KUALA LUMPUR: Malaysia's economic stability relies heavily on maintaining a surplus in its current account and attracting foreign investments, according to MARC Ratings.

Both are vital for long-term resilience against fluctuations in the exchange rate, the firm added.

"Competitiveness in global trade plays a significant role in determining the lasting value of a country's exchange rate," MARC said today.

A consistent CA surplus, indicative of external strength, ensures that a country earns more foreign currency than it spends, thereby reinforcing the relative value of its exchange rate, it added.

Malaysia, however, has witnessed a gradual decline in its CA surplus over the years, dropping from 15.9 per cent of gross domestic product (GDP) in 1999 to just 1.2 per cent in 2023, falling short of the official projection of 3.3 per cent.

The decline was exacerbated by a 16.5 per cent decrease in the trade balance in 2023 amid sluggish global demand, leading to a decline in the goods surplus of the CA balance to 7.3 per cent of GDP compared to 10.4 per cent in 2022.

This downward trend in CA surpluses is attributed to a shift from export-driven growth to domestic-focused strategies. Additionally, Malaysia's exports as a share of GDP have halved since 2000, further highlighting the challenges faced in sustaining a healthy CA surplus.

MARC said despite holding a significant share of the global semiconductor market and supplying a substantial portion of US semiconductor imports, Malaysia's local players are primarily involved in assembly and testing activities.

This reliance on back-end operations exposes Malaysia to substitution risks as companies seek cheaper alternatives in the Asean region.

To address these challenges, Malaysia has introduced the New Industrial Master Plan 2030 (NIMP), which aims to produce high-value and competitive goods.

"However, successful execution remains a key challenge, despite the plan's objectives of boosting employment, wages, and value addition in the manufacturing sector," said the rating agency.

The NIMP is expected to attract more foreign investments, which are crucial for Malaysia's economic growth.

Facilitating technological diffusion and ensuring timely implementation of approved foreign investments are essential steps towards achieving this goal.

In addition to goods, there is room for improvement in the services component of the CA balance, particularly in the travel subcategory.

Although Malaysia registered a surplus in the travel subcategory in 2023 after three years of deficit, ongoing initiatives to promote tourism should continue, focusing on emerging sectors such as medical, cultural and ecotourism.

https://www.nst.com.my/business/economy/2024/04/1040268/maintaining-surplus-critical-says marc ratings