3Q18 Current Account Surplus Lowest Since 3Q16 amid Continued Deficit in Services
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- Oswin Flynn
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1 n ECONOMIC REPORT Balance of Payment 21 November 218 3Q18 Current Account Surplus Lowest Since 3Q16 amid Continued Deficit in Services Malaysia s current account surplus at 9-quarter low. Current account still recorded a surplus however the gain is getting smaller since 2Q18. In 3Q18, current account surplus narrowed further to RM3.8B compared to RM3.9B in the previous quarter, making it the smallest surplus since 3Q16. The fall was mainly attributable to deficit in services account amounted to RM3.3B in 3Q18 however the figure has improved from a larger deficit of RM6.2B in 2Q18. Other investments dragged financial account down. For 3Q18, the financial account posted a net inflow of RM2M, way lower than RM9.2B in the prior quarter. The fall was largely due to the net outflow of other investments at RM8M, first outflow of the year. Meanwhile, portfolio and direct investment recovered in 3Q18. Portfolio investment recorded a net inflow of RM6M (-RM38.3B in 2Q18), the first inflow of the year amid clearer political direction. We revised down our forecast for current account surplus to RM32.7B in 218. Due to a slowdown in global demand and modest recovery in commodity prices, we expect Malaysia s economy to continue expanding however at a slower pace in 218. Via the channel of moderating exports demand, improving market confidences and optimistic tourism activity, we opine a continuous surplus in current account this year at RM32.7B yet below 217 s RM4.3B. Malaysia s current account surplus at 9-quarter low. Current account still recorded a surplus however the gain is getting smaller since 2Q18. In 3Q18, current account surplus narrowed further to RM3.8B compared to RM3.9B in the previous quarter, making it the smallest surplus since 3Q16. The fall was mainly attributable to deficit in services account amounted to RM3.3B in 3Q18 however the figure has improved from a larger deficit of RM6.2B in 2Q18. Meantime, goods account surplus increased marginally to RM26.6B from RM26.1B in the previous quarter due to a modest trade surplus of RM2.2B in 3Q18 (RM27.1B in 2Q18). In addition, average imports growth of 6.3%yoy exceeded those of exports (.3%yoy). Nevertheless, Malaysia still positioned as net external creditor built up from a record of current-account surpluses. Transportation drove deficit in overall services account. Services account deficit in 3Q18 was due to greater outflow in transportation at RM7.1B compared to RM6.8B in 2Q18. On the other hand, deficit narrowed for construction to RM1.3B from RM3.2B in the preceding quarter due to suspension and cancellation of a number of mega projects which involved high usage of foreign-owned construction services compared to domestic-owned. Meanwhile, tourism activities continued to demonstrate positive momentum in 3Q18 as reflected in travel which recorded a higher surplus of RM8B compared to RM6.6B in the previous quarter. We foresee that tourism activities will continue to be in upbeat momentum throughout the year and even next year in conjunction to government initiatives to promote domestic tourism underlined in Budget 219 on top of domestic airlines fare discounts. Some travel and tourism related initiatives introduced in Budget 219 were departure levy on travellers leaving Malaysian airports effective June-19 and fund allocation for private companies to boost international tourist arrivals through marketing efforts. KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES
2 Wednesday, 21 November 218 Primary and secondary income account continued to deteriorate. The weak current account surplus was also contributed by further deterioration in primary income (RM1B vs RM11.2B in 2Q18). The larger deficit in primary income was due to higher dividend payments to foreign investment. In addition, deficit in compensation of employees was recorded higher at RM2B compared to RM1.8B in 2Q18. Meanwhile, secondary income deficit reduced to RM4.B in 3Q18 after maintaining at RM4.7B for two previous quarters. Table 1: Summary of Current Account (RM Billion) Current Account Goods Services (.4) (6.2) (4.8) (4.8) (7.) (.8) (6.2) (3.3) Manufacturing Services Maintenance & Repair (.1) (.1) (.) Transportation (6.7) (7.3) (7.6) (7.4) (7.3) (6.7) (6.8) (7.1) Travel Construction (2.3) (2.7) (2.) (3.3) (4.3) (3.) (3.2) (1.3) Insurance & Pension (2.1) (2.3) (2.1) (2.2) (2.3) (2.) (2.2) (2.3) Financial (.) (.) (.) (.) (.) (.) (.) (.) Charges of Intellectual s use (1.3) (1.) (1.7) (1.7) (1.7) (1.6) (1.7) (1.8) Telecom, Computer & Info (.2) (.3) (.) (.4) (.4) (.) (.3) (.) Cultural & Recreational (.3) (.4) (.3) (.) (.2) (.3) (.3) (.4) Government Goods & Services (.2) (.2) (.3) (.4) (.) (.3) (.2) (.2) Other Business Services (2.2) (1.3) (.8) (.9) (.7) (.9) (.8) (.9) Primary Income (9.2) (1.1) (8.2) (9.6) (8.4) (1.2) (11.2) (1.) Compensation of Employees (1.3) (1.2) (1.2) (1.1) (1.2) (1.6) (1.8) (2.) Direct Investment (6.9) (1.8) (6.6) (9.2) (6.7) (8.4) (8.2) (11.4) Portfolio Investment (3.8) (2.) (3.9) (2.) (3.1) (3.9) (4.7) (4.1) Other Investment Secondary Income (4.1) (3.9) (4.2) (4.4) (4.8) (4.7) (4.7) (4.) Other investments dragged financial account down. For 3Q18, the financial account posted a net inflow of RM2M, way lower than RM9.2B in the prior quarter. The fall was largely due to the net outflow of other investments at RM8M, first outflow of the year. Meanwhile, portfolio and direct investment recovered in 3Q18. Portfolio investment recorded a net inflow of RM6M (-RM38.3B in 2Q18), the first inflow of the year amid clearer political direction. Similarly, foreign direct investments into Malaysia recovered slightly to RM1M in 3Q18 from -RM7M posted in the previous quarter. 2
3 3 Wednesday, 21 November 218 Table 2: Summary of Capital and Financial Account (RM Billion) Capital Account (.). (.) (.) (.) (.) (.) (.) Financial Account (1.3) (8.3) 9. (2.8) Direct Investment (7.1) (.7).1 Portfolio Investment (2.1) (32.4) 17. (9.1) 11.6 (2.6) (38.3).6 Financial Derivatives (1.2).6 (.3) 1. (1.).8 (.2).3 Other Investment (1.1) (3.) (9.) (.8) Net Errors & Omissions (7.) (3.8) (17.7) (12.) (13.9) (7.4) *Capital Account;.=Less than RM million Indonesia dilemma continues. Indonesia current account deficit hit 4-1/2-year high at USD8.8B in 3Q18, or 3.4% of GDP. This marked 28 th consecutive quarter of deficit for the country. The increase in deficit was largely attributable to the higher trade gap of USD2.6B posted in the 3Q18 (USD1.4B in 2Q18) as the imports strengthened more than exports partly due to high global oil price and weak rupiah. For the first three quarters of the year, the current account to GDP ratio recorded at -2.9% approaching the -3% mark the central bank considers safe for the economy. In addition, rising US interest rate resulting in investors typically reducing their exposure in emerging markets as they retreat to more traditional safe havens, hit economies running current account deficits like Indonesia even harder as they have to borrow in foreign currencies to make up the difference. Hence, these countries have been vigorously increasing their interest rates in order to protect their currency woes and fledgling domestic economy. To date, Indonesian key rate has been hiked six times by a total of 17bsp since. Moving forward, the nation s current account deficit is expected to remain below 3% for 218 on the back of efforts to decrease imports and increase revenue from tourism. Meanwhile, other countries such as China and Japan registered current account surplus for 3Q18. Table 3: Current Account to GDP by Selected Economies (%) Malaysia Indonesia (.7) (.9) (1.8) (1.7) (2.3) (2.2) (3.) (3.4) Singapore Australia (1.3) (1.3) (2.2) (3.3) (3.6) (2.3) (2.) China (1.1).2. EU United States (2.2) (1.8) (2.8) (2.3) (2.3) (1.9) (2.3) Korea Japan Source: CEIC, MIDFR We revised down our forecast for current account surplus to RM32.7B in 218. Due to a slowdown in global demand and modest recovery in commodity prices, we expect Malaysia s economy to continue expanding however at a slower pace in 218. Via the channel of moderating exports demand, improving market confidences and optimistic tourism activity, we opine a continuous surplus in current account this year at RM32.7B yet below 217 s RM4.3B.
4 4 Wednesday, 21 November 218 Chart 1: Current Account Balance vs External Trade RMbn 4. 3.% 3. 2.% 3. 2.% 2. 1.% 2. 1.% 1..% 1..%. -.%. -1.% 1Q1 2Q1 3Q1 4Q1 1Q16 2Q16 Trade Balance 3Q16 4Q16 Exports Growth (RHS) 1Q17 2Q17 3Q17 CA 4Q17 1Q18 2Q18 3Q18 Imports Growth (RHS) Chart 2: CA vs FA (RM Billion) Mar-1 Oct-1 CA FA (RHS) Chart 3: Direct Investment (RM Billion) Chart 4: Portfolio Investment (RM Billion) Mar-1 Oct Mar-1 Oct CA: Direct Investment FA: Direct Investment (RHS) CA: Portfolio Investment FA: Portfolio Investment (RHS) Chart : Other Investment (RM Billion) Mar-1 Oct Chart 6: Current Account vs GDP Growth RM bn Mar-1 Oct-1 % CA: Other Investment FA: Other Investment (RHS) CA GDP Growth (RHS)
5 Wednesday, 21 November 218 is part of MIDF Amanah Investment Bank Berhad ( X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose.
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