GDP; 1Q24: RM16.2b or 3.5% of GDP)
  
  − The decline was primarily driven by a big reduction in the goods surplus, alongside widening deficits in both the primary and secondary income accounts. A modest narrowing of the services deficit provided some mitigation. As a percentage of GDP, the contraction in the CA surplus reflects the expansion in GDP during2Q24 (5.9% YoY; 1Q24: 4.2%).
   
• Goods (RM24.6b; 1Q24: RM32.0b): Surplus narrowed to the lowest level since the onset of the pandemic, largely due to higher imports
   
  • Notably, imports of goods increased by RM13.3b (1Q24: -RM4.9b), partly driven by the strengthening of the ringgit and strong domestic demand, particularly in intermediate goods like industrial supplies and parts & accessories. This rise outweighed the marginal RM5.9b (1Q24: - RM3.7b) increase in exports, leading to the reduction in the goods surplus.
     
• Primary income (-RM15.5b; 1Q24: -RM8.8b): Deficit almost doubled
   
  • Mainly driven by higher investment income accrued by foreign companies in Malaysia (RM35.3b; 1Q24: RM32.8b) and a lower income from Malaysian investments abroad (RM22.2b; 1Q24: RM26.4b)
     
• Secondary income (-RM1.1b; 1Q24: RM0.3b): Reversed into a deficit
   
  • Mainly due to a decrease in inward remittances of RM9.9b (1Q24: RM11.8b), outweighing a marginal decrease in outward remittances (RM11.0b; 1Q24: RM11.5b).
     
• Services (-RM4.9b; 1Q24: -RM7.3b): Registered the smallest net deficit since 4Q19 (-RM4.0b)
   
  • Fuelled mainly by an increase in the travel surplus (RM8.2b; 1Q24: RM6.6b), boosted by a surge in tourist arrivals, especially from China. Further reductions in the deficit were supported by an expansion in the manufacturing services surplus (RM4.3b; 1Q24: RM3.5b) and a decline in the telecommunications account deficit (- RM0.8b; 1Q24: -RM1.3b), which offset the decrease in the construction surplus (RM0.6b;1Q24: RM1.1b).

• The financial account posted a significant surplus of RM17.1b in 2Q24 (1Q24: -RM18.7b), reversing two consecutive quarters of outflows
  
  − Other investment (RM35.6b; 1Q24: RM9.8b): recorded a substantial inflow of RM25.8b, propelled by increased interbank borrowing by resident banks, resulting in a huge net inflow of liabilities (RM27.7b; 1Q24: RM0.2b).
  
  − Direct investment (RM3.8b; 1Q24: -RM6.0b): reverted to a net inflow due to a sharp decline in direct investment abroad (-RM6.0b; 1Q24: -RM26.0b), signalling that local investors are scaling back the amount of capital they are investing in foreign businesses, particularly in debt instruments.
  
  − Portfolio investment (-RM21.7b; 1Q24: -RM23.7b): despite substantial acquisition of foreign debt securities by resident investors (-RM19.6b; 1Q24: -RM9.4b), a turnaround in foreign flow into the domestic debt market (RM3.8b; 1Q24: -RM7.8b) offset the overall outflows. Local investors continue to purchase foreign securities due to yield differentials, while foreign investors are attracted to domestic assets, anticipating potential capital gains.
   
•  2024 CA forecast maintained at 2.7% of GDP (2023: 1.5%), driven by stronger export outlook, increased tourism
  receipts, and government investment initiatives
  
  − We anticipate export growth to accelerate in 2H24, driven by a global technology upcycle, stronger external demand, and a favourable base effect. Although uncertainty clouds the demand outlook, anticipated rate cuts by global central banks in 2H24 could support this trend. This momentum, combined with an aggressive tourism campaign, government efforts to attract foreign investment, and initiatives to repatriate foreign income, is likely to bolster the CA surplus. However, challenges remain due to the global economic slowdown, particularly China’s sluggish recovery and ongoing geopolitical tensions, which could impact Malaysia's export-driven economy.
  
  − USDMYR year-end forecast (4.42; 2023: 4.59): The ringgit is set to strengthen in 2H24, driven by a favourable confluence of external and domestic factors. A weakening DXY, anticipated due to the Fed’s likely 25 bps rate cut in September amid a cooling job market and slowing inflation, will benefit the ringgit. Additionally, Malaysia’s ongoing fiscal consolidation and debt reduction efforts may boost investor confidence and attract capital inflows. BNM’s steady policy stance, coupled with expected rate cuts by major central banks in the coming months, supports this positive outlook. However, risks from US political instability and global geopolitical uncertainties remain.
  
  − Bank Negara Malaysia (BNM) policy rate: With stable inflation, BNM is likely to keep the OPR steady over the next 12 months. The central bank will closely monitor the impact of the diesel subsidy rationalisation, the progressive wage policy, and the significant civil servants’ salary increases in December (ranging from 7.0% to 15.0%). BNM's cautious approach aims to balance price stability with economic growth, adjusting policies as needed to support sustainable growth amid changing domestic and global conditions.

Source: Kenanga Research - 19 Aug 2024