The current account balance of the balance of payments is a barometer of how a country earns its income (exports of goods and services) and spends (its imports of goods and services). When a country has current account deficits, market investors raise concerns: is the country spending beyond its means; or is it structural or cyclical and/or unsustainable? A persistent and widening current account deficit is deemed as unsustainable if it relies heavily on short-term capital or foreign borrowings to bridge the gap. (This note is actually based on Lee Heng Guie’s article in The Star recently)
Heavy reliance on external financing makes the economy vulnerable to external shocks as a change in investor sentiment could result in a sudden stop of capital flows as seen during the 1997-1998 Asian Financial Crisis. As a result, the country was forced to deplete its foreign reserves to fund the deficit. Depleting foreign reserves will change investors’ perception about the sustainability of the current account, fuelling concerns about the fundamental value of the exchange rate. Market speculation and betting on currency devaluation follows. It will get worse if the country incurs twin deficits – both a budget deficit and a current account deficit.
Source: https://www.thestar.com.my
Malaysia had a full-year surplus of RM22.8bil or 1.2% of gross domestic product (GDP) in 2023 (RM55.1bil or 3.1% of GDP in 2022). This has stirred investors’ concern about whether the country will incur twin deficits in both a budget deficit and current account deficit in the years ahead.
While Malaysia has been running 26 successive years of current account surpluses since 1998, the surpluses have been dwindling from an average of RM70.3bil per year or 12.7% of GDP in 1998-2011, to an average of RM43.3bil per year or 3.3% of GDP in 2012-2023.
The current account surplus of 1.2% of GDP in 2023 was the smallest surplus in 26 years since 1998 and also the smallest in 12 years since the surpluses shrank to a single low digit of GDP trajectory starting in 2012.
Lee Heng Guie of SERC is of the view that the current account surplus is likely to stay in the low range estimated at 2.2% of GDP in 2024.
The following developments might influence the current account and overall balance of payments position over the medium term:
• Merchandise exports of goods (gross exports) had displayed a weakening momentum from 6.7% per annum (pa) in 1998-2011 to 4% pa in 2012-2023. This was due to the cyclical nature of global demand and semiconductor cycle, commodities and crude oil price fluctuation as well as exports competition.
• Malaysia’s electronics and electrical products (E&E) accounted for 40.4% of total exports in 2023, controls 7% of global market share and 13% of the global market for packaging, assembly and testing services for semiconductors. The E&E industry will continue to be a dominant driver of overall exports, given semiconductor components found in a wide range of consumer electronics and commercial products, including vehicles. The New Industrial Master Plan (NIMP) 2030 will enhance the E&E ecosystem by attracting more wafer fabs, IC design, advancing packaging in assembly and testing.
• The services account has been mired in large deficits for 14 consecutive years since 2010. This is mainly in the transportation sector, insurance and pension services, charges for the use of intellectual property, telecommunications, computer and information services, and other business services amongst others.
• We have to enhance our capability in logistics and shipping, IT-related and information, consultancy, insurance services, tourism and education services to help reduce the services payment. Payment for the use of intellectual property averaged RM11.6bil in 2021-2023.
• Another component contributing to lower current account surplus is the persistent widening investment income outflows averaging RM33.9bil per year in 2012-2023 due largely to:
(i) The influx of foreign direct investment (FDI) led to rising obligations to pay investment income owed to foreign investors as they repatriated interest, profits and dividends earned to their parent companies (an outflow of RM66.1bil per year).
(ii) The repatriation of dividends and profits earned on portfolio investment in domestic equities, investible funds and bonds amounting to RM16.5bil per year.
Repatriation of foreign workers’ remittances back to their home averaging RM33.1bil per year in 2012-2023 (RM15.8bil per year in 1999-2010), which was 1.95 times of the remittances sent back by Malaysians working abroad (an average of RM17bil per year).
Gross FDI inflows have expanded to an average of RM42.5 bil per year in 2011-2023 from RM16.8 bil per year. On average, portfolio investment suffered wider net outflows of RM16.7bil per year in 2011-2023 from mere net outflows of RM393mil per year in 1999-2010. Foreign portfolio investment recorded net inflows averaging RM16.9bil per year in 2010-2023. Domestic residents’ outflows were larger at RM28.9bil per year for the same period.
Sustained inflows of foreign capital and a large foreign reserves position would provide a strong buffer against the weakness in the current account balance and support the ringgit. Meanwhile, steps need to be taken to improve our current account surplus; halve inflation; reduce interest differential between U.S. and Malaysia; and be prudent in fiscal expansion (being mindful of debts of RM1.5 trillion) to strengthen the ringgit, which will then reduce our import cost.
Reference:
Explained: The shrinking surplus, Lee Heng Guie, The Star, 28 February 2024
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