Economic Report 2014/2015: Current account surplus despite projected fall in 2H2014

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MALAYSIA’s balance of payment is projected to stay “favourable” this year. The country’s current account balance for 2014 will be better than that of 2013 and is projected to stay in surplus for a 17th consecutive year, the Economic Report 2014/2015 reveals.

The country’s current account (CA) surplus is estimated at RM53.9 billion, being 5.1% of gross national income (GNI). While this is above the RM39.9 billion or 4.2% of GNI recorded in 2013 — due to expansion of domestic and global economic activity, resilient regional demand and a strong rebound in semiconductor sales — the 2014 estimate is also above the 2015 CA surplus forecast of RM49.05 billion or 4.3% of GNI.

More importantly, the RM53.9 billion estimated for the whole of 2014 implies that the government only expects a CA surplus of RM18.05 billion in the second half of 2014. This is given that Malaysia recorded a surplus of RM35.8 billion or 7.1% of GNI in 1H2014 versus just RM15 billion over the same period in 2013. “The economy is expected to moderate in the second half of 2014, partly due to lower commodity prices and the high-base effect from the corresponding period in 2013,” the report reads.

 Malaysia’s financial account will also continue to experience sustained two-way flows supported by inflows of FDI and portfolio funds amid strong prospects for the Malaysian economy. Nonetheless, outward investment flows are expected to be “equally strong as Malaysian companies continue to expand and finance operations abroad” and this is reinforced by resident investors diversifying their asset portfolios overseas.

Gross payments for transport services are anticipated to rise 5.4% to RM47.4 billion (versus a 7.7% rise to RM45 billion in 2013) largely due to continued reliance on foreign freight services. This is expected to cause the deficit in the transport account to widen to RM32.3 billion in 2014 from RM30.3 billion in 2013, given that the bulk of transport payments are to foreign shippers, and that this exceeds the RM15.1 billion in estimated gross receipts from services such as airport landing, port dues and storage handling services provided by domestic transport operators.

Still, in line with Malaysia’s aspiration to be the regional oil storage and trading hub, these gross receipts should strengthen with higher “imports for re-export activities related to refined petroleum products and metals, mainly in Southern Johor and Port Klang”.

On a brighter note, the surplus in the goods and services account is expected to grow to RM100.8 billion from RM91.5 billion in 2013, supported by higher external demand for manufactured products and commodities, strong domestic and regional global activity, and higher tourist spending.

 The services account is anticipated to show a lower deficit of RM12.6 billion from RM16.7 billion in 2013.

Over at the “primary income” account, which records investment income as well as compensation earned by residents working abroad or monies paid to non-residents working in Malaysia, the government expects a smaller deficit of RM28.6 billion for 2014 versus RM34.1 billion in 2013. The bulk of the deficit (RM24.56 billion) is due to the 6.2% growth in investment income accrued to multinationals operating in Malaysia to RM77.9 billion.

The “secondary income” portion in the current account is expected to see a bigger deficit of RM18.3 billion for the year, as outflows from repatriation of earnings by foreign labour benefitting from the minimum wage policy are expected to offset remittances by Malaysians working abroad.

Moving to the financial account, a net outflow of RM49.3 billion was recorded in 1H2014, reversing the surplus of RM5.6 billion last year due to large outflows in direct, portfolio and other investments.

Outflow in direct investment rose to RM37 billion from RM27.1 billion in 2013 on higher extension of inter-company loans and equity capital to subsidiaries of Malaysian companies overseas. For portfolio investments, concerns ranging from slower growth in China and the US Federal Reserve’s monetary policy, to geopolitical tensions in Eastern Europe and the Middle East, caused a RM6.5 billion net outflow in 1H2014 compared with RM7.2 billion in the same period in 2013. “In 2014, other investments are expected to sustain net outflows mainly on account of higher trade credit extended to foreign importers, placement of deposits abroad by the banking sector and net repayments of external loans by the public sector,” the report reads.

 Malaysia attracted inward direct investment inflow of RM18 billion, compared with RM16.1 billion in 2013, supported by higher extension of equity capital to subsidiaries in Malaysia and earnings retained for reinvestment.

This article first appeared in The Edge Malaysia Weekly, on October 13 - 19, 2014.