OVERVIEW

The 2Q16 current account surplus narrowed to RM1.9b or 0.6% of GDP from RM5.0b or 1.7% of GDP in the previous 1Q16 quarter on weaker external demand.

The surplus from trade in goods decreased by RM3.7b to RM19.8b or the lowest in three years during the 2Q16 quarter on rising imports and stable exports.

The deficit from trade in services reduced by RM2.2b to RM4.6b during the quarter.

The primary income and transfers deficits were larger in 2Q16 compared to 1Q16, by about RM1.5b and RM0.1b respectively.

A net capital inflow in portfolio investments of RM0.1b was recorded in 2Q16, adding to the RM29.0b net inflow in the previous two quarters following five consecutive quarters of net capital outflows totalling RM75.5b.

Our 2016 forecast expects the current account surplus to narrow further to 1.9% of GDP from 3.0% in 2015 on lagging merchandise exports and a larger services deficit.

The current account (CA) surplus or the net value of transactions between Malaysia and the rest of the world narrowed to RM1.9b in 2Q16 from RM5.0b in the previous 1Q16 quarter. This is the smallest CA surplus in three years or since 2Q13, when the CA surplus fell to RM1.0b.

As a share of economic output, the current account surplus fell to 0.6% of GDP in 2Q16 from 1.7% of GDP in the previous 1Q16 quarter. This compares with the previous high of 3.5% of GDP in 4Q15 and the previous low of 0.4% of GDP in 2Q13.

The narrowing of the 2Q16 CA surplus was not a surprise but the quantum of decrease was more than expected. Disappointing export growth, in large part due to persistently low commodity prices and weak global demand was to blame as much as the surge in imports.

The surplus from trade in goods was a smaller RM19.8b in 2Q16 from RM23.5b in 1Q16. Merchandise exports rose by just 0.6% QoQ while imports increased by a larger 3.4% QoQ resulting in a RM3.7b decline in the trade balance and explains the smaller trade balance of RM1.9b in 2Q16.

The deficit from trade in services was reduced by RM2.2b in 2Q16 to RM4.6b as the value of service imports decreased by more than the decrease in the value of service exports.

The primary income and transfers deficits were larger in 2Q16 compared to 1Q16, by about RM1.5b and RM0.1b respectively. The financial account saw a net inflow of RM9.5bb in 2Q16, up from RM5.8b in 1Q16. The net inflows in 1H16 are small compared to the total net outflow of RM50.9b in 2015 but are the result of net inflows of foreign funds into the capital markets. Both direct and portfolio investment categories recorded net inflows in 2Q16 as in 1Q16 on continuing improvement in investor sentiment.

A net capital inflow in portfolio investments of RM0.1b was recorded in 2Q16, adding to the RM29.0b net inflow in the preceding two quarters (1Q16: +RM13.1b and 4Q15: +RM15.9b) following five consecutive quarters of net capital outflows totalling RM75.5b.

Meanwhile, foreign direct investment into Malaysia fell by RM6.2b to RM8.8b in 2Q16. After subtracting investments originating from Malaysia destined for abroad, the balance is a net direct investment in Malaysia of RM5.3b in 2Q16, compared with RM3.7b in 1Q16.

OUTLOOK

Despite the narrowing of the current account surplus to the lowest in three years, there remains little to no risk of the current account slipping into deficit in the near to medium term. Downside risk factors such as the terms of trade shock from the commodities rout and depreciation of the ringgit have largely passed.

Rising imports, the main cause of the smaller CA surplus in 2Q16 will probably begin to slow in the later part of the year. The rise in imports could also be interpreted as due to the manufacturing sector stocking up on inventory in order to later increase production.

Thus, the merchandise balance should remain comfortably in surplus in 2016 despite the narrowing of the trade balance in. At the same time, the services and primary income deficits should stabilise at current levels on relatively lower ringgit volatility.

Our 2016 forecast expects the current account surplus to narrow further to 1.9% of GDP from 3.0% in 2015 on lagging merchandise exports and a larger services deficit.

Source: Kenanga Research - 15 Aug 2016